We are a little early this morning due to my schedule. The April employment report did some near term damage to the current bullish outlook for interest rates. The unemployment rate fell to 7.5% down 1 bp, non-farm jobs and non-farm private jobs in April were better than expected and there were upward revisions to Feb and March jobs adding an additional 114K jobs than what was originally reported. The 10 yr interest rate increased 11 bp on Friday taking away all the improvement seen since April 12th. Mortgage rates increased about six bp in rate on Friday.
Early this morning the 10 yr note traded unchanged from Friday’s close as were mortgage prices at 8:30. Stock indexes early were unchanged from Friday. There are no scheduled economic releases today, and hardly any key reports this week; weekly claims on Thursday is all there is in terms of data points. Treasury will auction $69B of notes and bonds this week, beginning tomorrow with $32B of 3 yr notes, Wednesday $24B of 10 yr notes and Thursday $13B of 30s. The 10 and 30 yr auctions will create a new 10 and 30 yr instruments.
Investors and traders this week will wrestle with whether the April employment report will lead to an end to the recent decline in rates. Most every key report on the economy for April and March has been weaker than analysts were expecting, prior to the employment report the bond and mortgage markets were quite bullish in the overall outlook with many expecting rates to continue to decline on the weak data and the belief the Fed would possibly add more easing based on the FOMC policy statement released last Wednesday. Weakening economic reports didn’t generate any selling in the very bullish stock market over the past few weeks, partly on the belief the Fed would continue its easing and maybe even increasing its buying; and interest rates were falling on somewhat the same view. Now, after the April employment report everyone is back to re-assessing those views.
With no economic data this week except weekly claims on Thursday there isn’t any additional info that may add to or take away the outlooks that prevail in stocks or bonds. That said, the better employment report with its revisions over the last three months non-farm job increases average 211 jobs per month. We don’t believe this one report is going to have any serious impact on how the Fed thinks at the moment. One month isn’t a trend, but if data measurements on the economy begin to improve---at least against estimates---the idea that the Fed is finished and the next move will be to back off from present $85B buying of treasuries and MBSs will likely increase. The Fed’s balance sheet now stands at $3.3 trillion while global sovereign debt is about $23 trillion.
There are a few Fed officials due to talk later this week; Wednesday has Jeremy Stein, one of the Fed governors, Thursday Jeffery Lacker Richmond Fed President and one of dissenters at the Fed that has been against the contend Fed easing. Also Thursday Charles Plosser Philly Fed president. Friday Ben Bernanke and Esther George, Kansas City Fed president, also a dissenter within the FOMC on continued Fed easing.
Technically the 10 yr has lost a lot of momentum after the route on Friday; the relative strength index is back to neutral after holding bullish readings since Mid-March; the note is trading above its 20 day average but still under its 40 and 100 day key averages. MBS markets about in the same pattern. Strictly frm the technical point of view, at the moment we suggest using any improvements to get deals done if closings are within the next two weeks.
At 9:30 the DJIA opened -12, NASDAQ +6, S&P unch; 10 yr unch and 30 yr MBSs +3 bps.