Rate snapshot: Consumer spending up, MBS fall

by MPA30 Jul 2014

ADP July private payrolls increased 218K in the month, the estimate was an increase of 235K.
202K of those jobs were in the service sector. Prior to the 8:15 report the 10 yield was 2.48% +2 bp and early trade in MBS prices -14 bps, in the fifteen minutes before the advance Q2 GDP report prices improved a little but still weaker on the day, but it didn’t take long for MBS prices to decline. Yesterday MBS prices ended a little better but not much and unchanged from 9:30 yesterday morning when lenders usually set morning prices. This morning the 10 yr note is seriously testing its 20 day average at 2.52%. (see below for technical specifics)
Q2 advance GDP shocked markets; the overall forecasts were for Q2 to increase to +3.1%; as released Q2 GDP +4.0% and Q1 revised from -2.9% to -2.1%. Prior to the release the 10 yr note was at 2.47% +1 bp, within two minutes the 10 jumped to 2.51% and MBS prices plunged, down 30 bps from yesterday’s close. US stock index in the futures markets increased to point to a very strong open at 9:30. The advance report usually misses some of the third month data in the report, a month from now the preliminary report will likely see a revision from this advance report, may be better, or less. In Q1 the advance report was revised downward on the advance and again on the final reading two months after the advance (and today back to the level seen in its preliminary report). Just a comment, we have no significant opinion, just saying.
Over the last year the GDP data has been volatile; note the improvement in Q1 from the “final” reading, from -2.9% to -2.1%. Consumer spending, the biggest part of the economy, rose 2.5%, reflecting the biggest gain in purchases of durable goods such as autos in almost five years; Q1 consumption was +1.2%. The consumption spending has added 1.7% to the Q2 GDP data. Inventories added a lot to the report, inventories grew by $93.4B, comparing it to Q1 at +$35.2B. The deflator, a measure of inflation, increased to 2.0% from Q1 +1.3%. The deflator was the biggest gain since the first quarter of 2012. The report this morning will add more credence to comments similar to that of Richard Fisher (Dallas Fed) in comments he made last weekend that the Fed is falling behind in terms of increasing interests, that inflation is accelerating somewhat and the economic growth is stronger than data has suggested (the GDP today confirms his concerns). If there was any doubt that the Fed would skip tapering at its policy statement this afternoon, there isn’t any doubt now.
At 9:30 the DJIA opened +65, NADSAQ +29, S&P +8. 10 yr at 9:30 2.52% +6 bps, 30 yr MBS prices -30 bps from yesterday’s close.
At 1:00 this afternoon Treasury will auction $29B of 7 yr notes, the demand is a little test on how investors are thinking about the 10 yr and longer dated maturities. The auction occurs one hour before the FOMC policy statement at 2:00.
Ukraine/Russia; EU and US increased sanctions against Russia designed to hurt segments of its economy. According to analysts though, the sanctions are not likely to have the direct impact intended. The US sanctions don’t include Russia’s biggest banks and the EU side-stepped some sanctions so not to harm the EU economy much. Israel/Hamas still fighting,  Israeli artillery hit a UN school and 15 were reported killed. Neither situation is getting much attention today with the morning data and the FOMC this afternoon. 
After starting fast out of the gate, the stock indexes are backing down from the opening levels, (the DJIA back to unchanged, see below).  The 10 yr note though at 10:00 and MBS prices are not backing off; the 10 at 2.52% breaching its 20 day average for the first time since July 2nd. The 14 day relative strength, is now testing its pivot at 50. Our other technical models still hold fractionally bullish biases. For two weeks the bellwether 10 yr traded in a five basis point yield range, today it has broken out of that range. Presently not looking good, but we will have to wait until the close to assess the breakout. The stock and bond markets won’t likely change much now until the FOMC policy statement this afternoon (2:00 pm).  The stock market investors after the open are now fearing the Fed may move to increase rates sooner than expected, higher rates, at least initially, will increase concerns that increased rates will hurt growth. Whether it will or not is a debate going on behind the scenes; after five years of the Fed supporting markets an driving investors into equity markets, it is uncertain how the economy will do and how consumers will fare after the Fed.



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