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Market Update

5/14/2015

Weekly claims down 1K to 264K, expectations were for an increase of 11K. The four-week average, a less-volatile measure, was the lowest since April 2000. Firings and lay-offs have declined leading to markets expecting wage increases are just around the corner. Recent employment data confirms that the slowdown in Q1 was ‘transitory’ as the Fed defines it.

Wholesale prices in April (PPI) were expected to have ncreased 0.2%, as reported prices declined 0.4%, excluding food and energy prices were thought to be up 0.1%, as released down 0.2%. Another indication that inflation concerns may be over-stated. Excluding food, energy and trade services, the index rose 0.1%. Producer energy prices dropped 2.9% in April from March and are down 24% on the year. Gasoline prices slid 4.7% last month. Food prices decreased 0.9% last month and are down 4.2% over the year. Costs of products used as inputs for production, fell 1.1% in April, its ninth straight decline, and was down 7.8% from a year earlier, the biggest fall since September 2009.

The initial reaction to the two 8:30 reports was basically muted with not much change in interest rates or MBS prices. US stock indexes improved on the data. At 9:30 the DJIA opened +119, NASDAQ +32, S&P +11; 10 yr note 2.26% -2 bps frm yesterday’s close but the yield is up 2 bps frm yesterday’s 10 yr auction. MBS price at 9:30 +14 bp frm yesterday’s close but 21 bps lower than at 9:30 yesterday. The rate on the 10 yr note at its highest in five months, mortgage rates also the highest in four months. The yield on the 10-year German bond closed at the highest level since early December.

This afternoon Treasury will auction a new 30 yr bond selling $16B. Yesterday’s 10 yr bidding was exceptionally strong, Tuesday’s 3 yr auction also found solid demand. The reaction in the rate markets after the strong 10 yr didn’t help the rate markets, demonstrating how bearish interest rate markets are now. Too bearish in our view but it is what it is and any attempts to pick a turn have been costly. Increasing interest rates in Germany and other EU countries along with the surprising decline in the dollar have eaten away demand for US debt, at least that is how it appears.

Investors and traders continue to unwind the bullish trades that were betting on even lower interest rates. The ECB’s apparent success with its QE is seen as helping the EU economies resulting in a massive increase in German rates that fed to US rate markets. This morning the MBS market trying to hold onto initial gains on the 8:30 data; that was the situation yesterday after the very soft April retail sales report but prices didn’t hold and another swift move to lower prices unfolded at 11:30 yesterday. We tried floating early yesterday morning on the better open but bailed (again) as prices quickly declined. PRICES @ 10:00 AM

10 yr note:                   +9/32 (28 bp) 2.24% -4 bps (essentially unchanged frm yesterday’s auction)

5 yr note:                     +6/32 (18 bp) 1.53% -4 bp

2 Yr note:                     +1/32 (3 bp) 0.56% -1 bp

30 yr bond:                   +20/32 (62 bp) 3.05% -2.5 bp

Libor Rates:                 1 mo 0.185%; 3 mo 0.275%; 6 mo 0.414%; 1 yr 0.734%

30 yr FNMA 3.0 June: @9:30 100.42 +14 bp (-21 bp frm 9:30 yesterday)

15 yr FNMA 3.0:          @9:30 104.29 +11 bp (-9 bp frm 9:30 yesterday)

30 yr GNMA 3.0:          @9:30 101.70 +20 bp (-33 bp frm 9:30 yesterday)

Dollar/Yen:                 119.01 -0.14 yen

Dollar/Euro:                $1.1396 +$0.0042

Gold:                          $1222.20 +$4.00

Crude Oil:                   $60.53 +$0.03

DJIA:                          18,174.50 +114.01

NASDAQ:                   5004.46 +22.77

S&P 500:                    2110.06 +11.58

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Market Update

5/11/2015

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A slight bounce on Friday after the April and March jobs data, but as noted Friday afternoon it didn’t hold. The 10 dropped to 2.10% on the reaction Friday morning but at the end of the day at 2.15% down just 3 bps. 30 yr MBS FNMA jumped 41 bps on the employment data but ended a little lower at +33 bps. We noted Friday that the trade was not positive although a little better, this morning in early trading the 10 up 4 bps to 2.19% and 30 yr MBS price at 9:00 -17 bps.

There are no scheduled data today but later this week April data will get a lot attention, the first month that economists, traders and investors can excuse weather for any weakness in various data points. News over the weekend, China cut base lending rates again, the third time in six months. The cut designed to help state-owned businesses that are choking on debt and dragging growth down. The cut isn’t likely to help small businesses that China is counting on for sustainable growth. Recently China lowered bank reserve requirements to help small businesses. Why should US markets care? Because China can influence the outlook for the US economic growth. The German finance minister said a referendum in Greece on the country’s international bailout program may be a good idea, a very risky idea as previously Angela Merkel in the past that a vote would automatically be a vote on whether or not Greece would stay in the euro-zone. Why should US markets care? Because the Greek debt issues may have a huge impact for all of the EU if other debt reddened countries decide to renege on debts owed to the IMF and Europe’s banks could send the region back into deep recession. Meetings return in Brussels today.

