Market Analysis

Analysts had braced for a lower than expected Advance 2nd Qtr GDP estimate to be released this morning and instead received an estimate that was slightly lower than expected at 2.4% growth instead of 2.5% but not a major variance.  The curve ball for markets instead came from the revision upward to 1st Qtr GDP.  It was revised up a full percentage point from 2.7% growth to 3.7% growth which was much hotter than anyone had expected in terms of a revision.  Immediately there were 2 camps in terms of "spin".  On one side are the "bears" who pointed to a much larger decline in growth in the 2nd Qtr than was expected giving the revision upward to 1st Qtr GDP.  On the other side were the "bulls" who pointed to much better GDP data in the 1st Qtr as evidence that, while the employment sector has still not recovered, the economy is gradually improving and that employment growth will eventually follow suit.  The net impact on the markets is that stocks are relatively flat, after opening down and that mortgage-backed securities (MBS) issued by Fannie Mae and Freddie Mac are only slightly better.  10 Year Treasury yields have benefitted the most this morning. In the last couple of weeks of trading there has been more volatility on the 10 Year Treasury notes than on MBS.  On days the 10 Year Treasuries have worsened, the MBS have remained relatively flat and visa-versa.

In separate economic news, the Chicago Purchasing Manager's Index (PMI) came in better than expected at 62.3 vs expectations of 56.3 and the University of Michigan final July Consumer Sentiment Index came in better at 67.8 than the 67.5 that had been expected.  Both of these reports came in better than June data.

US Treasury Notes opened slightly worse this morning but the 10 Yr Note has moved to breakeven as stocks have reversed course from early gains and now are in negative territory.  Mortage-backed securities (MBS) issued by Fannie Mae and Freddie Mac opened flat but have improved slightly in later morning trading.  Stocks are trading lower on concerns that top line revenue growth is not increasing at a level required to sustain continuing corporate earnings growth.

In economic news, Initial Jobless Claims for the week ended 7/24/10 came in at 457,000 which was slightly better than the 464,000 analysts had been projecting.  Continuing Jobless Claims for the week ended 7/17/10 came in at 4.565 million which was just slightly higher than the 4.550 million expected number.

Bonds improved slightly yesterday afternoon but are down this morning. The net effect on mortgage rates sheets is that the points/(rebate) for a given rate are essentially the same so far.  Fannie Mae and Freddie Mac mortgage-backed securities (MBS) are holding up better this morning in early morning trading than the US Treasuries which are under slightly more pressure in front of today's $38 billion 2-year note auction.  The stock market opened up but is currently slightly negative with the release of the July Consumer Confidence Index.  Selling in bonds is also abating in response to the Consumer Confidence numbers.

July's Conference Boards Consumer Confidence Index dropped to 50.4 vs expectations for a 51.0 number.  The 50.4 is the lowest number since February. Analysts had already been expecting a lower result for July as a result of the lack of good news on the jobs front. In other economic news, the Case-Shiller 20 city home price index for May showed a 1.3% increase compared to April and a 4.6% year-over-year increase compared to May 2009.  Analysts had been expecting a 4.0% increase on the year-over-year number. 

Bond markets opened down but ended the day slightly positive despite improvement in the stock market. The Dow ended up 100 points at 10,525.   This week's mortgage rates are expected to take their cues from the performance of the stock market and investor demand for US Treasury auctions.  So far equities have benefitted from improved quarterly earnings reports.  Despite stock market strength though demand for US Treasuries is expected to be strong particularly given the uncertain picture that Fed Chair Bernanke painted last week.  Should investors require a higher yield for treasuries though there could be a round of selling as investors elect to take profits off the tables and wait to see if current bond prices are sustainable.  Below is a recap of this week’s economic calendar:

Monday, July 26, 2010

• June New Home Sales – expected up to a 310,000 annualized pace. Actual # was 330,000 for June with a revision to May up to 300,000 from 267,000

Tuesday, July 27, 2010

• July Consumer Confidence – expected down to 51.0 from 52.9 index in June.
• US Treasury auctions $38 billion of 2-year notes

