Markets started quietly this morning ahead of the coming three day weekend. At 8:30 April durable goods orders were better than estimates, +3.3% against +1.2% expected; ex the volatile transportation orders durables increased 1.3%, the first gain in three months. March orders were down 5.9%, revised from -6.9% originally reported. The transportation component gained 8.1% after falling 14.7% in March. The report was better than thought but still isn’t real solid; the figures used to calculate gross domestic product this quarter were less positive, indicating business investment is cooling. Shipments of non-defense capital goods excluding aircraft dropped 1.5% after increasing 0.5% in March. Gains in inventories may help offset some of the softness in capital spending this quarter, limiting the damage to growth.
At 9:00 the stock indexes were pointing to a lower open at 9:30; the 10 yr note rate 2.00% down 2 bp and 30 yr MBS price at 9:00 +20 bp frm yesterday’s close. At 9:30 the DJIA opened -54, NASDAQ -19, S&P -8; 10 yr note at 2.00% -2 bp and 30 yr MBS price +20 bp frm yesterday’s close.
Markets still debating what Bernanke and the FOMC minutes really mean in terms of when the Fed will begin to withdraw some of the QEs. Wednesday there was enough confusion between the FOMC minutes of the 5/1 meeting and Bernanke’s testimony at the Joint Economic Commission that sent stocks and bonds in a wild trade; the 10 yr treasury note range on Wednesday, 1.89% to 2.04%, 30 yr MBS prices down 100 basis points. In the minutes there was evidence that more members were debating the possible tapering off of the $85B Fed buying; at the testimony Bernanke answered a question that within the next three or four meetings the Fed may begin to lessen the monthly purchases. Now after a day of reflection markets have realized the Fed will only move when the economy warrants it---and the movement from the Fed could be an increase as well as any tapering, all dependent on the economic conditions.
The Fed is always in play when it comes to the bond and stock market, especially now. On one hand there isn’t yet enough evidence that the US economy is gaining enough momentum for the Fed to withdraw its easing amounts; on the other hand, underlying all of the debate still holds that the end is approaching. As noted previously the next two weeks may be volatile as each key economic report is injected into the question---what does it mean to Bernanke? The recent spike in interest rates was triggered by the strong April employment report on May 3rd, was it the beginning of improvement or just a one off gain? Markets are likely to remain uncertain now until the May employment report on June 7th. Whether or not the Fed keeps the money flowing or begins to taper, we remain convinced that the interest rate markets will not likely decline much on any rallies. We suggest taking advantage of any improvements in the rate markets to get deals done.
The bond and mortgage markets will close today at 2:00 while stocks will go the entire day. Markets closed on Monday. Next week not much data, Treasury will auction $99B of 2s, 5s and 7 yr notes.