At 9:30 the DJIA opened +2, NASDAQ +11, S&P +1; 10 yr 2.19% +4 bp and 30 yr MBS price -20 bps frm Friday’s close and -28 bp frm 9:30 Friday).

Last Wednesday and Thursday the bellwether 10 yr, leader of MBS movement, ran to 2.25% the high of the year and matching the high in early March prior the rate decline. It’s a double top in the rate level; will it hold? Will yields back down after the swift increase in rates hear and lead by Germany’s 10 yr bund? The simple answer, its data dependent; increasing optimism of global growth is anathema for fixed income investments, obviously weaker outlooks will keep the Fed and other global central banks from worrying too much about inflation and increasing rates.

Still bearish; all our work remains negative. Possibly markets may be starting a new range for treasuries and MBSs; for the 10 2.25% to 2.00%; MBS price frm 102.64 to 100.45. After the spike higher in rates the last two weeks we would like to see a consolidation, the relationship between price (or yield) and time is important now.

This week’s Calendar:

          Tuesday,

              10:00 March JOLTS job openings (5.158mil frm 5.133mil in Feb) (still March data)

              1:00 pm $24B 3 yr note auction

              2:00 pm April Treasury budget (+$153B)

         Wednesday,

              7:00 am weekly MBA mortgage applications

              8:30 am April retail sales (+0.2%, down frm +0.9% in March; ex auto sales +0.5%)

                           April export and imp[ort prices (exports +0.1%, imports +0.4%)

              10:00 am March business inventories (+0.2%)

              1:00 pm $24B 10 yr note auction, a new 10 yr

         Thursday,

              8:30 am weekly jobless claims (+11K to 276K)

                           April PPI (+0.2%, ex food and energy +0.1%)

              1:00 pm $16B 30 yr bond auction, a new 30 yr

         Friday,

              8:30 am Empire State manufacturing index (5.0 frm -1.2)

              9:15 am April industrial production (0.0% frm -0.6% in March; manufacturing +0.2%)

                           April factory use (78.4% unch frm March)

             10:00 am U. of Michigan consumer sentiment ndex (95.8 frm 95.9 at the end of April)

PRICES @ 10:10 AM

10 yr note:                  -11/32 (34 bp) 2.19% +4 bp

5 yr note:                     -5/32 (15 bp) 1.52% +3 bp

2 Yr note:                     -1/32 (3 bp) 0.58% unch

30 yr bond:                  -31/32 (97 bp) 2.95% +5 bp

Libor Rates:                1 mo 0.184%; 3 mo 0.279%; 6 mo 0.414%; 1 yr 0.732%

30 yr FNMA 3.0 May: @9:30 101.25 -20 bp (-28 bp frm 9:30 Friday)

15 yr FNMA 3.0 May: @9:30 104.41 -10 bb (-29 bp frm 9:30 Friday)

30 yr GNMA 3.0 May: @9:30 102.44 -13 bp (-21 bp frm 9:30 Friday)

Dollar/Yen:                 119.91 +0.15 yen

Dollar/Euro:               $1.1155 -$0.0044

Gold:                          $1189.70 +$0.80

Crude Oil:                  $59.63 +$0.24

DJIA:                          18,183.87 -7.24

NASDAQ:                  5015.04 +11.49

S&P 500:                   2116.90 +0.80

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Market Update

5/8/2015

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Kind of a goldilocks report (media buzz word this morning); BLS said unemployment was 5.4% in April as expected, the lowest since May 2008, non-farm jobs +223K as expected but March jobs revised frm +126K to +85K, private jobs 213K fractionally off 220K expected. Average hourly earnings slightly weaker at +0.1% against +0.2% expected. Labor participation rate 62.8% frm 62.7% in March but remains weak historically; the U-6 unemployment rate 10.8% the lowest since August 2008 (workers in part-time jobs or too discouraged to look for work). Construction companies took on 45,000 workers in April, the most since January 2014. A nice increase, some initial comments pointed the increase to the housing sector however we don’t completely agree the increase was in residential construction. Many ‘new’ construction jobs were in roads and infrastructure work; not all construction jobs are in housing. Not much increase in manufacturing or retail. Mining sector, covering energy industries, fell by 15,000. The initial reaction pushed US stock indexes higher and interest rates lower.

The report appears to confirm that Q1 weakness was a blip due to weather and the West Coast port strike. Trade pushing stock indexes higher and improved MBS prices and the 10 yr note rate but not sure the improvements will hold through the day. Although average hourly earnings were +0.1% weaker than the normal 0.2% increase that is always the forecast, wages increased 2.2% yr/yr, not enough to worry about inflation.

Mother’s Day rally; the DJIA opened +203, NASDAQ +54, S&P +20. 10 yr at 9:30 2.11% -7 bps frm yesterday’s close. 30 yr FNMA 3.0 coupon +41 bps frm yesterday’s close and 63 bps better than at 9:30 yesterday. The summation to the employment report this morning; the Fed is not likely to increase rates in June with most now talking Sept at the earliest. The bond and MBS markets improving but mostly because as we have noted the markets were very oversold for the near term after 9 sessions of increasing rates and declining MBS prices. The improvements in MBSs and treasuries yesterday and this morning is not a trend change; it is a relief move in oversold markets. To change me to bullish again the 10 yr has to move below 2.00% and I do not expect that to occur. The gains now should be used to get deals locked especially if they have been floated recently.