Wednesday July 28, 2010

• June Durable Goods Orders – expected up 1.0% compared to down .6% in May. Excluding the transportation component expected up .6% vs up 1.6% in May.
• US Treasury auctions $37 billion of 5-year notes

Thursday, July 29, 2010

• Initial Jobless Claims week ended 7/23 – expected no change at 464,000
• Continuing Jobless Claims week ended 7/17 – expected increase to 4.55 million vs 4.487 million the prior week
• US Treasury auctions $29 billion of 7-year notes

Friday, July 30, 2010

• First estimate 2^nd Qtr Gross Domestic Product (GDP) – estimated up 2.5% vs 2.7% for 1^st Qtr
• 2^nd Qtr Employment Cost Index – expected up .5% vs up .6% in 1^st Qtr
• July Chicago Purchasing Manager’s Index (PMI) – expected down to 56.3 vs 59.1 in June
• University of Michigan Final July Consumer Sentiment Index – expected 67.5 reading vs 66.5 in June.

Bonds improved yesterday but are under pressure this morning.  Stocks move higher in early morning trading, with the Dow currently up approx 200 points.  The market was spooked yesterday by Fed Chairman Bernanke's comments about the economic outlook being "unusually uncertain."  This morning though stocks are responding to strong quarterly earnings reports from Caterpillar, 3M, UPS, Xerox and Ebay.  Also European economic data has been positive.  The composite purchasing managers index, which includes manufacturing as well as service industries in Europe, rose to 56.7 in July from 56.0 in June, instead of falling to 55.2 as expected. Also, euro-zone industrial orders showed a 3.8% rise in May vs expectations for no change.

In economic news in the US, Existing Home Sales in June fell to an annualized pace of 5.37 million which was better than the 5.09 pace expected.  Initial Jobless Claims for the week ended 7/17/10 were up to 464,000 vs expectations for an increase to 445,000 from a revised 427,000 the prior week.  Continuing Claims were down to 4.487 million which was much lower than the 4.6 million expected.  In separate news, the Conference Board's June Leading Indicators was down by .2% which was better than the .4% decline expected.

Bonds are down in price (higher in rate/yield) and stocks are stronger today.  No economic news is on the calendar today.  This week's economic calendar is also light.  Below is a  recap:

Monday, July 19, 2010

• No key data

Tuesday, July 20, 2010

• June Housing Starts and Buildiing Permits - Starts expected to down to an annualized pace of 575,000 units vs 593,000 in May. Permits expected to be down to an annualized pace of 572,000 units vs 574,000 in May

Wednesday, July 21, 2010

• No key data

Thursday, July 22, 2010

• Initial Jobless Claims for the Week ended 7/17/10 - expected up to 445,000 from 429,000 the prior week.
• Continuing Jobless Claims for the Week ended 7/10/10 - expected to be down to 4.6 million from 4.681 million the week prior.
• June Existing Home Sales - expected down to an annualized pace of 5.09 million from a pace of 5.66 million in May.
• Conference Board June Leading Indicators - expected down .4%

Friday, July 23, 2010

• No key data

The bond market improved yesterday late afternoon on the release of meeting minutes from last month's federal open market committee showing that the Fed is going to wait to beginning selling their massive portfolio of mortgage-backed securities (MBS) issued by Fannie Mae and Freddie Mac.  It was anticipated that their sale of MBS would put upward pressure on mortgage rates.

In economic news today, a slew of economic data was released and the general take on it by the markets was that it was not good news with regards to economic recovery.  While Initial Unemployment Claims for the week ended 7/10 came in lower than expected at 429,000 (vs expectations for 450,000), Continuing Claims for the week ended 7/3 came in at 4.681 million which was higher than the 4.4 million expected.  The June Producer Price Index expected to drop .1%, dropped .5% and excluding food and energy increased .1% which matched expectations.  The July Empire State (NY) manufacturing index expected to come in at 18.0, dropped to 5.08 (anything over 0 still signals expansion).  Industrial Production for June was expected to be unchanged and it came in slightly higher at up .1%.  June Industrial Capacity Utilization came in at 74.1% just slightly under the 74.2% expected.  The July Philadelphia Fed survey expected to come in at 10.1, came in at 5.1.

