Quiet Start

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US markets started quietly this morning ahead of Bernanke’s testimony to the Joint Economic Committee at about 10:00. Markets are completely focused on the Fed’s QEs recently, and when the Fed will begin to unwind its monthly purchases of treasuries and MBSs. The question of when was fueled by the April employment report on May 3rd that was stronger than most were expecting. Since then US interest rates increased as well as the key stock indexes. Yesterday there was a lot of position squaring as traders short the bond market evened out a little sending the 10 yr note yield down 4 bp and mortgage prices up 36 bps. At 9:00 this morning the 10 yr was down another bp to 1.93% and 30 yr MBS price up 9 bps. Stock indexes were aiming at a slightly better open at 9:30. Early this morning the weekly MBA mortgage applications were out and not a surprise that apps have fallen for the second week as mortgage rates have increased; especially re-finance apps. The purchase index is down 3% following the prior week's 4% decline, a tangible reversal that points to trouble for May home sales compared to April home sales. The refinance index is really showing its sensitivity to mortgage rates, falling 12% after the prior week's 8% drop. The average 30-year rate jumped 12 basis points in the prior week and is up another 9 basis points in the latest week to an average 3.78% (conforming balances $417,500 or less). At 9:30 the DJIA opened +13, NASDAQ +1, S&P +1. The 10 at 1.93% and 30 yr MBSs +9 bps. The first economic report this week at 10:00 this morning; April existing home sales. Forecasts were that sales increased 2.6% to 5.0 million units (annualized); as reported sales were up 0.6% at 4.97 mil units; yr/yr sales up 9.7%. March sales were revised higher, from -0.6% to -0.2% offsetting the weaker April data. Yesterday NY Fed President Bill Dudley said he has not decided whether the Fed’s next move should be to enlarge or shrink its bond buying program as he called for a fresh look at its eventual retreat from record asset purchases; “Because the outlook is uncertain, I cannot be sure which way -- up or down -- the next change will be.” While many Fed officials have voiced support for shrinking purchases as the next step, Dudley, who is also vice chairman of the FOMC, signaled willingness to increase purchases. Earlier today St. Louis Fed President Jim Bullard said the central bank should continue its bond buying because it’s the best available option for policy makers to boost growth that is slower than expected. Dudley said policy makers will know in three to four months whether the economy is healthy enough to overcome federal budget cuts and allow the central bank to begin reducing record stimulus. “I don’t really understand very well how the tug-of-war between the fiscal drag and the improving economy are going to sort of work their way out.” Bernanke is not likely to make the picture anymore clear in his testimony; the Fed simply isn’t sure about the forward path of the economy at this point. The last two months of data have seen a lot of weaker than expected data, but the April employment report still rings in the ears of most analysts and more importantly the Federal Reserve. Adding more uncertainty is the sequester, cutting spending is keeping the growth down; Dudley saying the spending cuts and tax increases will lessen GDP growth 1.75% this year. Bernanke isn’t likely to change is comments from the last FOMC meeting, providing anything of consequence to the debate on what the Fed will do. The only thing that has occurred since the last FOMC meeting was the strong April employment report two days after the conclusion of the meeting. Not only Bernanke today; at 2:00 the minutes frm the 5/1 FOMC meeting will be released. Normally the minutes provide some insight on the details of the discussions in the meeting. This time with Bernanke leading the minutes they won’t likely carry as much interest in markets. Technically, the 10 has resistance at 1.85%; until that level breaks the overall outlook remains bearish. 30 yr May 3.0 FNMA coupon has resistance at 103.47, about 70 bp higher than where it trades today.