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The May employment data has been a huge shock to the markets and the outlook for the economy. The unemployment rates increased to 8.2% frm 8.1% the past two months. Non-farm jobs were expected to be up about 150K, jobs increased just 69K and private jobs were thought to be up 168K, as reported up 82K. April non-farm jobs were revised down 38K frm the original report and Mach jobs revised lower by 11K frm originally reported. April non-farm private jobs originally reported +130K were also revised lower, to +87K -43K. Factory employment increased by 12,000, less than the survey forecast of a 15,000 increase. Employment at service-providers increased 84,000 in May. Construction companies cut 28,000 jobs, the most in two years, and retailers boosted payrolls by 2,300. Government payrolls declined by 13,000. Average hourly earnings increased 0.1%. Compared with May of last year, earnings climbed 1.7%, the smallest increase since December 2010. The average work week for all workers fell to 34.4 hours from 34.5 hours. The so-called underemployment rate — which includes part-time workers who’d prefer a full-time position and people who want work but have given up looking — increased to 14.8% from 14.5%. The report also showed an increase in long-term unemployed Americans. The number of people unemployed for 27 weeks or more rose as a percentage of all jobless, to 42.8% from 41.3%.
No matter how one looks at it, the employment data clearly shows the US is being dragged down by Europe and its complete inability to deal with its debt problems. The initial reaction to the report this morning sent the 10 yr note yield down to 1.44% -13 bp frm yesterday’s close and down 31 basis points since last Friday’s close. Mortgage prices on the reaction increased 11/32 but by 9:00 MBS prices had fallen back to +6/32 (.16 bp). The DJIA futures on the reaction fell 200 points, by 9:00 though -166.
Also at 8:30, April personal income expected up 0.3% was reported up 0.2% while spending increased 0.3% as expected.
Wanting lower interest rates is what most want to see, but as with eating candy, too much makes us sick. The rapid drop in rates this week is setting off a run to renege and recast those locks of a week ago. Those that are re-financing are likely to increase their demand for lower rates and walk away. Lenders are facing the problem of what will actually close and at what rate. How low can rates go? We don’t know for sure, but technically the bond market is very overbought for the moment, panic is increasing with investors and Europe continues to move closer to the preverbal cliff. The best scenario now would be for interest rates to stabilize and move up a little; not cheering for higher rates, but markets are unstable here and in need of consolidation. We expect there will be some retracement soon as the bond market is currently stretched to its limit; not saying in any way that rates have bottomed, but expect an increase in price volatility next week. Longer term, the present bullish trend could withstand a backup to 1.60% on the 10 and not change the bullish outlook. That said, at this point it is unlikely that will occur, but there will be some rebound coming very soon.
The DJIA opened -116, NASDAQ -51; the 10 yr note yield climbed back to 1.50% frm 1.46% on the employment report, MBS prices +5/32 (.15 bp) and down from +11/32 (.34 bp) on the reaction to the employment report. As noted in the above paragraph we don’t look for more declines in rates over the next few days; mainly a technical observation but we have confidence in it and will stand by our short term forecast that rate markets will consolidate here for a while.
Continuing today’s data; at 10:00 the May ISM index expected at 54.0 fell to 53.5 and down from 54.8 in April. New orders component increased to 60.1 frm 58.2, employment at 56.9 frm 57.3 and prices pd at 47.5 frm 61.0. Another weak report but no immediate reaction with rates already rallying. April construction spending at +0.3%.
After the very weak data today the idea of another Fed QE has increased. I still cannot square why the Fed would need more QE with rates at these lows. What is the advantage of more Fed involvement? Will it force more employment, NO, will it force investors to invest in equities looking for profits, NO. Will it force investors to move money out of the US to sovereigns return higher rates, POSSIBLY.