Bond markets opened slightly negative but have moved into positive territory in late morning trading. The economic calendar is light at the beginning of the week but picks up starting on Wednesday. Below is a recap:

Monday, July 12, 2010

• US Treasury auctions $35 billion in 3-year notes.

Tuesday, July 13, 2010

• US Treasury auctions $21 billion in 10-year notes

Wednesday, July 14, 2010

• June Retail Sales – expected down .2% compared to down 1.2% in May. Excluding the automotive component, expected 0% change vs .8% drop in May.
• May Business Inventories – expected up .2% vs up .4% in April.
• US Treasury auctions $13 billion in 30-year bonds.
• Minutes from the 6/23 Federal Open Market Committee (FOMC) meeting are released – no surprised expected in minutes as investors generally expect the Fed to discuss slowing growth in the 2^nd half of 2010 .

Thursday, July 15, 2010

• Initial Jobless Claims for the Week Ended 7/10/10 – expected down 4,000 to 450,000.
• Continuing Jobless Claims for the Week Ended 7/3/10 – expected down 13,000 to 4.4 million.
• June Producer Price Index (PPI) – expected down .1% vs down .3% in May. The Core PPI (excluding food and energy) expected up .1% vs up .2% in May.
• July Empire State (NY) Manufacturing Index – expected 18.0 reading vs 19.57 in June.
• June Industrial Productions and Capacity Utilization – Production expected to be unchanged vs up 1.3% in May. Capacity Utilization expected 74.2% vs 74.1% in May
• July Philadelphia Fed Index – expected 10.1 reading vs 8.0 in June

Friday, July 16, 2010

• June Consumer Price Index (CPI) – expected up .1% vs up .1% in May. Core CPI, excluding food and energy) expected down .1% vs down .2% in May
• July Initial Univ of Michigan Consumer Sentiment Index – expected 74.5 reading vs 76.0 in June.

Bonds opened negatively today.  US Treasury notes remain at lower level, but mortgage-backed securities (MBS) issued by Fannie Mae and Freddie Mac have moved to break even in mid-day trading.  Stocks opened strong in the morning and have moderated somewhat.  The Dow is currently up approx 50 points at the 10,666 level.

In economic news, Initial Unemployment Claims for the week ended 7/3/10 were 454,000 which was less than the 460,000 projected.  Continuing Unemployment Claims for the week ended 6/26/10 were down to 4.413 million vs expectations of a 4.60 million number.

Bond markets have opened slightly positive despite strength in stocks.  This week is very light in terms of economic data. Below is a recap:

Tuesday, July 6, 2010

• June Institute of Supply Management (ISM) Service Sector Index - expected reading of 55.0.  Actual reading was 53.8.  Anything over 50 signifies expansion.

Wednesday, July 7, 2010

• No key economic releases

Thursday, July 8, 2010

• Initial Jobless Claims Week Ended 7/3/10 - claims expected to drop by 12,000 to 460,000
• Continuing Jobless Claims Week Ended 6/26/10 - claims expected to drop 16,000 to 4.6 million from 4.616 million.
• May Consumer Credit - consumer credit outstanding expected to decrease by $3 billion compared to an increase of $1 billion in April.

Friday, July 9, 2010

• No key economic releases

US Treasuries are improved this morning but mortgage backed securities issued by Fannie Mae and Freddie Mac are unimproved and have a slight negative bias. 

In economic news, Initial Jobless Claims for the week ended 6/26 were up to 472,000 vs expectations for a 458,000 number.  Continuing Claims for the week ended 6/19 were up to 4.616 million vs expectations for a drop to 4.510 million.  The Institute of Supply Management (ISM) manufacturing sector index for June fell from a May level of 59.7% to 56.2% vs expectations for a 59.0% reading (anything over 50% reflects expansion).