|Weekly claims down 1K to 264K, expectations were for an increase of 11K. The four-week average, a less-volatile measure, was the lowest since April 2000. Firings and lay-offs have declined leading to markets expecting wage increases are just around the corner. Recent employment data confirms that the slowdown in Q1 was ‘transitory’ as the Fed defines it.
Wholesale prices in April (PPI) were expected to have increased 0.2%, as reported prices declined 0.4%, excluding food and energy prices were thought to be up 0.1%, as released down 0.2%. Another indication that inflation concerns may be over-stated. Excluding food, energy and trade services, the index rose 0.1%. Producer energy prices dropped 2.9% in April from March and are down 24% on the year. Gasoline prices slid 4.7% last month. Food prices decreased 0.9% last month and are down 4.2% over the year. Costs of products used as inputs for production, fell 1.1% in April, its ninth straight decline, and was down 7.8% from a year earlier, the biggest fall since September 2009.
The initial reaction to the two 8:30 reports was basically muted with not much change in interest rates or MBS prices. US stock indexes improved on the data. At 9:30 the DJIA opened +119, NASDAQ +32, S&P +11; 10 yr note 2.26% -2 bps from yesterday’s close but the yield is up 2 bps from yesterday’s 10 yr auction. MBS price at 9:30 +14 bp from yesterday’s close but 21 bps lower than at 9:30 yesterday. The rate on the 10 yr note at its highest in five months, mortgage rates also the highest in four months. The yield on the 10-year German bond closed at the highest level since early December.
This afternoon Treasury will auction a new 30 yr bond selling $16B. Yesterday’s 10 yr bidding was exceptionally strong, Tuesday’s 3 yr auction also found solid demand. The reaction in the rate markets after the strong 10 yr didn’t help the rate markets, demonstrating how bearish interest rate markets are now. Too bearish in our view but it is what it is and any attempts to pick a turn have been costly. Increasing interest rates in Germany and other EU countries along with the surprising decline in the dollar have eaten away demand for US debt, at least that is how it appears.
Investors and traders continue to unwind the bullish trades that were betting on even lower interest rates. The ECB’s apparent success with its QE is seen as helping the EU economies resulting in a massive increase in German rates that fed to US rate markets. This morning the MBS market trying to hold onto initial gains on the 8:30 data; that was the situation yesterday after the very soft April retail sales report but prices didn’t hold and another swift move to lower prices unfolded at 11:30 yesterday. We tried floating early yesterday morning on the better open but bailed (again) as prices quickly declined.
PRICES @ 10:00 AM
10 yr note: +9/32 (28 bp) 2.24% -4 bps (essentially unchanged from yesterday’s auction)
5 yr note: +6/32 (18 bp) 1.53% -4 bp
2 Yr note: +1/32 (3 bp) 0.56% -1 bp
30 yr bond: +20/32 (62 bp) 3.05% -2.5 bp
Libor Rates: 1 mo 0.185%; 3 mo 0.275%; 6 mo 0.414%; 1 yr 0.734%
30 yr FNMA 3.0 June: @9:30 100.42 +14 bp (-21 bp frm 9:30 yesterday)
15 yr FNMA 3.0: @9:30 104.29 +11 bp (-9 bp frm 9:30 yesterday)
30 yr GNMA 3.0: @9:30 101.70 +20 bp (-33 bp frm 9:30 yesterday)
Dollar/Yen: 119.01 -0.14 yen
Dollar/Euro: $1.1396 +$0.0042
Gold: $1222.20 +$4.00
Crude Oil: $60.53 +$0.03
DJIA: 18,174.50 +114.01
NASDAQ: 5004.46 +22.77
S&P 500: 2110.06 +11.58