Market Analysis

The bond market opened down sharply this morning.  Below is commentary from David Shirmeyer with Sigma Research:

Not a good open this morning; the rate markets opened soft on better outlook for the stock market today. At 9:00 the 10 yr note -6/32 3.85% +2 BP, mortgage prices are continuing to fall, at 9:00 -10/32 (.31 bp) frm yesterday's close; the DJIA traded +67 in the futures markets. At 9:30 the DJIA opened +76, 10 yr note -8/32 to 3.86% +3 BP and mortgage prices -10/32 (.31 bp).

Weekly jobless claims were in line with estimates this morning; down 6K to 439K new unemployment filings. Continuing claims were fractionally lower at 4.662 mil frm 4.668 mil last week. The 4 wk average of unemployment claims is now at its lowest since 9/13/08 and continuing claims at their lowest since 12/08. Claims have been slowly declining over the past couple of months confirming employers are ending their job cuts, however claims are still high historically and the unemployment rate remains at 17% to 20% when discouraged workers are counted. The BLS reports them in the guts of the data but as we know, its the "official" unemployment rate that hangs at 9.7%.

At 10:00 two additional data points; Feb construction spending expected -1.0% was down 1.3% the lowest level of spending since Nov 2002; Jan construction spending revised fro -0.6% to -1.4%. The decline in spending was expected and is being over-shadowed by the March ISM manufacturing index that increased more than expected at 59.6 compared to forecasts of 57.0. The new orders component increased to 61.5 frm 59.5, prices increased to 75 from 67 and employment slipped fractionally to 55.1 frm 56.1. Any of the index readings over 50 indicates expansion. The initial reaction sent eh 10 yr note price lower and mortgage prices 4/32 (.12 bp) lower than at 9:30 this morning.

US stock markets are strong into the open, being fueled by strong economic reports from China and Japan this morning. Asian stocks and commodity prices climbed after China’s Purchasing Managers’ Index rose to a seasonally adjusted 55.1 last month from 52 in February, according to Li & Fung Group, a Hong Kong-based company that releases data for the Federation of Logistics and Purchasing. In Japan, the Tankan index of sentiment among the country’s largest manufacturers rose to minus 14 in March from minus 25 in December, the least pessimistic since 2008, according to the Bank of Japan.

Inch by inch the economic outlook is continuing to improve and drawing money into stocks and away from the bond markets. It is getting more difficult to hold to the potential of an economic double dip; that view or outlook based on the continuing weak housing sector, high unemployment with little expectations of strong job growth and declining consumer spending. Consumer spending has picked up recently; it may be necessary spending and more discretionary spending, whatever spending has picked up the last three months.

Here comes more supply; this morning Treasury will announce next week's auctions; likely a total of about $80B. Now that the Fed is out of the game in purchasing US treasuries and mortgages the pressure on rates is increasing. So far this week the MBS markets have been weaker than the weakness in treasuries; not much but most likely due to the Fed's ending of MBS buying. We however remain with our view that MBS markets will not experience inordinate increases in rates in relationship to treasuries. So far that is the overall consensus based on our canvassing of dealers and large investors. We will focus on it over the next few weeks, this week's action is somewhat bothersome but too early to make any definitive assessments. On the larger outlook all interest rates are likely to head higher as long as economic growth is anticipated.

Beside the improving economic outlook that has pushed rates higher recently; crude oil increases are reviving inflation concerns. Crude today is pushing $85.00.