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Prior to 8:15 this morning the 10 yr and mortgage markets were slightly weaker in price. At 8:15 ADP reported its estimate for May private jobs, thought to be up 150K, increased 133K; the average for the first five months this year 123K. Not much reaction to the weaker data. At 8:30 weekly jobless claims were expected to have declined 4K, as reported claims were up 10K to 383K after last week was revised from 370K to 373K. The 4 wk average on claims at 374,500 frm 370,750K; continuing claims at 3.242 mil down frm 3.278 mil as more unemployed lose their benefits. The continuing claims are the lowest since July 2008. Also at 8:30 Q1 preliminary GDP was expected at 1.9% and was as reported and down from +2.2% on the advance report last month; final sales in Q1 +1.7% frm +1.6% on the preliminary report.
Market reaction on the early data took the 10 yr note to 1.60% -0.1% and mortgage prices +5/32 (.15 bp) frm yesterday’s close. Stock indexes still held minor gains on the data but were well off the levels prior to the data. At 9:30 the DJIA opened +15, NASDAQ unch; the 10 yr note +5/32 at 1.60% and MBS 30 yr price +5/32 (.15 bp) frm yesterday’s close. As the day has progressed rates continue to decline (see below)
In Tokyo last night Fed’s Bullard said he doesn’t see the need for more QE frm the Fed. One man’s opinion in a Fed divided. There remains a number of Fedsters that still want another easing. We continue our opinion that the fed will not ease at the June 19-20 meeting, and after that the Fed will hold off as it generally doesn’t want to be seen as political into the Nov elections.
At 9:45 the May Chicago purchasing managers’ index, thought to be at 57.0 frm 56.2, took a big decline to 52.7. The components also weaker than thought; new orders index at 52.9 frm 57.4, the lowest read since Sept 2009, employment component at 57.0 frm 58.7; prices at 60.4 frm 68.6 on the decline of energy prices. Although markets are taking it badly in the stock market, the key indexes still are above 50 and expanding, albeit very slowly and weakening. Europe is having a serious negative impact on the US and global economies as it is clearly in deepening recession dragging the rest of the world along with it. That’s it for scheduled reports today; tomorrow of course is the mother lode with the May BLS employment report; after the data this morning many traders already adjusting to a weaker than thought report.
Spanish and Italian bonds rallied amid speculation the European Central Bank will announce measures to combat the debt crisis when it meets next week. Spanish 10-year bond yields declined from a six-month high today even as ECB President Mario Draghi told a European Union Parliament committee the central bank cannot fill the “vacuum” of the lack of fiscal prudence and governance in the euro area. Policy makers will meet on June 6. Round and round we go with conflicting news from the region.
The safe haven move to US treasuries has moved more toward 30 yr bonds than the 10 yr note as investors are looking for higher yields. The 10 yr note this morning hit a new low at 1.59% for a nanosecond; the 30 yr bond declined 6 bp at 9:30 compared to -1 bp on the 10 yr; the 10 price +4/32 while the 30 yr bond up 25/32. Mortgage markets take their direction from the 10 yr, not the 30 yr. In Germany this morning their 10 yr bund traded at 1.25% compared to 1.60% on the US 10 yr. Mortgage markets not rallying much this morning but prices have improved, at 10:00 the 10 yr note at 1.58% a new record low.
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A new record low for the 10 yr note this morning, at 1.67% at 8:30; stock indexes being crushed early on. Mortgage rates also at new record lows. Of course its all about Europe as has been the case now for well over a year; an index of executive and consumer sentiment in the 17-nation euro area fell to 90.6 from a revised 92.9 in April, the European Commission in Brussels said today. That’s the lowest since October 2009 and below the 91.9 forecast by economists. A gauge of sentiment among European manufacturers fell to minus 11.3 from minus 9 in April, today’s report showed. That’s the lowest since February 2010. An indicator of services confidence dropped to minus 4.9 from minus 2.4, while a gauge of consumer sentiment rose to minus 19.3 from minus 19.9. Sentiment in the construction industry also declined this month.
Italy’s bond yields surged to a four-month high as the nation missed its maximum target for sales of five- and 10-year securities. German two- five-, 10- and 30-year government bond yields fell to record lows. Spanish bonds slumped, driving five-year yields to more than 6.0% for the first time since November. The Italian 10-year yield advanced 18 basis points, or 0.18 percentage point, to 5.95 percent early today; the rate reached 6.01% before bouncing, the highest since Jan. 31. German 10-year yields fell five basis points to 1.32% after dropping to 1.304% before a bounce, the least since tracking the data in 1989. German two-year yields slipped to 0.01%, five-year yields declined to 0.383%, while 30-year rates slid to 1.849%, all the least on record for the securities.
