Housing starts and Fed speak overshadow overseas fears

Strong housing data, improved retail sales and public remarks from Federal Reserve officials are pushing interest rate outlooks higher, even as concerns in Syria and North Korea persist.

This week, bond yields edged higher as investors reacted to indications that both the U.S. economy and central bankers are becoming more active. The yield on 10 Year Treasurys pushed closer to a new high for the year on Thursday, surpassing 2.9 percent for the first time in weeks. The move higher is being driven by strong economic indicators, rising prices of oil, steel and Fed officials suggesting the central bank will be even more hawkish than some expected.

The 10 Year Treasury Note has been trading in a relatively tight range since late February. This week we have seen a breakout above 2.86% and 2.91%. We need to watch to see if this trend continues to a close above 2.95% which means the next stop would be north of 3%. See the chart of the 10 Year Treasury Note below which also include technical trading levels.

The rising 10 Year yield is a good indicator of continued upward pressure on mortgage rates, considering the 30-year fixed-rate mortgage rate tends to follow the same trend as the yield on 10 Year Treasury bonds.

Leading this week's economic data, housing starts rose 1.9 percent in March, beating expectations. Building permits also increased 2.5 percent month-over-month, another good sign for the construction industry. However, those numbers were fueled by increases in multi-family construction, not single-family homes. As a result, don't expect near-term relief to the persistent housing inventory shortage in many markets.

Retail sales also rebounded in March, driven by a 2 percent increase in auto sales. Some categories came in softer than analysts expected, but that is being blamed on winter weather in March. Overall, increased spending supports the trend of a consumer economy that is heating up in the wake of tax cuts and increased employment.

New York Federal Reserve President William Dudley this week gave a speech in which he said economic conditions were "quite favorable." He advocated for continued rate increases until the Fed's benchmark rate is at about 3 percent. That would equate to six more quarter-point hikes. Dudley indicated that prescribed approach would leave rates in a place that were neither too restrictive or accommodative.

Meanwhile, Federal Reserve Governor Lael Brainard in a separate speech this week called recent economic improvement "heartening." However, she also raised concern that recent tax cuts and increased federal spending had added additional stimulus to the economy and could lead to imbalance. Analysts took those comments as indications Brainard would support more rate hikes as a counter balance.

In recent weeks, the long-enduring turmoil in Syria and North Korea has served as a counterbalance to economic growth in the U.S., keeping a lid on rising interest rates. But this week's developments domestically have pushed yields higher even after a U.S. missile strike on Syria and new developments from President Trump and his administration's ongoing negotiations with North Korea's regime.

The Syria missile strike has been widely received as a public relations move that punished that nation's regime for its chemical weapons programs, but didn't strike targets that would draw the U.S. into additional conflicts.

All eyes now turn to the Trump administration's negotiations with North Korea. North Korea appeared to budge this week by conceding that U.S. troops in neighboring South Korea don't have to be removed as a condition of nuclear weapon negotiations. Is this a positive development or just another false start in the long-simmering dispute? Time will tell.