ADP said there were 220K private jobs created in April and they revised the March number from 191K to 209K. A little better than 210K expected but didn’t cause a lot of reaction because fifteen minutes later Commerce released the advance GDP report for Q1, it was expected to have slipped from +2.6% in Q4 to +1.1%, as reported the advance GDP was a feeble 0.1%. Prior to the ASDP data the 10 yr note traded -2/32 to 2.70% after the two reports in fifteen minutes the 10 was unchanged. The very weak GDP, while scary on its surface, the weather in Q1 likely had more negative impact on the economy than what had been thought. Keep in mind that this is the advance report and always is revised a month later when the preliminary report includes more data from the third month of the quarter. We believe when we see the preliminary report in a month the revision will be higher. Since the end of Q1 and the end of weather issues, gains in retail sales, employment and manufacturing at the end of the quarter indicate the setback will be temporary. Within 30 minutes of the releases of the data the stock and bond markets were essentially unchanged. In 2013 GDP was up 1.9%, falling from +2.8% in 2012.
At 9:30 the stock market opened about unchanged; -4, NASDAQ -16, S&P -4; 10 yr note doing a little better ahead of Chicago PM index at 9:45, -1 bp to 2.68%, 30 yr MBS price +16 bps from yesterday’s close. The Q1 GDP has taken the front seat from the stronger ADP jobs report.
Fifteen minutes after the stock market open, the April Chicago purchasing mgrs. index, expected to have increased to 56.9 from 55.9 in March, the index jumped to 63.0, the best since last October.
In Europe annual inflation rate missed forecasts in rising to 0.7% from 0.5% in March. The core rate, which strips out volatile items such as energy, food, alcohol and tobacco, rose in line with estimates to 1%, and the price of services increased at the fastest pace in more than a year. Mario Draghi has been outwardly concerned that the EU may fall into deflation, he has said on numerous occasions that the ECB may add more QE and/or go to negative interest rates if inflation doesn’t increase; the ECB target for inflation is the same as here, +2.0%. Next week (May 8th) the ECB will meet, the inflation data this morning is likely to keep the bank from starting another round of QE that Draghi has been thinking about. Why do we care? Because what happens in Europe and globally does have a direct impact on the US economy, never ignore the reality anymore that this is a global economy, not just a US one.
Nothing of market-moving news out of Ukraine this morning. Ukraine’s acting president vowed to create a special police force to staunch the spread of separatism in the country’s east, vowing to overcome unrest he says is stoked by Russia and hold a May 25 election.
Now that all the scheduled data has been reported markets should be quiet now until 2:00 this afternoon when the FOMC policy statement will be released. There isn’t anything in the reports or news this morning that will keep the Fed from continuing its tapering. The Fed will cut another $10B a month from its monthly purchases, taking the monthly Treasury buying to $45B a month from $55B a month of MBSs and long dated treasuries.
Being Wednesday, the weekly MBA mortgage applications were released early this morning and the data wasn’t good. The Market Composite Index, a measure of mortgage loan application volume, decreased 5.9% on a seasonally adjusted basis from one week earlier. The Refinance Index decreased 7% from the previous week. The seasonally adjusted Purchase Index decreased 4% from one week earlier. The unadjusted Purchase Index was 21% lower than the same week one year ago. The refinance share of mortgage activity decreased to 50% of total applications from 51% the previous week. The refinance share is at its lowest level since July 2009. The adjustable-rate mortgage (ARM) share of activity remained unchanged at 8% of total applications. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) remained unchanged at 4.49 percent, with points decreasing to 0.38 from 0.50 (including the origination fee) for 80% loans. The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,000) decreased to 4.37 percent from 4.41 percent, with points decreasing to 0.14 from 0.34 (including the origination fee) for 80% loans. The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA decreased to 4.17 percent from 4.20 percent, with points decreasing to 0.10 from 0.41 (including the origination fee) for 80% loans. The average contract interest rate for 15-year fixed-rate mortgages decreased to 3.53 percent from 3.55 percent, with points decreasing to 0.31 from 0.33 (including the origination fee) for 80% loans.
Already this morning the MBS market has shown high levels of volatility. It is the same story, the 10 yr note is coiling like a pissed off rattler, the narrowing trading range is something to follow carefully; the bulls and bears are balanced now. Once the balance shifts the move will be rapid in the direction of the breakout, the deeper look remains the same; the overwhelming consensus is for rates to increase. So far that view has remained but real money in the real market caps any of the near term comments. We believe rates will eventually increase but price action over the last four months doesn’t agree at the moment.
RateSnapshot courtesy of TBWSratealert.com