July 5th, 2011 9:10 AM by Lehel S.
A nice start today with treasuries and mortgages doing much better after the huge increase in interest rates last week. The 10 yr note rate jumped 37 basis points and mortgage rates up 25 percent last week. Looking for some retracement after the beatdown last week, and volatility this week will be very high. This is employment week and the expectations are not that great so if we were to see any less than thought reads on jobs some rte improvement is likely. Last week it was the stock market making big moves higher in the indexes, the best week for stocks in 2 yrs; the DJIA up 648, NASDAQ +208 and S&P +71. Like the bond market it too was likely a little ahead of itself.
This morning in early activity (9:00 am) the 10 yr note +10/32 at 3.15% -5 bp and mortgage prices +11/32 (.34 bp); the DJIA +7 but the S&P -2.
Although the potential for a bounce in the bond and mortgage markets is likely, the trend and technicals have changed to bearish or at best sitting here for awhile. That said, as noted its employment week. The early forecasts for Thursday's ADP non-farm private job growth an anemic +60K, the forecast for the BLS non-farm private job growth on Friday, also a weak +110K. These are not numbers that show much improvement. Expect estimates to change a little as the week progresses.
In Europe Thursday it is expected the ECB will increase its base rate once again. European services and manufacturing growth were revised lower, with a composite index falling to 53.3, from an earlier reading of 53.6, London-based Markit Economics said today. Spanish and Italian bonds fell, increasing the additional yield investors demand to hold the securities instead of German bunds, on concern Greece’s debt crisis may continue to harm its euro-area peers. Portuguese 10-year bonds also sank as the Financial Times reported commitments from banks to reinvest funds from maturing securities into new Greek debt may fall short of policy makers’ target. Europe's debt problems are not over, even Greece is still subject to defaulting eventually as some continue to expect it will.
Crude oil higher this morning after two days of declines; crude is well trapped between $97.00 and $92.00 a barrel.
At 9:30 the DJIA opened -14, S&P -2; 10 yr note +11/32 at 3.14% -6 bp and mortgage prices +12/32 (.37 bp).
The only data today; at 10:00 May factory orders were up 0.8% against estimates of +1.0%; April orders were revised to -0.9% frm -1.2%. May durable goods orders revised to +2.1% frm +1.9%-----no initial reaction to the data.
This Week's Economic Calendar:
10:00 am May Factory Orders as reported +0.8%
7:00 am Weekly MBA mortgage apps (N/A)
10:00 am June ISM services sector index (54.0 frm 54.6)
8:15 am ADP non-farm private jobs (+60K)
8:30 am weekly jobless claims (-3K to 425K; con't claims 3,70 mil frm 3.702 mil)
8:30 am BLS employment report (NFP jobs +80K, non-farm private jobs +110K; unemployment rate 9.1% unch)
10:00 am May wholesale inventories (+1.0%)
3:00 pm May consumer credit (+$3.5B, Apr +$6.5B)
Last week's strong stock market rally, the momentary deal worked out to keep Greece afloat, the end of QE 2 and the previous week's very poor demand for $99B of Treasury offerings combined to break the bond and mortgage markets. This week's employment data that will set the next move for the bond market. The US economy is feeble giving many the idea that US interest rates will move back below 3.00% after the spike last week; we do not subscribe to that view however. Although the economy isn't likely to grow quickly and inflation is not a problem, the recent auctions suggest risk levels for US debt will increase a little, keeping interest rates a little higher than 3.00% for the benchmark 10 yr note---driver for mortgage rates.