AM Market Update

As noted here, we have talked about volatility that would dominate markets the next couple of weeks. today a good example; yesterday MBS prices fell 33 bp on the day, this morning the 30 yr 3.5 FNMA coupon at 8:30 +73 bps. All about data points and markets were surprised (again) when at 8:30 the final read for Q1 GDP reflected the economy was not nearly as strong in Q1 as was widely believed. The overwhelming expectation was Q1 would be +2.4% unchanged from the preliminary report last month; as reported the economy grew at just 1.8%. The reaction sent 10 yr note yield down to 2.52% frm 2.60% yesterday, and spiked MBS prices higher.

 

 The weaker growth in Q1 has turned speculation that the Fed would begin tapering in Sept into turmoil. As we noted, it is all data dependent on how and when the Fed would begin to end its market support; Bernanke made that plain when the surprised the markets with his comments that he was ready to begin the end of Fed market support.

 

At 9:30 the DJIA opened +89, NASDAQ +28, S&P +9; 10 yr note at 2.52% -8 bp and 30 yr MBS price +82 bps.

 

At 1:00 this afternoon Treasury auction $35B of 5 yr notes; yesterday’s 2 yr auction was not well bid.

In Europe the stock markets rallied that added to it when Q1 US GDP hit on relaxed concerns of an early exit by the Fed. A German consumer confidence gauge for July rose to 6.8 from 6.5 in June, Nuremberg-based research company GfK AG said today. That would be the highest since September 2007. Analysts had expected a reading of 6.5. The German 10 yr bund yield fell seven basis points to 1.74% frm 1.85 two days ago. Euro-area bonds rose, led by those of peripheral nations including Italy and Spain as European Central Bank President Mario Draghi said monetary policy will stay accommodative, boosting the appeal of fixed-income assets.

 

Today’s fall in US interest rates is a welcome move; that said the technicals remain bearish. The 10 yr and MBSs could rally a lot more and still not change the bearish outlook. The 10 yr would have to fall to under 2.35% the 3.5 July FNMA coupon price would have to exceed 102.50---presently 100.64. Today’s weak Q1 GDP report is adding support to the bond and mortgage markets that maybe the Fed will not be moving as quickly as had been thought to unwind its easing. That said, although Q1 was softer, it is to an extent history. The future remains unsure however recent Q2 data has been strong; yesterday May durables were better than expected so too May consumer confidence index and May new home sales. Us this and any rallies to button up deals; interest rates are not likely to fall much from current levels.