About 7:00 am this morning news wires reported the European Commission called for direct euro-area aid for troubled banks and touted common bond issuance as an antidote to the debt crisis now threatening to overwhelm Spain. The current EU plans call for the 500 billion-euro European Stability Mechanism, set to start up in July, to funnel bank-aid money through national governments and, ultimately, require those governments to pay it back. The commission appealed for a “banking union” that would more tightly integrate supervision and create a pool of European funds to clean up banks with cross-border exposure and segregate their underperforming assets. The “new” plan being floated calls for direct loans to troubled banks and not through governments; it is being opposed by Germany however. The German view is that lending to banks directly instead of through governments would lessen the moves to austerity in spending.
All Europe’s stock markets are getting hit hard this morning on increasing lack of confidence in the region and the inability of Italy to sell its debt. Money continues to flow to safety, into German bunds and US treasuries. US interest rates trading higher than German rates; the German 10 yr bund at 1.32% compared to US 10 yr treasury at 1.66% keeping demand high. In China today the government said it won’t inject stimulus at the pace it did in 2008 as its economic growth is expected to decline to +8.2%, also helping drive global rates lower.
Mortgage applications decreased 1.3% from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending May 25, 2012. This week’s results do not include an adjustment for early closings on Friday before the Memorial Day holiday. The Market Composite Index, a measure of mortgage loan application volume, decreased 1.3 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index decreased 1.6 percent compared with the previous week. The Refinance Index decreased 1.5 percent from the previous week. The seasonally adjusted Purchase Index decreased 0.6 percent from one week earlier. The unadjusted Purchase Index decreased 1.8 percent compared with the previous week and was 3.9 percent lower than the same week one year ago.
At 9:30, in line with Europe’s markets, the DJIA opened -110, NASDAQ -29. The 10 yr at 9:30 1.66% -9 bp frm yesterday and taking out resistance at 1.70%; MBS 30 yr prices +10/32 (.31 bp).
The only data today; April pending home sales, expected up 0.2%, fell 5.5%; yr/yr sales +14.4%. Pending sales are contracts signed but not closed; cancellations led to the decline as appraisals and credit problems continue to eliminate potential buyers. The stock indexes weakened more and the rate markets improved slightly on the report.
Limbo, Limbo. How low can they go? How bad will things get in Europe’s financial crisis, and how deeply will Europe drive global economies down? The US 10 yr is now technically set to test the next resistance at 1.60%. As long as German 10 yr bunds fall it will drive US rates down with it as US rates continue to trade at higher rates. That said, it is the moving target and completely depends on the deteriorating outlook in the EU’s ability to work out a solution to its debt and growing problems in the banking sectors. Germany is the key; will it step up and take the leap to save the day as it did with east Germany? So far Germany is unwilling to take on the challenge.
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This is employment week, always a big one for the markets. ADP will report its estimate for private jobs in May on Thursday then the BLS reports the “official;” report on Friday. In the meantime Europe still dominates overall, now Spain is taking the spotlight on concerns Spanish banks are teetering on the edge and need capital infusion in some manner in order to remain solvent. It only gets worse in Europe, Greece is increasingly viewed as leaving the EU with the deciding vote in about two weeks (June 17th).
How low can US interest rates fall? Based on comparisons of some other AAA sovereign yields the US 10 yr note is cheap, trading at 1.73% this morning compared to Germany’s 10 yr bund at 1.346%; the spread .385 bp at 9:30. $ yrs and counting, the US budget deficits have exceeded $1.0T with US debt downgraded by rating agencies and no longer AAA. One of the key drivers for US interest rates is there are better yields here than in Germany, Australia and other better controlled countries. The extra yield investors receive for holding Treasuries is an added benefit for investors seeking a haven from Europe’s sovereign debt turmoil. In the US there is absolutely no incentive for politicians to focus on budgets; neither Democrats or republicans, no matter what comes out of their mouths, our politicians have no interest in actually dealing with excess spending regardless of what you may here from any of them.
