Very early today the 10 yr note was better with the yield down to
2.47% down 1 bp frm yesterday; it didn’t last however, at 8:30
the 10 yr yield increased to 2.50% with US stock indexes working lower early
after the strong improvements over the last few days. Mortgage prices at 9:00
-20 bps frm yesterday’s close.
At 9:30 the DJIA opened -72, NASDAQ -11, S&P -6. 10 yr at 2.54% +6 bp
and 30 yr MBSs -50 basis points. No real let up in underlying volatility, and
it will continue through next week at least.
Over the last couple of days, and after the shock to markets frm
Bernanke’s comments last week, Fed officials are out to cool off the fears. Three
Fed officials yesterday making comments that the Fed was still uncertain about
what will happened with the QEs. Bernanke last week said the Fed would begin to
taper by the end of the year pending how the economy performs. The Fed’s
outlook for the economy is optimistic, that the economy is recovering and the
Fed will begin backing away. Since that remark the markets convulsed into
panic; interest rates increased, the stock market fell---both on significant
moves. Then it was the Fed’s turn to be shocked, Bernanke’s remarks were not
expected to crash markets and set of the volatility. Now the Fed is out
attempting to calm markets with less hawkish comments from the likes of NY Fed
Pres. Dudley yesterday and other Fed officials out making speeches.
There has been some relaxation in the bond market, the 10 yr note
yield has declined from 2.65% to 2.50% early this morning but the bearish bias
remains intact. Unless the US and global economies reverse and weaken the bond
and mortgage markets are not likely to improve much. It is all about how the
economy performs in the coming months; Bernanke made it clear in his remarks
last week that the Fed’s actions moving forward is dependent on data measuring
the economy’s performance. Initially no ne chose to focus on that aspect,
setting off the hysteric moves last week. Now some balance being worked into
the equation, but not much and the market volatility will continue with wide
swings. Don’t allow yourself to believe rates will fall much; the trend is for
higher interest rates, or at best trade at present levels. Bottom
line: the Fed believes the economy is improving, the track record at the Fed on
economic forecasting isn’t stellar by any means and markets know it. Taking the
interest rate forecasts to its lowest denominator in terms of outlook---it all
depends on the economy. Our view, the economy isn’t as strong as the Fed
thinks, if we are correct interest rates should stabilize at present levels.
That said, it isn’t our view or the Fed’s outlook that is important it is what
markets think.
Two data points this morning; at 9:45 the June Chicago
purchasing managers index, expected at 55.0 frm 58.7 in May, the index declined
to 51.6. The decline is counter to the increases seen in other regional indexes
as most have been better but Chicago isn’t Richmond, there are many more manufacturing
operations in the Chicago region. The reaction sent stock indexes down more but
didn’t do lot for the bond and mortgage markets. At 9:55 the final June U. of
Michigan consumer index was expected at 83.0 frm 82.7 at mid-month, the index
increased to 84.1. The final reading for the May index was 84.5 so on a month
to month view the index declined. The report sent stock indexes down more, but
didn’t improve the bod and mortgage markets.
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