Rate snapshot: Stocks improve, Treasuries remain volatile

by MPA04 Aug 2014

The stock market started better this morning following the improvement in Europe’s stock markets
as the uncertainty about a stock market correction continues. Although the equity market have experienced recent selling, at this point if there is going to be a setback it has only just begun and it isn’t set in cement that it will happen; that said all of our technicals are presently bearish for stocks. Why should we care? Because if there is real sustained selling it will support interest rates as investors look to balance portfolios into treasuries and help mortgages. Early this morning (8:30) the 10 yr traded +3/32 (9 bp) at 2.49% -1 bp; 30 yr MBS prices +3 bps frm Friday’s close. .
This week, after last week’s full economic calendar, there isn’t much on the plate. Markets continue to digest the July employment report last Friday, non-farm job growth was less than expected in July but revisions in June and May made up the difference. The unemployment rate increased to 6.2% but markets are not completely convinced the unemployment rate is an accurate reflection of the job market. The labor participation rate edged fractionally higher, frm 62.8% to 62.9%, a slight negative for employment as more have dropped out of the labor market. In that regard though, it is still uncertain whether its baby boomers retiring or that people are so discouraged many are no longer seeking a job. Average hourly earnings dipped to +0.1%, a penny; not a big deal unless it is viewed frm an inflation perspective. In the employment report it was evident that there was a minor increase in higher wage jobs. All in all there was something for everyone in the data. .
Other releases last week provided more mixed reactions, The Chicago purchasing mgrs. index fell hard to 52.6 frm 62.6 in June, the national ISM manufacturing index increased to 57.1 frm 55.3. The Q2 employment cost ndex increased 0.7% against 0.5% expected (a negative for the inflation outlook) but the June PCE increased 1.6% yr/yr after increasing 2.0% in May (a positive for inflation outlook). June construction spending declined 1.8% against estimates of an increase of 0.5%. Q2 preliminary GDP report was a lot stronger than thought, +4.0% against forecasts of +3.1% and Q1 was revised frm -2.9% to -2.1%..
Those data points last week should continue the volatility in the stock markets and feed through to the interest rate markets most of the this week. There are three reports this week that will get attention; the ISM July services sector index, Q2 productivity and Q2 unit labor costs; the rest of the data is less interesting. (see calendar below).
At 9:30 when most lenders send out their price sheets; the DJIA opened +20, NASDAQ +11, S&P +4; 10 yr note rate 2.49% -1 bp, 30 yr MBS price +3 bps frm Friday’s closes.
Global issues; the potential banking crisis in Portugal has been cooled with the Portugal central bank taking control of Espirito Santo bank. Spain’s 10-year yield fell seven basis points to 2.49% today and Italy’s decreased seven basis points to 2.69% Benchmark German bonds were little changed, with the 10-year yield at 1.14% after dropping to 1.109% on July 29, the lowest on record. Israel held its fire in parts of the Gaza Strip to allow for humanitarian relief while continuing to strike elsewhere in the Hamas-run territory, as rockets fired by militants slammed into southern Israel. Ukrainian forces were seeing mixed results in their battle against pro-Russian separatists in the east of the country on Monday, reporting they had moved closer to cutting off the separatist stronghold of Donetsk even as a number of Ukrainian troops surrendered overnight across the Russian border. In Moscow, an ally of President Vladimir Putin said Russia's business elite won't put pressure on the president to soften his line on Ukraine despite worsening Western sanctions. (Bloomberg News).
There has been no mass exodus of US treasuries so far; a lot of volatility as the chart above clearly shows. The US economy is slowly improving, all but the housing sector, the argument remains the same as it has been for weeks now; when will the Fed begin to increase interest rates. The Fed last week at the FOMC meeting continued with its statement that when is data dependent, but went on to refrain the comment that rates will continue to stay low for a lot longer, Yellen reiterated she is concerned that the employment sector still is underutilized, and worries as we do, that quality isn’t as sound as quantity in job growth.
This Week’s Economic Calendar:.
10:00 am June factory orders (+0.6%).
-July ISM service sector ndex (56.5 frm 56.0 in June).
7:00 am weekly MBA mortgage applications (we expect apps will be better).
8:30 am June trade balance (-$45.0B).
8:30 am weekly jobless claims (+3K to 305K).
3:00 pm June consumer credit (+$18.3B, +$19.6B in May).
8:30 am Q2 productivity (+1.4%).
-Q2 unit labor costs (+1.6%).
10:00 am June wholesale inventories (+0.7%) .
We have mentioned recently that we are not quite as concerned about the technical analysis recently as the bond market (10 yr note) is well contained in a range frm 2.60% and 2.44%, the range began in mid-May and hasn’t moved out of it. Our short term technicals move frm bullish to bearish as the 10 rotates. MBSs are in the same state and will only move in a trending direction when the 10 yr leads the way. Looking at the weekly chart (longer term view) the 10 yr has yet to break below its 100 week average on its rate, but is under its 20 and 40 week averages.