Home values in 20 U.S. cities fell in the 12 months ended March at the slowest pace in more than a year as lower borrowing costs and an improving job market gave sales a boost. The S&P/Case-Shiller index of property values fell 2.6% from a year earlier after a 3.5% drop in February.
At 9:30 the DJIA opened +83, NASDAQ +25; 10 yr note +3/32 at 1.73% -1 bp and mortgage prices that were slightly better early were unchanged.
At 10:00 May consumer confidence index from the Conference Board, expected at 69.4, was a lot weaker at 64.9 frm rev’d Apr at 68.7 frm 69.2. Expectations at 77.6 frm 80.4, the present situation at 45.9 frm 51.2. The rep[ort on consumers is a lot weaker than what the U. of Michigan consumer sentiment index reported last week. The reaction wasn’t much, the 10 yr note moved up 2/32 in price but the stock market ignored the report.
Probably won’t see much movement in the financial markets through the rest of the day; at least until; 3:00 for the stock market. The final hour in stock trading is generally volatile. The interest rate markets are not likely to improve a whole lot this week until employment on Friday or a significant decline on German 10 yr bunds. Technically the US 10 yr is going to need a large push to move and stay below 1.70%. Mortgage rates are likely to be unchanged through most of this four day week.
This Week; is employment week on Friday. The 10 yr note still not yet able to break below 1.70%, the level that has held all rallies since last Sept. Two reports on manufacturing, the regional Chicago purchasing managers index and the national ISM report. April personal income and spending also top the data. Tuesday at 10:00 the consumer confidence report, after the big increase in sentiment on the U. of Michigan report last week we want to see if the Conference Board’s confidence will substantiate the improvement in consumer outlooks. Crude oil has fallen over $12.00/barrel from the recent high levels, now that the holiday is behind prices at the pump should decline.
Europe’s debt issues continue to dominate investor concerns driving more to US treasuries in a safe haven move. Greek elections on essentially whether Greece will leave the EU are now just a couple of weeks away. Meantime Spain has moved to center stage with its debt problems and concerns Spain’s banks may fail unless they receive more capital. Germany continues its drive for austerity over more spending to revive the region. The bond and mortgage markets testing strong resistance as both are at historic low yields. Trade this week likely to be choppy with employment on Friday.
For all your mortgage needs in Washington State call William Tuning at CU Mortgage Division.
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Kind of a peculiar day so far; the US bond market is weaker while the stock markets in Europe are rallying pushing US indexes higher. Making it peculiar is that economic data out of Europe was not good and at 8:30 US durable goods orders in April were not up to forecasts. Durables were up 0.2% but less than +0.3% expected, when the volatile transportation orders are removed durables were expected up 1.0% but as reported they were down 0.6%. Weekly jobless claims were 2K to 370K, last week’s claims were revised from 370K to 372K; the 4 wk average did decline, from 375,500 to 370,000.
As has been the case for months, the US equity market is lemming-like, following Europe wherever it goes. Today much of the data out of Europe was weak but apparently the European markets are focusing on that never ending optimism that the EU will survive and Greece will stay in. Not sure why the optimism though, the summit meeting yesterday didn’t accomplish anything; summits in Europe are routine over the last two years—18 of them with no tangible progress. German business confidence also declined more than forecast in May. The Munich-based Ifo institute said today its business-climate index, based on a survey of 7,000 executives, slipped to 106.9 from 109.9 in April. Economists had forecast a reading of 109.4. European services and manufacturing output contracted more than economists forecast in May. A composite index based on a survey of purchasing managers in both industries fell to 45.9 from 46.7 in April. In the UK gross domestic product fell 0.3%, compared with a 0.2% decline estimated last month. Construction output fell 4.8%, the most in three years and more than the 3.0% initially estimated, while services and production were unrevised.
Soft data in Europe, the UK and here in the US hasn’t phased the equity markets. Stocks in Europe higher, in the US higher. While we found little to cheer about after the EU summit, the Greek prime minister continues to talk out both sides; yesterday it was Greece is working on plans to exit if the June 17th elections defeat austerity, today he said Greece is likely to stay. Europe’s debt crisis is so big that in over two years the leaders continue to tread water and can’t solve the insolvable.
