Weekly claims started the day; claims were about what was expected, down 6K to 312K. The smoother 4 wk average declined to 311,750 frm 315,500. The number of people continuing to receive jobless benefits dropped by 54,000 to 2.56 million in the week ended June 7, the fewest since October 2007. Early trading in the treasury market pushed the 10 yr note yield to 2.57%, the lowest rate since June 6th.
Markets still digesting the FOMC and Yellen’s press conference yesterday. Two things stood out against the recent inflation fears that were ignited by Tuesday’s May CPI report; the Fed isn’t worried about inflation and its outlook for inflation increase this year is 1.5% to 1.7%. The second major point; as we expected, the Fed lowered its 2014 GDP growth rate frm +2.8% in March to +2.1% in the June report. The Fed, IMF and the World Bank continue to lower growth expectations but thus far equity market investors are oblivious to the lower outlooks. For stock markets it is about earnings; as long as earnings continue to hold up the key indexes have little reason to decline. As growth forecasts decrease, markets continue to focus on the longer outlook frm the Fed, IMF and other international estimates investors push stock indexes higher and higher. Yellen made it clear once again, the Fed has no plans to begin increasing the FF rate until well into 2015 and Yellen reiterated inflation still lags what the Fed wants to see. The dollar dropped to a one-month low against its major peers after the Federal Reserve said it will keep interest rates near zero for a “considerable time.”
Iraq: Obama is signaling a need for a regime change in Iraq, saying the current prime minister Nouri al-Maliki is in essence not inclusive enough with more Sunni representation in the current government. Today, U.S. Secretary of State John Kerry said the U.S. isn’t coming to Maliki’s rescue. The US has begun over-flights in Iraq but so far no use of weapons. France joined the U.S. in urging a wider sharing of power in Iraq, saying military action alone can’t quash Sunni militants threating to break up the country. The situation is not having much impact on US or global markets; a lot of talk about oil prices increasing that could drag down the economy. The price of crude is about $1.00 lower this morning than it was last Thursday.
The DJIA opened -6, NASDAQ +5, S&P unch; 10 yr at 9:30 2.57% -2 bp and 30 yr MBSs continue to rally after yesterday’s FOMC meeting, up 11 bps frm yesterday’s close and +41 bps frm 9:30 yesterday.
Two economic releases at 10:00; June Philadelphia Fed business index, expected to have decline to 13.0 frm 15.4 in May, the ndex jumped to 17.8 the best reading since Sept 2013. The employment index was up to 12 frm 8 in May, the new orders index increased to 16.8 frm 12, the prices pd index ncreased to 35 frm 23 a sixeable increase frm May. The surveyed respondents indicated that price increases for purchased inputs were more widespread this month. More inflation concerns, but according to Janet Yellen, not to worry, inflation isn’t on the increase and is still less than what the Fed wants----but tow reports in 3 days that inflation was higher than what most had been thinking.
The index of U.S. leading indicators rose in May for the fourth straight month, showing the economy will gain momentum following a slowdown at the start of 2014. The Conference Board’s gauge, a measure of the outlook for the next three to six months, increased 0.5 percent after a 0.3 percent gain in April, market consensus was for an increase of 0.6 percent. The stronger data at 10:00 did not have a positive impact on the key stock indexes and the bond and mortgage markets also kind of yawned. The 10 held at 2.57% -2 bp and 30 yr MBS price held at 9:30 levels +11 bps.
Technicals have turned slightly bullish after yesterday’s improvement and this morning’s gains. The 10 yr has resistance at 2.55%, a break below will take it down to 2.50%. While slightly bullish we take it with a little grain of salt; we don’t expect rates will increase much in the near term but there isn’t enough momentum now for rates to decline much. That said; as we always remind, go with the flow and market action----don’t try to rationalize the outlook listening to all the comments and news.