May 19th, 2011 1:51 PM by Lehel S.
Read all of this; 10:00 data has had an impact.
Yesterday's market trading in treasuries was a shot across the bow for interest rates; this morning more selling and we can say the end of the recent decline in rates is likely over. We have warned for a few days the decline in rates was becoming difficult to sustain. Tuesday the 10 yr note did take out its technical resistance at 3.14%, the level that had pushed back any attempts to move lower for two weeks. Yesterday there was no follow-through and yields jumped, in our view the increase in rates added confirmation to our forecast that rates have finally hit bottom and will likely inch higher now. The lows have likely been achieved, however we are not expecting interest rates to explode, rates will move up a little but still will be low in the near term. The economic outlook remains cloudy, that should keep interest rates from increasing much.
More selling to start the morning; at 9:00 the 10 yr note yield at 3.22% +3 bp after increasing 8 basis points yesterday; mortgage prices at 9:00 -9/32 (.28 bp) after declining 11/32 (.34 bp yesterday). All about weekly jobless claims early; claims were expected to decline 9K to 425K, as reported at 8:30 claims were down 29K to 409K. Continuing claims also fell more than thought, to 3.71 mil frm 3.792 mil the prior week; the 4 wk average did notch up, to 439K frm 437,750 however the average is set to fall next week with recent two week declines in claims. This is survey week for the BLS gathering data for May employment report that will be reported June 3rd.
Yesterday the minutes from the 4/27 FOMC meeting were released, although Bernanke held a press conference after the meeting his remarks didn't allude to the amount of time the members took to debate in more detail than any prior meeting on how the Fed will end its easing moves. That the members spent a great deal of time discussing it has lead to the belief there will be no more easing from the Fed. There was a view out there that the Fed might continue its easing efforts when the current QE 2 ($600B of treasury buying) ends at the end of next month, that idea took a hard blow yesterday.
At 9:30 the DJIA opened +40, the NASDAQ and S&P also opened better; the 10 yr note 3.24% +5 bp and mortgage prices at 9:30 -10/32 (.31 bp) frm yesterday's close.
More data at 10:00; April existing home sales, expected up 2.0%, fell 0.8% to 5.05 mil units frm 5.09 mil last month; the average sales price $163,700 down 5.0% frm April 2010. The shocker at 10:00, the May Philly Fed business index; it was widely expected at 20.0 frm 18.8 in April, as reported it fell to 3.9 a huge decline the lowest since Oct 2009. The new orders component at 5.4 frm 18.8 in Apr, prices pd at 48.3 frm 57.1 and the employment component at 22.1 frm 12.3 (any index over zero is considered expansion). The report is strange in that orders fell hard while employment increased. Finally at 10:00 April leading economic were expected +0.1% but was down 0.3% the first decline in that series since Feb 2009.
OK, early on treasuries were being hit hard, the 10:00 data stopped the selling and markets are improving. The 10 yr note cut its losses in half as have the mortgage markets. The DJIA and other key stock indexes took the data badly, the DJIA is generally unchanged at 10:10 after being up 60 points prior to the 10:00 data. Volatility will be high today after the very unexpected weak data reported. We will not change our outlook however, the bond and mortgage markets have likely seen their best levels.