May 20th, 2011 7:17 AM by Lehel S.
Yesterday's shocking surprise on the May Philly Fed business index turned what was likely to be a run to slightly higher rates around on a dime. The index was expected to increase from 18.5 in April to 20 in May' as released the index plunged to 3.9 and the new orders component fell substantially, from 18.8 to 5.4. Until that hit at 10:00 the bond and mortgage markets were not looking good; the 10 yr note yield had spiked from 3.11% on Tuesday to 3.25% at 9:59 yesterday and mortgage prices had declined 24/32 (.75 bp) with the 30 yr rate up 10 basis points. The very closely monitored Philly Fed decline temporarily reversed heavy selling that was predicated on the FOMC minutes from the 4/27 meeting in which there was a lot of discussion about the Fed ending easing moves and how the Fed would begin to exit and the first move to tighten. The take away on Wednesday; the Fed believes the economic recovery will continue, no more QE and with interest rates so low investors and traders started toward the exit.
Already this morning we have seen a little volatility; at 8:00 the 10 yr note traded up 4/32 at 3.15%; at 9:00 the 10 yr note -4/32 at 3.19%. Mortgages followed, trading up 3/32 (.09 bp) at 8:00, -3/32 (.09 bp) at 9:00. At 9:30 the DJIA, NASDAQ and S&P all opened weaker; at 9:30 the 10 yr note unchanged and mortgage prices down 3/32 (.09 bp) frm yesterday's close.
There are no economic releases scheduled today and nothing next Monday. With no data points to either confirm the weak Philly Fed data or refute it the bond and mortgage markets will look to the action in the equity markets for direction today. Next week Treasury will auction $99B of notes, with the markets presently uncertain today well be a quiet one.
Crude oil started a little better but has turned lower, while the key stock indexes are starting a little soft after some minor improvement yesterday. By 10:00 the DJIA was down 61, mortgage prices at 10:00 up 6/32 (.18 bp) frm 9:30 levels and the 10 yr note yield 3.15 -2 bp. As equity indexes fall the rate markets will benefit and helps erase the bearishness that had developed on Wednesday.
News out of Germany's central bank today that the economy will likely slow suggests Germany will not likely have to increase rates again. The reaction is strengthening dollar against the euro and indirectly adds some support to the US bond market. The US economic outlook has been lowered, if Europe's economies slow our bond and mortgage markets should hold up well. German growth is “likely to ease somewhat in the foreseeable future,” the Frankfurt-based Bundesbank said in its monthly bulletin published today. Not only Europe; Japan is now in its third recession in the last 10 yrs, this time the March 11th earthquake is causing deeper spending cuts by consumers than what had been expected. Household spending had the largest back-to-back quarterly drop since the global financial crisis in 2008, the Cabinet Office said yesterday. The figures contrast with comments by Japan’s central bank, which refrained from adding more stimulus today, that the economy’s main challenge is one of supply chain disruptions caused by the earthquake, tsunami and nuclear crisis.
Earlier this week we were expecting a small increase in rates when the bellwether 10 yr note continued to fail at its resistance level (3.14%/3.11%). Until yesterday's Philly Fed business index collapsed rates were gathering momentum with rates increasing. The Philly Fed changed our view somewhat; with increasing evidence of economic slowing what appeared to be the beginning of a little increase in rates has been alleviated, at least momentarily. Technically the 10 yr, 30 yr futures contracts as well as the 30 yr 4.0 FNMA coupon all testing their respective 200 day moving averages, so far all of those averages have held.