The DJIA opened +9, NASDAQ unch. The 10 yr at 9:30 -7/32 at 1.76% while MBS 30 yr prices were down 5/32 (.15 bp) frm yesterday’s close.
US treasuries are weaker this morning even after the stock market opened better but turned lower within 10 minutes of the slightly better start; obviously, mortgage markets are following as they do. This afternoon Treasury will auction $29B of 7 yr notes putting a little pressure on the long end of the curve after yesterday’s so-so 5 yr auction.
What is known, and what isn’t? A strange market so far this morning; the economic releases I Europe and China weaker, the weekly claims and durable goods orders this morning not strong yet Europe’s key stock markets rallying and not much change in the US equity market while the bond and mortgage markets slightly weaker. With economic data softening in most global markets and nothing outright from Europe’s so-called monthly summit meeting yesterday we find the action this morning disconcerting that something is missing. The US 10 yr note does have a big resistance at 1.70%, it won’t be broke easily, and possibly not at all but trade today so far is peculiar.
For all your mortgage needs contact CU Mortgage Division in Olympia, Washington at (360) 539-4687.
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The bond and mortgage markets started slightly weaker this morning but have managed to hold close to unchanged with stock indexes trading a little better. There are no economic reports today. This week Treasury will auction $99B of notes beginning tomorrow through Thursday; with rates now at historic lows the demand will be the measurement of how well the auctions go off. Economic reports this week have April existing and new home sales, durable goods orders and of course weekly jobless claims.
In Europe the EU summit starts Wednesday. German and French finance chiefs are scheduled to meet in Berlin before the summit meeting. Concern Greece will exit the euro erased about $4 trillion from global stock markets this month. There is a strong desire for keeping Greece in the 17 county currency, although Germany still holds court with its insistence for severe austerity. Greece will have another election in June, in essence to determine whether voters want to stay or go; while the election isn’t framed as a do or die thing, that is what it will be. Hedge funds reduced wagers on a rally in commodities to the lowest this year on mounting speculation that Greece will leave the euro, slowing global growth and curbing demand for everything from copper to soybeans. US stock indexes trading higher on comments from China it would support the economy and German and French officials prepared to meet before a summit. There is an increasing belief that Greece will leave the euro currency, that belief will keep US interest rates from increasing much. According to one report 90% of respondents now believe Greece will go. On Saturday at Camp David G-8 leaders urged Greece to stay within the euro area as polls in the country showed a close race between parties supporting and opposing the European Union’s bailout deal.
Speculation has risen that the Fed may need to add to the $12.8 trillion already spent to avert a second recession in three years after reports showed jobs are growing more slowly than forecast and Bernanke said April 25 that the Fed “remains prepared to do more as needed.” For first time since it announced Operation Twist in September, the Fed’s preferred gauge of measuring traders’ inflation expectations is poised to fall for a second straight month. Six weeks frm now the Fed’s Operation Twist is set to end, with inflation not a factor and the weakening global and US economy there is likely to be increasing speculation the Fed will either extend it or have another plan to keep interest rates from increasing.
At 9:30 the DJIA opened +25, NASDAQ +5; Facebook trade started lower than its IPO price last Friday -$3.00 frm the IPO price of $38.00. The 10 yr note -3/32; mtg prices traded about unchanged from Friday.
Interest rate markets continue their bullish bias, mostly on the inability of Europe’s leaders to come to any significant plan to keep Greece in the EU while softening and supporting moves to boost growth with spending increases. Two plus years and counting as the region chokes on debts it can’t pay and disagreement on how to create a miracle that will save the EU. If Greece leaves the fear of contagion to Ireland, Portugal and Spain will increase exponentially. The remainder of the day the bond and mortgage markets will take their lead from the US stock market; At 10:00 the key indexes are slightly better but appear to be struggling to hold gas.
For all your mortgage needs in Washington State call William Tuning at CU Mortgage Division in Olympia, Washington at (360) 539-4687.
