Cedar Point's Top Thrill Dragster has a 420 feet (42 stories), 120 mph drop. It is a TOTAL blast for anyone who is a roller coaster fanatic like myself. But at least the Top Thrill Dragster stops. Mortgage bonds continue their downward trend in pricing / interest rate increases.
Bonds are currently down -16 basis points so we expect rates to increase. Yesterday, as we expected, the Fed Minutes from May 9 stated "nearly all participants viewed core inflation as remaining uncomfortably high," and "all participants agreed the risks around the anticipated moderation in inflation were to the upside." Even though the Fed went on to say that the economy is growing at a slower pace than anticipated, which would normally be a Bond friendly remark, the concerns on inflation took the air out of yesterday morning's early gains and left Bonds finishing the day unchanged.
This morning the Preliminary Gross Domestic Product (GDP) for the first quarter of 2007 was revised lower to 0.6%, which was lower than expectations of 0.8%. A larger trade deficit, falling inventory levels, and declining investments in the Housing Sector all contributed to the decline. This was the slowest growth rate since the fourth quarter of 2002. The 0.6% level is close to zero - and remember that 2 consecutive quarters of negative GDP growth is a Recession. We think the economy will do better in the second quarter.
Even the anemic growth rate could not help Bonds move higher - Why? The "I" word - INFLATION. Within the GDP report is the accompanying Chain Deflator, which measures inflation of a basket of goods and services and it showed inflation rising at a 4.4% annualized rate, the most since 1991. Even though most of the increase came from soaring food and energy costs, the Fed's concern over inflation remains valid.
The Chicago Purchasing Managers Index was reported at 61.7 which was much hotter than expectations of 54.0 and matches the highest reading in two years. Mortgage Bonds quickly dropped on this strong report.
Stocks remain on fire and have now set a new closing high for the S&P 500. And yesterday we thought they would rally even though they were lower when the update was published. They appear destined to reach an overextended level before the inevitable and significant decline. Until this happens, stocks will remain a drag on bonds.
Jobs Report and Core PCE Strategy
Tomorrow we have two super high-impact reports scheduled for release - the Jobs Report and the Core Personal Consumption Expenditure (PCE) Index. So how do we advise our clients going into tomorrow? Expectations are for around 135,000 jobs and the recent ADP data and Initial Jobless Claims reports suggest the number should come in close to expectations. We think the report will come in a bit higher but also close to expectations. Look for a level around 137,000. The Unemployment Rate should hold steady at 4.5%. Bonds will probably have some trouble with tomorrows numbers.
The Core PCE may be a sign of good news; we expect the number to be 2.0% to 2.1% Year over Year. This would be a good number, but will it be good enough to get bonds out of the nasty downtrend...probably not.
One thing I have learned is that you can't fight the trend, even if the trend is not correct. For now, it's higher stocks and lower bonds. Lock until it's over.
Make it a GREAT day!
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