Rate snapshot: MBS down, 10-year note up

by MPA01 Jul 2014

At the beginning of the day this morning the stock indexes were better while the interest rate markets a little weaker.
Neither are likely to change much through the week until Thursday’s June employment data. In the meantime there are key data points that markets have to work through. Yesterday the June regional Chicago purchasing mgrs. index was fractionally weaker than estimates at 62.6 against forecasts of 64.0, the May index was 65.5. NAR’s May pending home sales were stronger than forecasts; May sales were expected to be up 1.0%, as reported +6.1%, the biggest monthly increase since April 2010.
At 9:00 this morning ahead of two key data points at 10:00, the 10 yr note rate was up 5 basis points to 2.55% and 30 yr MBS price -11 bps from yesterday’s unchanged levels. US stick indexes prior to the 9:30 open were firmer, the DJIA pointed to a 45 point open. At 9:30 DJIA +69, NASSAQ +20, S&P +6; 10 yr 2.56% +4 bp and 30 yr MBS price -16 bps.
China’s manufacturing expanded in June at the fastest pace this year. China’s Purchasing Managers’ Index was at 51.0, the National Bureau of Statistics and China Federation of Logistics and Purchasing said, matching analysts’ median estimate and climbing from May’s 50.8. A similar index from HSBC Holdings Plc and Markit Economics increased to 50.7 from the previous month’s 49.4. Numbers above 50 signal expansion just like the US ISM data. China’s economic data does have direct impact on US investors.
For those that believe Ukraine has an impact on US treasuries these days, the country is ending its cease fire that began June 20th saying too many violations from Russian separatists; the rebels killed 27 and wounded 69 while the cease fire was in place. Now Ukraine Pres. Poroshenko has pledged to retake the country’s easternmost regions. There is no notice being paid to it by investors and traders. Like the mid-east situation, markets are keeping an eye on both but so far the idea of safe haven treasury buying appears to be minor at best. Presently neither are cause for global economic concerns. Ukrainian forces used aircraft and artillery against pro-Russian separatists in the east of the country.
Two key reports at 10:00; June ISM national manufacturing index expected at 55.6 from 55.4 in May, the index came at 55.3. Not a bad reading but not strong either. May construction spending, expected +0.5% was up 0.1%, however April spending was revised from +0.2% to +0.8% taking the sting out of the lower May data.
Checking around the markets, there is an increasing view that the Fed will begin to increase rates by the 2nd Q of 2015. The foundation for the increasing view is that the US economy will grow quickly after Q1 GDP declined 2.9%, current forecasts are Q2 +3.5%. BlackRock, the world’s biggest money manager, forecast the first increase in borrowing costs for the second quarter of 2015. Thursday’s June employment report is expected to reveal more than 200K jobs were added in the month.
Equity markets on fire so far this morning keeping interest rates under pressure. The technical view is not quite as bullish as last week but the 10 is still holding slightly positive readings. Until the employment report is out on Thursday confirming the increasing view that the economy is heating up, it is difficult to draw any conclusions either technically or fundamentally. The wider outlook for interest rates is that rates are going to increase, there isn’t much opportunity to trade bonds from the long side as long as consensus remains strong for the economic outlook.


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