Rate Snapshot: Yellen to testify before Congress; Ukraine heats up

by MPA05 May 2014

More turmoil in Ukraine over the weekend is giving the rate markets a boost early this morning and putting pressure on the stock market, along with continued weakness out of China.
China’s manufacturing contracted for a fourth month in April. HSBC Holdings Plc and Markit Economics said today their purchasing managers’ index rose to 48.1. That missed the median estimate of 48.4 and the preliminary reading of 48.3. Numbers below 50 indicate contraction.  Over the weekend Ukraine leaders sent troops into Odessa to dislodge separatists from the area; the result was a lot of injured and four dead. Ukrainian Acting Prime Minister Arseniy Yatsenyuk said in a BBC interview the conflict is turning into a “real war” and that it’s “due to Russian aggression and due to Russian-led protesters.” More than 30 administration buildings, police stations, security services offices and other installations are currently blocked by rebels in the eastern Donetsk and Luhansk regions, the Interior Ministry said today.
This week is the one week each month that has little economic data; at 10:00 this morning the April ISM services sector index is the most important report of the week. The index was expected at 54.2 from 53.1, as reported the index . In terms of news this week, Janet Yellen is the major event. Yellen will testify before the Joint Economic Committee in Congress on the economic outlook on Wednesday (10:00) and at the Senate Budget Committee on Thursday (9:30).
Treasury will auction $69B of notes and bonds beginning tomorrow with a 3 yr note, $24B of 10 yr notes on Wednesday, and $16B of 30 yr bonds on Thursday. Each auction will be a new note or bond, this is quarterly refunding month. The demand recently has been good, especially for the 10 and 30 yr offerings; US interest rates for our treasury debt is higher than the equivalent notes and bonds in the key European countries adding to the demand for safe and the best rates.
At 9:30 the DJIA opened -90, NASDAQ -31, S&P -11; 10 yr 2.58% -1 bp and 30 yr MBSs at 9:30 +8 bps from Friday’s close and 36 bps better than at 9:30 Friday morning. 9:30 is important as it is about the time each day lenders set their morning prices.
At 10:00 the April ISM services sector index was expected at 54.2 from 53.1; as reported the index was better, 55.2. The new orders component increased from 53.4 to 58.2 but the employment component fell to 51.3 from 53.6. All-in- all the report was not bad. The initial reaction provided a little support for the stock indexes---but not much so far.
With only a few data points this week most of the focus will be on how the stock market performs, the testimony from Yellen on Wednesday and Thursday, and Treasury auction demand. Of course the US financial markets will also focus on what is now an escalation of military type developments in Ukraine, as Russia is increasing its efforts to split the country. Sanctions that the Administration is advocating aren’t  likely to get a huge amount of support from EU countries as the impact would hurt the region’s economy while not much harm in the US. Obama and Merkel met last week, both talked tough but Merkel is feeling the pressure from German business to go slowly on any serious sanctions. At the moment Putin is holding the cards and doesn’t appear ready to fold them.
Technically, the 10 yr is at the lowest yield this year at 2.58%; regardless of the various fundamental issues that have driven the 10 yield to these lows four previous times since the beginning of February, the 10 has not been able to move below 2.58%. This time down to these levels there are two issues; the Russian/Ukraine issues and the soft stock market outlook. We continue to hold that the stock market is overbought and likely will experience a major sell-off soon. Not confident of the timing but investors and traders are increasingly more concerned at the moment. The 10 at 10:00 is finding resistance at the yearly low, early on it was 2.58%, now 2.60% +1 bp.
This Week’s Calendar:
           10:00 am April ISM services (54.2 from 53.1) as reported 55.2.
           8:30 am March Trade deficit (-$40.5B from -$42.3B in Feb)
           1:00 pm $29B 3 yr note auction
           7:00 am weekly MBA mortgage applications
           8:30 am Q1 productivity and Q1 unit labor costs (productivity -1.2%; unit labor costs +2.8%)
           1:00 pm $24B 10 yr note auction
           3:00 pm March consumer credit (+15.1B from +$16.5B in Feb)
           8:30 am weekly jobless claims (330K -14K from last week)
           1:00 pm $16B 30 yr bond auction
           10:00 am March wholesale inventories (+0.5%)
                         March JOLTS job openings (4.125 mil; Feb 4.173 mil)

RateSnapshot courtesy of TBWSratealert.com


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