Right out of the box this morning, April retail sales were better than forecasts. Sale up 0.1% on estimates of a decline of 0.3%; ex autos -0.1% as expected. Sales in the U.S. rose in April, reflecting broad-based gains that may ease concern consumers are holding back. The 0.1% gain followed a 0.5% drop in March, Prior to 8:30 the 10 yr was up 2/32 at 1.89%, by 9:00 at 1.93%. US stock indexes were slightly weaker at 9:00 but no support in the rate markets. Early trade in the mortgage market saw another strong selling binge; at 9:00 30 yr FNMAs -28 bp frm the close on Friday.
The interest rate markets continue to reflect the possible end to the 30 yr old bond market rally that started in 1983 with 30 yr mortgage rates at 17% and the 10 yr note at 18% (bank prime rate at 20%). The action in the rate markets that was triggered by the strong April employment report has not been able to achieve even a modest bounce after rocketing the 10 yr frm an intraday low of 1.63% to 1.93% last Friday before ending the week at 1.90%. Mortgage rates up about 15 basis points in rates last week. Japan’s plan to weaken its currency is working against the US bond market; as the yen falls there is less demand for US bonds. Every technical indicator on the bond and mortgage markets is now solidly bearish; last Friday in a Tweet PIMCO co-CEO and bond king Bill Gross declared the end to the declining interest rate rally, even after a month ago Gross said he was increasing PIMCO’s investment in US notes and bonds. Most likely Gross was looking at the magnitude and speed in which rates rose last week.
The current move to exit long positions in the bond market that had built over the last few months on bets prices would increase and yields decline is driving rates to levels we were not expecting a couple of weeks ago. The race to the exit has done severe technical damage to the bullish outlook that had prevailed for months based mainly on the Fed continuing its easing and thoughts the economy is slowing has rattled fixed income markets and increased the view the end has arrived. The Fed hasn’t implied anything that it is about to end its monthly buying of treasuries and mortgages, so far there isn’t any evidence that the Fed will stop soon. Nevertheless, the rate markets are seriously wounded now. Speculative long positions or bets prices will rise, outnumbered short positions by 37,956 contracts on the Chicago Board of Trade. Net-long positions fell by 94,088 contracts, or 71%, from a week earlier, resulting in the biggest reduction in net longs since March. Hedge funds decreased their long positions in 10 yr note futures at the end of last week according to the CFTC.
At 9:30 the DJIA opened -40, NASDAQ -5, S&P -4. 10 yr note 1.92% +2 bp and 30 yr MBSs -18 bps. So far this morning the rate markets have continued the high intraday volatility; at 9:00 30 yr MBSs -28, at 9:30 -18, the 10 yr climbed as high as 1.94% early, slightly better at 9:30.
March business inventories, expected up 0.3% were unchanged, Feb inventories originally reported +0.1% was revised to unchanged. No reaction to the report.
No matter how we look at it, the speed and depth of the selling in the bond and mortgage market clearly states investors and traders are unloading a lot of the long positions held on ideas that rates would decline to re-test the lows at 1.40% on the 10 yr note seen last year. No matter how we try to paint a more optimistic outlook, we just kind find anything now that provides any near term evidence of a rebound. The momentum oscillators we monitor measuring the speed and magnitude in determining overbought or oversold are approaching over-extended levels but still not yet there yet. There will be a rebound, but from what levels? As we continue to remind; do not fight the tape here. This market at present is very bearish.