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This Week; Treasury will auction $99B of notes beginning Tuesday through Thursday. The 10 yr note yield fell to 1.70% last week, a key resistance level and matching the lowest yield on the 10 yr set last Sept. April existing and new home sales along with April durable goods orders are the key reports this week. Stocks should rebound from their worst week since September and U.S. futures rise as China signaled it would support the economy and German and French officials prepared to meet before a summit. Commodities snapped a three-day drop while Treasuries and the yen declined. The Bank of Japan, which starts a two-day meeting tomorrow, expanded its asset-purchase program in February and April. Last week, two bond-buying operations failed to attract the central bank’s target for sell offers. The European Union summit starts Wednesday. Concern Greece will exit the euro erased about $4 trillion from global stock markets this month. Europe’s debt problems continue to dominate US bond market as money from around the world is piling in to safety in treasuries.
For all your mortgage needs call CU Mortgage Division in Olympia, Washington at (360) 539-4687.
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The bond and mortgage markets started a little weaker this morning with stock indexes better. Not surprising however after the run the bond market drove long term rates (10 yr) down from 1.90% to 1.70% over the last five sessions, and the stock market down 9 of the last 10 days. The financial markets remain bullish for interest rates and bearish on stocks. There are no economic reports to think about today.
The day’s big event is Facebook going public today; the stock will begin to trade at 11:00 am at the IPO price of $38.00.
Moody’s Investors Service downgraded 16 Spanish banks last night, citing the nation’s recession, reduced funding access for lenders and deterioration in loan quality that will spread beyond real estate to household and company loans. Concern more bad loans will come to light at Spanish banks has driven up the country’s borrowing costs on speculation the final bill may hurt government finances. Spanish 10-year bond yields surged to 6.46% this week, the highest since November. The yield slipped 7 basis points to 6.21% today. With unemployment topping 24 percent and the economy set to shrink 1.8 percent this year, according to International Monetary Fund estimates, analysts say the state will need to impose more charges on banks as the slump damages assets beyond real estate.
In China, prices of new homes fell from a year earlier in 46 of the 70 cities tracked by the National Bureau of Statistics, the agency said today. Many analysts are lowering its estimate for China’s second-quarter growth after weaker-than-forecast economic data released last week. The nation’s expansion may drop to a 13-year low this year. The slowing global economies are directly yield to Greece and other European economies as the region continues to be unable to stop the concern that Greece’s debt problem will eventually force it out of the 17 member Union and spread to Ireland and Portugal; Spain also suffering and becoming more a concern.
Angela Merkel and fellow European leaders will face pressure from their G-8 counterparts to do more after speculation Greece will exit the euro wiped about $4 trillion from global stock markets this month. The summit starts today in the U.S. Greece has new elections on June17th, in the meantime Germany has to re-think the severe austerity it jammed down Greece and other EU countries with debt default concerns. France’s new President and the recent inability in Greece to form a government that will accept the draconian spending cuts pushed by Germany. It isn’t news that Europe is in complete turmoil as no matter the debate, in the end there is not enough money to fend off eventual defaults. It keeps on dragging on but reality is increasingly sinking in that defaults and bank failures are inevitable.
Some minor price declines today in the bond and mortgage markets, but the outlook remains positive for lower rates. The 10 yr and mortgages have made a huge run over the week or so, a slight pullback isn’t unusual. At 9:30 the stock market (DJIA) opened +45 but by 10:00 the key indexes were having trouble holding gains. 1.70% on the 10 yr note is a technical resistance level that held the rally last Sept; this time though we expect the 10 will move below 1.70% with the potential of 1.50%, especially if traders believe the Fed will launch anther QE. Given the decline in economic outlooks around the world the Fed is more likely to ease again to continue pushing rates lower and with the intent that investors will be forced into the stock market and business will increase spending; at least that is what many believe.
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Weekly jobless claims at 8:30 were unchanged at 370K filings after last week’s claims were revised from 367K to 370K; continuing claims were a little higher, 3.265 mil frm 3.247 mil last week. Generally flat open this morning in the rate markets with the 10 yr -2/32 while MBS prices at 8:45 unchanged. The forecast called for a drop in claims to 365,000. The four-week moving average, a less volatile measure than the weekly figures, fell to 375,000 last week from 379,750. Forecasts released by the Fed in April showed it expects joblessness to fall to 7.8% to 8.0% by the final three months of this year.
