Very early this morning the 10 yr note and MBSs were weaker; by 8:30 however with stock indexes seeing selling the 10 and MBSs were improving. 2.00% for the 10 is still holding on selling, although the note has traded over 2.00% it hasn’t been much and when it has moved slightly above 2.00% it hasn’t had any follow-through. We still hold that the rate and stock markets are overdue for a correction; is this the day it starts? We are not willing to go that far since any attempt to push stock indexes lower has so far failed to gather any momentum. It isn’t a case that we think markets are wrong, it’s just that both markets need to correct in order to continue to move higher on rates and stocks. It is all technical that we expect some retracements.
This week there isn’t much in the way of data to motivate markets. Last week the economic calendar had a number of data pots, most of which were seen as bullish for the economy. Since the year began there hasn’t been much from Washington; the suspension of the debt ceiling until May and possible pay suspensions for either house that doesn’t pass a budget by April 15th. Once the debates heat up again the likelihood of the present enthusiasm will wane somewhat. The economy is improving but in our view not as strong as what the stock markets is presently discounting.
More comments from the Fed; James Bullard, St Louis Fed Pres. said Last Friday in an interview that he expects growth in the world’s biggest economy to gain enough momentum to let the central bank reduce the pace of bond-buying as early as the middle of the year. As I recall that is the first time any Fed official has actually put a specific timeline for the Fed to begin withdrawing. Bullard isn’t Bernanke though and within the Fed the majority still think continuing the $85B of purchases each month should go on longer than what he is saying. Nevertheless what cannot or should not be overlooked; the Fed is increasingly talking about an end strategy. Bullard did back the Federal Open Market Committee’s decision last week to continue purchasing securities, the third round of a policy known as quantitative easing or QE.
Treasury will release today its borrowing estimates for the current quarter and the three months beginning April 1. The department has resorted to “extraordinary measures” to continue funding the government after reaching its statutory debt limit. The House of Representatives voted Jan. 23 to suspend the $16.4 trillion federal debt ceiling until May 19.
At 9:30 the DJIA opened -73, NASDAQ -14, S&P -7. 10 yr note at 1.99% -3 bp; 30 yr MBSs +20 bp.
The only report today; Dec factory orders at 10:00 were thought to be up 3.0%, as reported inventories were up 1.86% and Nov inventories originally reported unch were revised to -0.3%. No reaction to the report.
Is today the day markets begin the corrections long overdue? So far the stock indexes are lower but a few hours isn’t enough to call it. When the pullbacks begin in earnest the 10 yr note yield should decline about 10 basis points to 1.90% and 30 yr MBSs also down 10 bp in rate. To turn the bond market frm bearish to bullish the 10 yr would have to drop to 1.80% which we don’t expect. As long as the outlook for the economy remains as it currently is (improving), there is little likelihood rates will fall much. That said, as we have noted previously, as long as Markets continue to believe the Fed will continue its QE, interest rates are not likely to increase much more than where they trade today. Last week Commerce said GDP actually declined 0.1% in Q4 2012; it was largely due to a decline in government outlays and a smaller gain in inventories that subtracted a combined 2.6% points from growth.
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