Treasuries and MBSs opened weaker this morning and early activity in stock index futures also weaker. Setting up for the ECB on Thursday and May employment on Friday; markets adjusting positions going into what is likely to be a busy Thursday and Friday. Thursday the ECB is widely expected to announce that it will lower interest rates and probably a bond buying program. The EU economies, except Germany and France, are struggling but the big concern is the region is moving toward deflation; Mario Draghi has made that his major fear. Deflation in the region will further reduce any economic growth potential. Markets believing Draghi will lower the 18-nation currency bloc’s official rate toward zero and take the deposit rate negative for the first time. While the central bank’s lending survey showed conditions for new loans stabilized in the first quarter, lending to companies and households has been contracting for almost two years.
Euro-area inflation slowed in May more than economists forecast, cranking up pressure on the ECB to deploy a range of measures to kindle prices and drive growth. The rate fell to 0.5% from 0.7% in April, the European Union’s statistics office in Luxembourg said today. The median forecast in a Bloomberg News survey was for a decline to 0.6%. The euro-area jobless rate fell to 11.7 percent in April from 11.8 percent a month earlier, according to Eurostat. Economists had forecast an unemployment rate of 11.8 percent, according to a Bloomberg News survey.
No improvement in China’s purchasing mgrs. index. SBC Holdings Plc and Markit Economics reported China’s purchasing mgrs. index at 49.4 in May down from 49.7 in April. Similar to the ISM manufacturing and service sector indexes, a reading lower than 50 indicates contraction.
The May employment report on Friday is expected to show NFP job growth at +213K and private job growth +215K, tomorrow ADP will report its private jobs data with estimates at +210K. The ADP report, pending how it is reported, many times causes analysts to revise the BLS outlook. Based the present forecasts, if they are reported as estimates suggest job growth in May will be less than April improvements. In April NFP jobs from BLS were +288K and private jobs were +273K. May unemployment is thought to have declined to 6.3% from 6.4% in April. The unemployment rate is largely ignored these days as a reliable indicator of employment; more are simply dropping out of the work force for various reasons (retirement, many just giving up looking), if a person surveyed says he/she has not looked for a job in the last month, he/she becomes invisible as far as the BLS is concerned. What continues to amaze though, is how much the Fed and media continue to make out of the unemployment percentage.
At 9:30 the DJIA opened -34, NASDAQ -12, S&P -5; 10 yr note 2.56% +3 bp and 30 yr MBS price -17 bp from yesterday’s 24 bp decline.
At 10:00 April factory orders were expected to have increased 0.5%; as reported orders increased 0.7% and March orders were revised from +1.1% to +1.5%.
It never hurts to remind; the US economy is tied directly to global economies, there is no such thing in the world today of an independent economy. The US growth is tied to how China, Europe, and emerging markets are doing. Our economy can only grow to a limited degree if Europe and China are slowing; China is slowing to about a 7.0% growth rate from 14% a couple of years ago, Europe’s growth is about to go negative and deflation is a real possibility, reducing any growth potential. Meanwhile the US stock indexes continue to make new all-time highs with Q1 GDP -1.0%. Q2 is expected to be positive and economists (those that have about a 35% rate of success on forecasts) continue to expect US growth at 3.0% to 3.5% this year. That will not happen—period!
It is unlikely that the interest rate markets will improve much from present levels this morning unless the stock market comes under severe pressure, and that is unlikely also. Interest rates fell faster than the fundamentals suggest without more soft economic data and that won’t happen unless key reports indicate slowing. The magnitude of the fall in rates was driven by heavy short-covering from investors and traders that were betting on rates increasing. Those big positions have been lessened now. To move rates lower it will take weakening economic data or some global event that drives investors to safety. For the moment forget the Ukraine/Russia situation; while still a hot button, there is not much fear at the moment over what may occur.