Home Sales Expected To Go UP!!!

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Weekly jobless claims at 8:30 was slightly weaker than forecasts, increasing 10K to 354K with estimates of unchanged. Last week’s clams revised up an additional 4K to 344K. The smoother 4 week average increased to 347,250 frm 340,500 last week; the number of people continuing to collect jobless benefits rose by 63,000 to 2.99 million in the week ended May 18. Not a good report but not bad either; prior to the data the 10 yr note was down 11/32 at 2.15% +3 bps, 30 yr MBS prices down 23 bps after the strong bounce yesterday. Stock indexes were better prior to 8:30 and held their gains after the data. Q1 GDP preliminary data showed the quarter grew at 2.4% slightly less than 2.5% expected and down frm 2.5% on the advance report last month. Slower inventory building and cutbacks in government spending overshadowed the biggest gain in consumer purchases since the end of 2010. Consumer spending, which accounts for about 70 percent of the economy, increased at a revised 3.4 percent annualized rate in the first quarter. The gain, which added 2.4 percentage points to GDP, was more than the previous estimate of 3.2%. This is the second of three for the quarter, with the final release scheduled for late June when more information becomes available. Overall take; the quarter showed improvement in the economy, the key strong consumer spending was the main driver. The slightly softer data took a little away from the stock indexes in the futures markets and erased the losses in the mortgage markets. At 9:00 MBS prices were unchanged after trading off 23 bp earlier; the 10 yr note back to unchanged at 2.12% after climbing to 2.15% before the data. At 9:30 the DJIA opened +13, NASDAQ +8, S&P +3; 10 yr note unchanged at 2.12% as were 30 yr MBS prices. Within a few minutes of the open though the stock market went negative, then only 20 minutes into the day the DJIA jumped up 70 points. At 10:00 April pending home sales were expected to be up 1.3%, as reported sales were up just 0.3% frm March. Yr/yr pending sales up 10.3% the best since Apr 2010 when the home buyers credit ended. At 1:00 Treasury will auction $29B of 7 yr notes to complete this week’s borrowing. Yesterday the 5 yr auction met with decent demand. The US stock market is exhibiting some increased volatility as we noted it would after the strong rally over the past three months. The recent increase in interest rates is causing a little concern about how the increase in mortgage rates will impact the overall economy. It has been the housing sector that has driven the improvement in the economy and consumer confidence; any slowing in the housing sector may take a little wind out of stocks. No major selling so far but the last couple of days have been volatile with wide swings in the indexes through the sessions. A little pause, or a correction? The bond and mortgage markets have stopped their increases, we expect some improvement in rates over the next few days. The run-up in rates at the speed in which it occurred does suggest the end has come for any lower rates, but we believe the Fed will continue to support the low rate environment with QEs that will keep rates from increasing much more and likely see some small decline from present levels. Unemployment is still too high and the economy still fragile. The Fed isn’t going to let all its efforts go down the drain now, if it takes more QE the Fed will do it. Technically, what we have going for us is that both the bond and mortgage markets are momentarily oversold based on momentum oscillators. That said though, the overall trend is bearish and will continue unless the 10 yr note declines below 1.97%. Look for near term improvement in prices but don’t ignore the bearish trend. The data this morning was all a little worse than expected but no slippage in the stock market and not much change in the rate markets so far.