Interest rates edging higher this morning with the stock market opening better and no serious turmoil in Ukraine with the referendum on secession. Eastern Ukrainians voted overwhelmingly for the referendum, there were reports of dome voter fraud and a few skirmishes but nothing that investors are concerned with. Even with Putin suggesting delaying the referendum (wink-wink) it went on as scheduled and precedes the May 25th presidential election. Russia indicated it “respects” the results of two disputed referendums in eastern Ukraine that separatists said backed autonomy as the European Union imposed sanctions on companies in Crimea for the first time.
Last week we didn’t have a lot of economic data; this week a number of key reports, most of which will be later in the week; (see calendar). Not much today on scheduled data, this afternoon Treasury will report it had a surplus of $114B in April because of tax receipts. Last Friday the DJIA made another new all-time high and is starting today adding to it; at 9:30 the DJIA opened 61, NASDAQ +25, S&P +9; 10 yr note 2.64% +2 bp and 30 yr MBS price at 9:30 -11 bps from Friday’s close.
There is a lot of news coming out of Europe this week; important to keep focused on Europe as an economy in the global world. The European Union’s statistics office in Luxembourg is due to release the GDP data at 11 a.m. on May 15. Germany, France, Italy, Austria and the Netherlands will release their national figures earlier in the day. Q1 GDP probably climbed 0.4% in the three months through March, which would be double the previous quarter. ECB’s Mario Draghi is intent on lowering rates; the ECB increasingly more concerned that deflation could de-rail the slow growth and turn the EU back into recession. Draghi said after April’s rate decision that his “biggest fear” is a protracted stagnation that leads to high unemployment becoming structural.
Since the first of May the 10 yr note has not been able to break the 2.58% level on a close; most of the support recently has been on the Ukraine/Russia situation; that is waning a little now---not over but somewhat less concerns at the moment that the region will erupt into civil war. It cannot be completely ignored but equally it isn’t the fear that has prevailed over the last month. With economic news and expectation from Europe and investors increasingly looking at China’s equity markets, the fundamental outlook this week is likely to put pressure on the bond markets. Chinese premier said the nation’s “relatively large” currency reserves have become a “big burden” because they can cause inflation, based on a report May 10 from Hong Kong. Here in the US data this month have shown gains in employment, consumption and manufacturing. This week April PPI and CPI will provide a more current look at US inflation. Federal Reserve Chair Janet Yellen is due to speak May 15 after using comments last week to temper speculation an improving economy will accelerate an increase in interest rates.
The 10 yr note yield has increased to be testing its 20 day average this morning. The recent bullishness and decline in rates is stalling now. We advise not to press the market now, we still have positive technical readings on most of our work but the intensity has lessened over the last week as rates have been unable to continue their declines. Stepping back; although we have had a bullish bias over the last few weeks, we as well as about everyone else in the markets fully believes rates will increase by the end of the year, although we have floated most of the last two weeks, we will not be as aggressive now.
This Week’s Economic Calendar:
2:00 PM April Treasury Budget (+$114B)
8:30 am April retail sales (+0.4%, ex auto sales +0.7%)
April import prices (+0.4%); export prices (+0.2%)
10:00 am March business inventories (+0.5%)
7:00 am weekly MBA mortgage applications
8:30 am April PPI (+0.2%, ex food and energy +0.2%)
10:00 am NABB May housing mkt index ( 49 from 47 in April)
8:30 am weekly jobless claims (-2K to 317K)
April CPI (+0.3%, ex food and energy +0.1%)
May NY Fed Empire State manufacturing index (5.0 from 1.3 in April)
9:15 am April industrial production (0.0% from +0.7% in Mach)
April Capacity utilization (79.2% unch from March)
10:00 am May Philly Fed Business index (14.3 from 16.6 in April)
No Time (Janet Yellen speaks)
8:30 am April housing starts and permits (starts +3.5% to 980K; permits +3.0% to 1020K)
9:55 am U. of Michigan mid-month consumer sentiment index (84.5 from 84.1 at the end of April
RateSnapshot courtesy of TBWSratealert.com