The monthly employment data this morning followed its usual path of volatility, this morning on the lower job growth in March than originally thought and wage increases remain mostly flat. This go round, huge price gains. Technically still bearish so let’s keep it in perspective. It is a gift that should be taken advantage of. The 10 has to close under 2.00% to change our wider perspective for lower rates; the FNMA 3.0 May coupon must move above 101.87 (101.53 presently).

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Market Update

5/1/2015

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Volatility returned yesterday. Stocks rolled over yesterday afternoon with the DJIA at one point down 250 points, NASDAQ ended down 82 points. Interest rate markets opened weak yesterday morning with the 10 yr at 2.10% +6 bps and 30 yr MBS prices -28 bps at 9:30. By the end of the session MBS prices ended +6 bp[ and the 10 yr note unchanged at 2.04%. No change in the technicals, still bearish on both treasuries and MBSs. Weekly claims down 34K spooked traders as the always changing guess on when the Fed will move; better employment or any key economic measurement that is stronger than expectations is going to rattle equity markets. Yesterday’s turnaround in the bond and mortgage markets, some money moving from equities to treasuries as a safety trade. This morning early the stock indexes were recovering and in turn the bond and mortgage markets losing ground. We noted yesterday the reluctance of many lenders to improve pricing when MBS prices surged. Quick to worsen, not so speedy improving.

April is over, wasn’t a good month for investors; the drop in the DJIA almost took the index back to unchanged on the year. The bets that the dollar would continue to strengthen, that oil prices would continue to decline and bond yields would fall lower---all wrong as it turned out. The dollar/euro was expected to go to parity, two months ago trading at about $1.04, yesterday ending at $1.12, a huge swing. Crude was trading at $45.00, now $59.00. Interest rates increased in Europe, German 10 yr bund early April 0.07%%, now 0.37%. The US 10 at the beginning of April 1.86%, this morning 2.08%.

At 9:30 after dropping 195 points yesterday the DJIA opened +136, NASDAQ +34 after -82, S&P +13. The 10 at 9:30 2.07% +3 bp and 30 yr MBS price -16 bps. Earlier this morning MBS price down 24 bps. Lenders won’t be aggressive this morning as they were reticent yesterday. Tin markets exist in treasuries and even thinner in the MBS markets.

Three key data points at 10:00. April ISM manufacturing index expected at 52 frm 51.5 was at 51.5. March construction spending -0.6% against +0.4%, until now haven’t had three months down in a row since back in 2009. The U.of Michigan consumer sentiment index was expected at 96.0 came at 95.9, the best the index has been was in January at 98.1. No immediate reaction to the data at 10:10 am.

Recently we talked about how the bond market would perform once the 30 session trading range was violated; we thought volatility would immediately increase in all US financial markets. Yesterday’s intraday action clearly increased volatility in both stock indexes and rate markets. Increasing numbers of analysts are still holding out that stocks will worsen on a technical correction, so far nothing although no real gains (ex NASDAQ). Each time the indexes have a rough day, the following day there is and has been recoveries. Day traders field day; buy at the end of the session when indexes take a big hit, sell at 1:00 pm the following day. Current near term support at 2.10% on the 10 yr and 101.43 on the FNMA 3.0 May coupon ( 101.70 at 9:30). Our work is negative (bearish) now. A lot of uncertainty has oozed into markets in the last few sessions that is going to increase market volatility. Unlikely interest rates will improve unless that long-awaited and never happening stock market actually occurs. Already it has gotten old to hear the well-worn phrase; sell in May and go Away for stocks.

PRICES @ 10:10 AM

10 yr note:                   -17/32 (56 bp) 2.09% +5 bp

5 yr note:                     -9/32 (28 bp) 1.48% +6 bp

2 Yr note:                    -2/32 (6 bp) 0.60% +2 bp

30 yr bond:                  -40/32 (125 bp) 2.81% +6 bp

Libor Rates:                1 mo 0.180%; 3 mo 0.278%; 6 mo 407%; 1 yr 0.699%

30 yr FNMA 3.0 May: @9:30 101.70 -16 bp (+18 bp frm 9:30 yesterday) (how did your lender(s) do this morning?)

15 yr FNMA 3.0 May: @9:30 104.60 -9 bp (+17 bp frm 9:30 yesterday)

30 yr GNMA 3.0 May: @9:30 102.69 -3 bp (+32 bp frm 9:30 yesterday)

Dollar/Yen:                 119.90 +0.52 yen

Dollar/Euro:               $1.1276 +$0.0052

Gold:                         $1169.60 -$12.80

Crude Oil:                 $59.18 -$0.45

DJIA:                        17,938.68 +98.16

NASDAQ:                 4973.29 +31.86

S&P 500:                  2095.91 +10.40

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