Interest rate markets started better this morning on the 8:30 data. Weekly jobless claims were right on estimates, -2K to 312K; the four-week average of claims rose to 314,250 from 312,250 the week before. May personal income, expected up 0.4%, also was right on, as reported +0.4%. May personal spending, expected up 0.4% was up just 0.2%. Adjusting spending for inflation, which generates the figures used to calculate gross domestic product, purchases dropped 0.1% last month after falling 0.2% in April. The PCE, Yellen’s favorite inflation gauge, increased 0.2% and yr/yr at +1.8%; the Fed’s target is 2.0% inflation. The 1.8% rate was the biggest 12 month increase since April 2012. While it is only one month, the spending slide may add further confusion for economists (not that they need more confusion) trying to estimate Q2 GDP which is presently expected to show growth of 3.5%.
Not much new in the news today. The two 8:30 reports is all there is today. At 1:00 Treasury will auction $29B of 7 yr notes, yesterday’s 5 yr found good demand; the 7 yr has more impact on long maturities as its term not far off the 10 yr term. At 9:30 the DJIA opened quietly, +2, NASDAQ and S&P -1 point. The 10 yr note yield down 2 bps at 2.54$ and 30 yr MBS price +9 bps. It took about five minutes before the indexes came under some selling pressure although not much so far.
Inflation fears were ratcheted higher last week when May CPI increased to 2.1%yr/yr and the prices pd component frm the Philadelphia Fed’s business index jumped 12 points, frm 23 to 35. Yellen commented that she thought the increases were more ‘noise’ than a new trend. This morning’s May personal consumption expenditures, that Yellen believes is more accurate, increased 1.8% yr/yr. Inflation fears have subsided frm last week’s mania.
Yesterday the bellwether 10 yr note broke out of its three week narrow trading range, closing at 2.56% yesterday but did achieve a low of 2.53% before edging a little higher into the close. This morning the technical breakout is getting confirmation with the 10 at 2.52%. As we noted previously, the technicals were holding flat readings, not bullish or bearish; now with the break of resistance at 2.58% the patent is positive for more rate declines. Not sure how low rates will go but 2.50% on the 10 is likely as the first new resistance will be tested. As I click the send button the stock market is under strong pressure after opening flat; as long as the equity market is pressured it will act as support for the bond and mortgage markets Over the last few weeks investors and traders have become more concerned that the stock market is setting up for a sell-off, but until the last two sessions there was little selling.