The rally in the bond and MBS markets yesterday was, to say the least, surprising in terms of its magnitude.
The stock market opened its flood gate again yesterday, nothing new about that in the last two months, leading the way for bonds along with Hong Kong, weak manufacturing reports out of Europe and here, and Ukraine still a hot spot. This morning weekly jobless claims were expected to be up 4K to 297K, as reported claims declined 8K to 287K. Claims better but there is little reason to jump up and down on the report, 8K in either direction is so small given the total job market a swing of 8K is more noise that accuracy. There was no reaction to the report; the 10 prior to 8:30 -7/32 (22 bp) at 2.41% +2 bps frm yesterday, stock index futures essentially unchanged frm yesterday.
Not much happened last night in Hong Kong as officials are trying to wait the protestors out and not engage in force. The calm though early this morning may be lessening. The standoff between police and pro-democracy protesters threatened to come to a head as student demonstrators prepared to block more government buildings and police vowed to stop them. There is a deadline laid out by protestors for the resignation of the current chief executive of Hong Kong, t runs out at 12:00 pm our time today. Force seems to be the last thing anyone wants but Beijing won’t allow the unrest to feed into the mainland and no doubt if that were to occur there will be troops in the streets.
The ECB meeting concluded, keeping interest rates unchanged. Officials waiting to see if aggressive stimulus measures announced earlier are enough to boost the eurozone's fragile economy. Ever since the 2008 global financial crisis the EU and ECB seem to just take baby steps attempting to hold the economies together. The EU and ECB because of the way the Union is put together don’t have the tools that the Fed has had in that period. Nevertheless Europe is grinding down almost monthly, even Germany now showing signs of slowing. We care because as that region declines back into recession it will have a dampening effect on US growth. At his press conference a few minutes ago, Draghi had little to say to support markets; EU banks getting hit, the stock markets getting hit and here the disappointment is feeding into our markets.
Yesterday Sept auto and truck sales continued to grow at the strongest pace in years. Yr/yr sales in Sept were up 9.0% frm Sept 2013. Easy financing, low gas prices, and since potential homeowners are not going to buy, a new set of wheels is a nice alternative. The industry is expecting sales to continue to increase and expects the soft foreign sales will begin to increase.
At 9:30 the DJIA opened -7, NASDAQ +2, S&P unch. 10 yr note 2.41% +2 bp, 30 yr MBS price -9 bp frm yesterday’s close and +27 bp frm 9:30 yesterday.
August factory orders at 10:00, expected -9.3% after +10.5% in July. Orders were reported -10.1%. No reaction, it was expected; July and August make orders unchanged for the two months.
Nothing now on the schedule until tomorrow morning when the BLS will report the Sept employment data. Estimates are for non-farm job growth at 215K and private jobs also +215K. The unemployment rate unchanged at 6.1% with average hourly earing +0.2%. Yesterday ADP said there were 213K new private jobs in Sept.
The National Federation of Independent Business out this morning with its monthly survey. NFIB owners increased employment by an average of 0.24 workers per firm in August (seasonally adjusted), the twelfth positive month in a row and the largest gain this year. Seasonally adjusted, 13 percent of the owners (unchanged) reported adding an average of 3.7 workers per firm over the past few months. Offsetting that, 10 percent reduced employment (down 3 points) an average of 2.4 workers, producing the seasonally adjusted net gain of 0.24 workers per firm overall, an historically large figure. Reductions in employment are becoming less frequent and smaller (so initial claims for unemployment remain low), but it was a surge in hiring that produced a stronger net gain in employment. The remaining 77 percent of owners made no net change in employment. Fifty percent of the owners hired or tried to hire in the last three months and 42 percent (84 percent of those trying to hire or hiring) reported few or no qualified applicants for open positions. Twenty-one percent of all owners reported job openings they could not fill in the current period, down 5 points, not a good sign for improvements in the unemployment rate. Fifteen percent reported using temporary workers, down a point.
Expect some pullback today in the MBS prices after the very strong move higher yesterday; with Sept employment in the morning it is unlikely either stocks or bond markets will rally. Technically the move yesterday added more optimism for fixed income markets but to achieve lower rates the stock market will have to continue declining. That outlook is difficult; all the techs we use are bearish for stocks, however with the Fed and continuing low rates investors and traders will be go down kicking and screaming if they have to exit stocks.
PRICES @ 10:10 AM
10 yr note: -9/32 (28 bp) 2.42% +3 bp
5 yr note: -2/32 (6 bp) 1.68% +1 bp
2 Yr note: unch 0.52% unch
30 yr bond: -27/32 (84 bp) 3.14% +4 bp
Libor Rates: 1 mo 0.152%; 3 mo 0.232%; 6 mo 0.324%; 1 yr 0.577%
30 yr FNMA 3.5 Oct: @9:30 102.77 -9 bp (+27 bp frm 9:30 yesterday)
15 yr FNMA 3.0 Oct: @9:30 103.44 unch (+25 bp frm 9:30 yesterday)
30 yr GNMA 3.5 Oct: @9:30 103.91 -4 bp (+28 bp frm 9:30 yesterday)
Dollar/Yen: 108.63 -0.26 yen
Dollar/Euro: $1.2654 +$0.0031
Gold: $1216.10 +$0.60
Crude Oil: $90.05 -$0.68
DJIA: 16,782.90 -21.81
NASDAQ: 4425.74 +3.66
S&P 500: 1945.75 -0.41