Wednesday the 10 YR note broke out of its three week 8 BP yield trading range, a technically significant move; since then the 10 YR rate has declined from 2.58% to 2.52% this morning. The break to lower rates with new inflation concerns confounded many traders but traders have no memory, they move on technical signals while fundamentalists usually are left on the sidelines for a day or two. Nothing of significance yet unless you fund your own loans and can profit nicely floating.
What’s up with the new bullish technical outlook? Maybe, finally, it is beginning to sink in for the stock market bulls that the US economy isn’t likely to meet the forecasts for GDP growth this year that has been the overwhelming belief. Even the -2.9% annualized GDP for Q1 didn’t shake the view that Q2 GDP will be up 4.5%. Can’t argue that May inflation has increased, based on the May PCE up 1.8%, close to the Fed’s target. Surprisingly weak data on first-quarter economic growth on Wednesday, and mixed data on jobless claims and consumer spending on Thursday have led five Wall Street firms to question the growth outlook through the rest of the year. It is important to keep in mind that the Fed, IMF, the World Bank and other central banks have consistently over-estimated growth for over a year now. Still that said, there is no panic.
The Federal Reserve, according to James Bullard yesterday (St. Louis Fed) will likely increases interest rates sooner than what has been thought, because he believes the US economy will see strong growth later this year. The Fed and regional Fed presidents have kept markets sitting on a hot skillet with mixed outlooks for growth but in the real world the Fed and economists are losing a little credibility when seen from the markets themselves. The dollar slumped to its lowest level against a basket of major peers in seven weeks as reports this week highlighted speculation the U.S. economic recovery hasn’t fully gained traction. The US interest rate markets are declining, we believe that both the dollar trade and the move to somewhat lower rates is happening due to less confidence on future forecasts of better growth; the recent history speaks volumes to the misses from about every source.
Two more days, today and Monday, before the end of the quarter and the end of the first half of 2014. The stock market is beginning to look a little tired but should not experience any major declines today or Monday as firms and funds want to dress up their quarterly reports. Next Tuesday may not be so easy for stock investors though. This morning the DJIA opened -17, NASDAQ and &p -3, not much change. The 10 at 2.51% -1 bp and 30 yr MBS prices +14 bps from yesterday’s close at +23 bps better than 9:30 yesterday.
The only data scheduled today, the final June read for the U. of Michigan consumer sentiment index, expected at 81.9 from 81.2 two weeks ago. The index as reported 82.5, a little better, a month ago at the end of May the index was 81.9; at the end of April 84.1. Holding OK but when seen against consumer spending it begs some caution on belief the index points to anything significant. Sentiment is nice but sometimes it doesn’t follow that consumers actually spend more. The personal spending in May was up a minor 0.2%, half of what had been expected.
As noted above, we are not expecting a big change in rates or stock indexes through the day. After holding neutral technical readings on all of our work for the last two weeks, the bond market with the breakout on Wednesday below 2.58% has changed all our work to bullish. I want to be clear though, with rates at these overall historic lows it is prudent not to get too bullish for the longer term outlook. To really drop rates in any significant way the stock market has to capitulate into a major sell-off. We expect that will happen but these are tough times to forecast as is evident by all the misses from those expected to know better. The five years of market manipulation by the Fed and other central banks twists all historical comparisons, thus how markets will act as the economic outlook continues to be revised weaker.