The bond and mortgage markets started this morning where they left off yesterday, interest rates are increasing and mortgage rates going higher. Yesterday’s surprise 4.0% Q2 GDP, Q1 revised from -2.9% to -2.1% and the Q2 deflator at 2.0% took all of the bullishness out of the rate markets. Geopolitical situations are also being pushed back as increasing belief that Ukraine/Russia and Israel/Hamas are more regional and won’t escalate to wider perspectives. The US stock market, the European stock markets are under pressure and likely will sell off more as economic reports increase the outlook that the Fed will increase interest rates sooner than expected. In the policy statement yesterday the Fed said it will keep the FF rate at current levels for an extended period. The Fed concerns that the employment gains show significant underutilization in the labor markets (low paying and part time jobs) went nowhere in the minds of traders in stocks and bonds. Under the headlines there is more dissension within the FOMC on when to increase the FF rate; we get the sense that more members are leaning toward an earlier increase than what was stated in the policy statement. That is what markets are also thinking.
Weekly jobless claims were in line with estimates; claims increased 23K back above 300K to 302K, we were looking for an increase of 21K. As noted yesterday this time of year the claims data is volatile because of the auto industry model year change over with workers being laid off for re-tooling. The four-week average of jobless claims, considered a less volatile measure than the weekly figure, dropped to 297,250, the lowest since April 2006, from 300,750 the prior week.
Q2 employment cost index was expected up 0.4%, as reported costs increased 0.7% the highest level since Q3 2007; more fuel for the sooner than later increase in the FF rate.
At 9:30 the DJIA opened -102, NASDAQ -43, S&P -15. 10 year note 2.59% +3 bps and 30 year MBS prices -13 to -17 bps. Earlier this morning the 10 traded at 2.61% at its 100 day average, MBS prices at 9:00 -24 bps.
9:45 July Chicago purchasing mgrs. index, expected at 63.2 from 62.6 in June, declined to 52.6, the lowest level since June 2013. Tomorrow the national ISM manufacturing index will be reported.
With all of the activity yesterday morning on the Q2 GDP report the weekly MBA mortgage applications slipped through our minds. The composite index declined 2.2%; the purchase component increased 0.2%, the refinance component fell 4.0%. 53% of the apps were for re-finance down from 54% the previous week.
Stocks are being tagged hard this morning, beside the changing sentiment about when the Fed will begin increasing rates, Argentina defaulted on its debt and the Ukraine/Russia sanctions are seen as a drag on Europe’s economy. Although there isn’t any new news in the region, Russia continues to fuel the separatists with weapons and Putin has shown he doesn’t care about sanctions and what they will do to the Russian economy.
Tomorrow the July BLS employment report, the July ISM manufacturing index, June construction spending and the month end U. of Michigan consumer index are all out. The employment report of course is the elephant. Non-farm jobs expected up 230K, private jobs +233K, the unemployment rate unchanged at 6.1%. The labor participation rate will garner a lot of attention as will where the job growth is coming from; most of the gains in employment are in the service sector.
Early this morning the 10 tested its 100 day average at 2.61%, since then the rate has declined back to 2.59% +3 bps from yesterday’s 10 basis point increase in the rate. All technicals are bearish; possibly a new wider trading range is unfolding, between 2.44% the resistance that was tested six times and now 2.66%. Today will not likely see any improvements but equally we don’t expect rate will increase much with employment tomorrow.