|Q1 GDP preliminary data at 8:30 was about where most were expecting, down 0.7% frm the advance at +0.2%. The initial market reaction didn’t move much, the 10 was already at 2.12% prior to the release MBS prices also saw no reaction, up 5 bps prior to the release and up 5 bps at 8:45. It was no surprise that Q1 was weak, markets were totally expecting the contraction of 0.8% ( the general consensus). Bad weather and stronger dollar, a larger trade deficit and weaker inventory builds, and weak consumer spending were the hallmarks of the contraction. Compared to a year earlier, the economy grew 2.7% in the first quarter, though that figure is exaggerated by a sharp contraction that occurred in the first quarter of 2014. Consumer spending, representing more than two-thirds of economic output, grew at a 1.8% rate in the first quarter after a surge of 4.4% growth in Q4 2014. Spending on durable goods declined was the weakest in 4 yrs. The price index for personal consumer expenditures (PCE)—the Fed’s preferred gauge for inflation—fell 2% early this year. Core prices, which exclude food and energy costs, grew 0.8%. Inflation no problem yet.
As usual with any contra growth data these days the immediate reaction from bullish economists and analysts, and brokerage firms that make money when stocks increase, there are the arguments that the decline is a one off quarter. That does have legs due to weather issues but that is about as far as I would take it. Excuses to justify weakness are a normal human reaction. We are now at the end of the second month of Q2, based on reported data so far this quarter will be better but likely not as strong as most are thinking now.
Next week is a big week for key economic measurements, the results of which will have markets on edge. May employment data, the two May ISM indexes, personal income and spending, factory orders, the trade deficit, Q1 productivity and unit labor costs—all out next week. Q1 is history now, it is all about Q2 now. Based on the Atlanta Fed’s GDPNow currently Q2 growth is much less than economists’’ forecasts; +0.8% growth compared to +2.5% frm traditional forecasting methods.
Next Friday is the current deadline for Greece to make the next payment to the IMF, Greek officials talking optimistically but European officials said yesterday the two sides remain far apart on several issues and that further progress is needed in the technical talks, reining in expectations from Athens for an imminent deal. Concerns of a default centers on the idea if a default occurs it will spread to other EU countries like Spain that is also reeling with debt payments. We will take all bets that there will be a deal worked out to keep Greece from defaulting, just kicking the can down the road to the next deadline.
At 9:30 the DJIA opened -29, NASDAQ -3, S&P -3. 10 yr at 9:3 2.11% -2 bps, 30 yr MBS price +8 bps from yesterday’s close and 19 bps better than at 9:30 yesterday.
At 10:00 the final May U. of Michigan consumer sentiment index, expected at 90.3 frm 88.6 mid-month, the index hit at 90.7. Not so good though; the April final was 95.9, the 90.7 is the lowest month end read this year.
Finally a break from the three week trading range; the 10 at 2.11% now. Not much change frm yesterday but the 10 has declined this week frm 2.21% last Friday, 10 bps. The data this morning was what markets were expecting. Our technical work is now slightly bullish. Next week though markets face a number of key data points including May employment data. Then there is the Greek tragedy, markets fearing a possible default however we think that that is highly unlikely. For all the saber rattling, the IMF and EU, the ECB and the European Commission do not want a default.
PRICES @ 10:10 AM
10 yr note: +8/32 (25 bp) 2.11% -2 bp
5 yr note: +4/32 (12 bp) 1.49% -3 bp
2 Yr note: +1/32 (3 bp) 0.62% -1 bp
30 yr bond: +18/32 (56 bp) 2.86% -3 bp
Libor Rates: 1 mo 0.184%; 3 mo 0.282%; 6 mo 0.423%; 1 yr 0.752%
30 yr FNMA 3.5 June: @9:30 104.42 +8 bp (+19 bp frm 9:30 yesterday)
15 yr FNMA 3.0 June: @9:30 104.35 +3 bp (+5 bp frm 9:30 yesterday)
30 yr GNMA 3.5 June: @9:30 104.70 +5 bp (+12 bp frm 9:30 yesterday)
Dollar/Yen: 124.01 +0.06 yen
Dollar/Euro: $1.0989 +$0.0040
Gold: $1190.90 +$2.10
Crude Oil: $57.96 +$0.28
DJIA: 18,070.30 -55.82
NASDAQ: 5086.83 -11.15
S&P 500: 2115.49 -5.30