A lot of economic data to look at today. At 8:30 three reports, all better than expected; April CPI was right on, estimates up 0.3%, the core rate up 0.2% a little hotter than 0.1% expected. The core yr/yr now at +1.8%. Inflation based on yesterday’s PPI and this morning’s CPI is heating up a little. Based on the data the cost of living rose the most in almost a year. Weekly jobless claims fell below 300K to 297K down 24K, the lowest claims filings in 7 yrs; estimates were for claims about unchanged from last week. The NY Empire State manufacturing index, expected at +5 from +1.29, the index increased to 19.1. The knee jerk pushed MBS prices down 10 bps but within 15 minutes after the 8:30 reports MBS prices were back to unchanged and the 10 yr note rate at 2.55% up 1 bp. US stock indexes were slightly weaker prior to the reports then continued to decline. By 9:00 this morning the 10 had declined to 2.51% and 30 yr MBS price +11 bp from yesterday’s close.
Two more key reports at 9:15; April industrial production expected 0.0% after increasing 0.7% in March; production fell -0.6%. April capacity utilization expected unchanged from March at 79.2% declined to 78.6%. The initial reaction pushed the 10 down to 2.51% from 2.53% immediately prior to the two reports on manufacturing.
The DJIA opened -38 at 9:30, NASDAQ and S&P both -3; 10 yr note 2.52% -2 bp and 30 yr MBS price +13 bps from yesterday’s close.
More data at 10:00; May Philly Fed business index was expected at 14.3 from 16.6; the index was 15.4. The May NAHB housing market index was expected at 48 from 47, fell to 45 the lowest level since last May; the housing sector continues to falter, the NAHB index last August hit 58, since then it has declined.
The euro-area economy grew 0.2% in the first quarter from the previous three months, missing the average analyst estimate of 0.4%, according to figures released today by the European Union’s statistics office in Luxembourg. Dutch GDP fell 1.4%, the sharpest contraction in the euro area. The Italian and Portuguese economies shrank 0.1% and 0.7%, respectively, while French growth missed estimates. The weakness in Europe adds additional confidence that the ECB will lower rates and increase QEs. The ECB easing is almost completely baked into the cake by traders and investors. The European Central Bank is ready to loosen monetary policy further to prevent the euro zone from succumbing to an extended period of low inflation.
Fed Chair Janet Yellen will address the U.S. Chamber of Commerce after the market closes today. She said last week that the world’s biggest economy still requires a strong dose of stimulus. While data shows “solid growth” in the second quarter, “many Americans who want a job are still unemployed” and inflation remains low, she said.
The 10 yr note last October declined to 2.47%, the next technical test for the note as investors and traders are piling into sovereign debt in Europe and in the US. Although last Oct the 10 did hit 2.47%, it has not closed below 2.50% since last July. US interest rates are higher than rates in Germany, France and most other countries. Investors have moved heavily into Spain and Italian bonds even with the two economies high unemployment rates and weak growth. The entire move lower in rates, here and globally has caught investors flat-footed. The overwhelming consensus was for rates to increase even though the market itself was pointing to lower rates. Some of the decline in rates started with safety moves on worries that Russia and Ukraine will come to blows over secession moves by separatists in East Ukraine; now the fear of weakening economic conditions are increasing. Recall that we have been concerned about the lofty levels of the US stock market. The rate declines have been rapid over the last 2 sessions and so far this morning as bearish trades are being closed out. The 10 on Tuesday’s high was 2.66%, 14 bps decline in less than 3 days as bears capitulate. We strongly recommend taking advantage of this rate decline, it isn’t going to last long and not likely to improve a lot from these lows. Do not get greedy or let customers be lulled into believing rates will fall much more; not worth the risk. The current rate declines will increase volatility in the next couple of weeks.
PRICES @ 10:10 AM
10 yr note: +15/32 (47 bp) 2.49% -5 bp
5 yr note: +6/32 (18 bp) 1.52% -4 bp
2 Yr note: +1/32 (3 bp) 0.36% -1 bp
30 yr bond: +36/32 (112 bp) 3.32% -6 bp
Libor Rates: 1 mo 0.151%; 3 mo 0.225%; 6 mo 0.323%; 1 yr 0.537%
30 yr FNMA 4.0 June: @9:30 105.53 +13 bp (+33 bp frm 9:30 yesterday)
15 yr FNMA 3.0 June: @9:30 103.80 +5 bp (+14 bp frm 9:30 yesterday)
30 yr GNMA 4.0 June: @9:30 106.64 +9 bp (+23 bp frm 9:30 yesterday)
Dollar/Yen: 101.82 -0.08 yen
Dollar/Euro: $1.3672 -$0.0043
Gold: $1295.40 -$10.50
Crude Oil: $101.88 -$0.49
DJIA: 16,472.85 -141.12
NASDAQ: 4046.25 -54.37
S&P 500: 1869.89 -18.64
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