The euro currency continues to decline against the dollar as traders hammer the currency down in the face of continual inability to get some acceptable plan to save Greece and to fend of contagion that will spread if Greece defaults and their citizens vote next month to effectively leave the EU. European leaders are now openly talking about a possible Greek euro exit after attempts to form a ruling coalition in Athens broke down on May 15. The debt crisis in the region sent Spain’s 10-year bond to a five-month high of 6.5% yesterday and Italy’s 10-year bond yield rose to as much as 6%, the highest since Jan. 30. Spanish 10-year bond yields eased after the auction to 6.334%, remaining near the 7.0% mark that pushed Greece, Ireland and Portugal toward European rescue packages. Spain’s Prime Minister said yesterday that Spain faces the “serious risk” of losing access to debt markets and called on European institutions for support. Spanish bond yields have risen almost 60 basis points since elections in Greece on May 6 failed to produce an outright winner.
ECB’s Draghi acknowledged for the first time that Greece could leave the monetary union. While the bank’s “strong preference” is that Greece stays in the 17-nation euro area, the ECB will continue to preserve “the integrity of our balance sheet,” he said in a speech in Frankfurt yesterday. The European Central Bank said it will temporarily stop lending to some Greek banks to limit its risk. Greece’s four biggest banks are waiting for European Union approval to receive 18 billion euros of bonds issued by the European Financial Stability Facility for their recapitalization.
At 9:30 the DJIA opened +5, NASDAQ +3; the 10 yr note -3/32 at 1.77% and mortgage prices unchanged frm yesterday’s close.
At 10:00 the May Philadelphia Fed business index, expected at 10.0 frm 8.5 in April, took a huge hit to -5.8; new orders at -1.2 frm +2.7, prices 5.0 frm 22.5 and employment -1.3 frm +17.9. This is a very weak report; any index under zero is considered contraction. The initial reaction hit stock indexes and pushed interest rates a little lower from before 10:00. The data was so weak it isn’t seeing the market response we would expect. Also a weak report; the April leading economic indicators were expected up 0.1% but decline 0.1%.
Gold is trading higher this morning after days of heavy selling that took its price down 20% frm it’s high. Crude is also better after falling from $104 to $93. The euro currency is unchanged, it too has been falling on Greece’s troubles and the outlook for the EU.
The NY Times is reporting today that the loss at JPM on its hedge mess has already hit $3B; Jamie Dimon had said the loss would be more than the $2B reported earlier this week.
The economic data this morning should keep the rate markets from much selling; tie the data to the Europe situation and we can expect interest rates to be well-supported. The all-time low rate for the US 10 yr note was 1.70% last Sept 23rd; at 1.74% this morning the note is likely to test the low.
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This Week; interest rates are likely to continue lower on increasing fears Europe is facing defaults from Greece and increasing likelihood Greece will depart the EU. If Greece were to exit the EU it may set up a domino effect with Ireland, Portugal and Spain; Europe’s attempt at severe austerity inn efforts to bring countries’’ fiscal spending under control has failed. In Germany over the weekend Angela Merkel’s party suffered another defeat in local elections, last weekend another local election went against her. Germany is the rock in Europe and voters are showing their resistance to any additional help from the country. In Greece over the weekend the attempt to form a coalition government has failed leading now to another general election; most Greeks are rebelling against the austerity pledge Greek officials agreed on a few months ago.
This week after a week with little domestic economic data, there are a number of key data points on Tuesday, Wednesday and Thursday. April reports for the most part; retail sales, CPI, housing starts and permits, industrial production and factory use, the Philly Fed May index. The minutes from the 4/25 FOMC meeting will get a lot of focus, looking for clues about another possible QE; we still hold the Fed will not initiate another QE but there are many analysts and economists thinking the Fed will ease one more time. If the Fed were to ease again it would likely have to happen at the next FOMC meeting in June, after that the Fed will likely refrain with elections coming in November.
