Rate snapshot: Q1 GDP way down

by MPA25 Jun 2014

Backward looking?
Most of the bulls out this morning are working overtime to paint Q1 GDP as looking in the rear view mirror; and that is true with Q2 one week form ending. The problem with that idea is it isn’t being seen that way by traders. Q1 GDP last month was lowered from 0.1% on the advance report two months ago to -1.0% on the prelim report a month ago. Today the final reading was expected to be lowered to -1.8%; Q1 GDP on the final down 2.9%, a huge decline. The rest of the day will be a debate over what happened in Q1; can it be blamed all on the bad weather that covered most of the mid-west and east? Or are there other issues that jammed the economy to potential recession readings. Not sure, but it seems illogical to lay it totally on weather. More important, looking forward from Q1, there has been a pick-up in the economy. Yesterday new home sales exploded in May +18.5%, June consumer confidence jumped to its highest reading since January 2008. Since the end of Q1 the economy has improved, no doubt about it; has it improved enough to hold that 2.8% GDP growth the Fed is now forecasting for the entire year? 25% of 2014 down almost 3.0% will require a serious increase in the economy to get to that +2.8% growth. A month from now we will get the advance Q2 GDP data. No matter one’s view, one thing can’t be argued; the Fed, economists, and analysts have been way off when forecasting economic growth.
More current data this morning wasn’t good on the headlines either. May durable goods orders were expected up 0.4%; as reported down 1.0%; excluding the volatile transportation orders durables were expected up 0.3%, as reported -0.1%. Durables are goods that are supposed to last three years or longer. Looking deeper though, orders for non-military orders and excluding aircraft orders did increase 0.7% after falling 1.1% in April; business orders increased suggesting businesses are increasing investments.
The two data points at 8:30 this morning have challenged both bulls and bears; the debates being played out and likely will continue through the rest of the day. There is little debate that the economy is better now than at the end of Q1; housing is slowly picking up momentum, auto sales are strong, and weekly unemployment claims have declined, and there is an increasing concern that inflation may be moving a little higher, implying some pricing power may be returning. No matter what you hear through the day, or read in the papers, there is one over-riding issue that sums it all up; given the misses on economic forecasts relying on them is at your own risk. Every quarterly revision form the Fed over the last year has been revised lower frm the previous estimates. We don’t want to be negative, we only want to focus on the facts and report them as best we can, please don’t shoot the messenger.
Earlier this morning weekly mortgage applications reported by the MBA declined 1.0% form last week’s decline of 9.3%. The Refinance Index decreased 1 percent from the previous week to the lowest level since May 2014. The seasonally adjusted Purchase Index decreased 1 percent from one week earlier to the lowest level since May 2014. The refinance share of mortgage activity remained unchanged at 52 percent of total applications from the previous week. The adjustable-rate mortgage (ARM) share of activity remained unchanged at 8 percent of total applications. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.33 percent from 4.36 percent, with points decreasing to 0.18 from 0.24 (including the origination fee) for 80 percent loans. The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,000) decreased to 4.28 percent from 4.32 percent, with points increasing to 0.12 from 0.09 (including the origination fee) for 80 percent loans. Jumbo rates now lower than conforming rates.
At 9:30 the DJIA opened +4, Nasdaq -6, S&P unch; 10 yr 2.54% -4 bps and 30 yr MBSs +13 bp and +20 bps from 9:30 yesterday.
At 1:00 this afternoon Treasury will auction $35B of 5 yr notes; should be interesting with the decline in rates this morning. Normally the 5 doesn’t have a lot of imp[act on MBS prices but this isn’t a normal day today.
Technicals now turned bullish with the 10 breaking below 2.57%, three weeks of consolidation broken implying rates may decline further. Most of our models have turned slightly more bullish this morning. The rest of the day is critical for the rate markets’ decline in yields. Investors and traders alike have to choose whether to ignore the backward looking economic decline in Q1 and focus on the Q2 improving economy, or come down on the side that a -2.9% Q1 growth is a precursor to the rest of the year slowing soft growth and little inflation. As we say; go with the market action rather than opinions. Looking good so far but there is a lot of day left to work through.