Unchanged

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Early this morning the interest rate markets were unchanged from yesterday’s close; by 9:30 though the 10 yr note yield had increased to 1.90% frm 1.88% and 30 yr MBSs -16 bp frm yesterday’s close. The DJIA opened +40, NASDAQ +19, S&P +5; the 10 yr at 1.90%, mtg prices -16 bps. There were no economic reports today until 9:55 when the U. of Michigan consumer sentiment index, expected at 78.0 frm 76.4 at the end of April. The index jumped to 83.7, a strong improvement and nice to see but the index is volatile and generally reflects sentiments driven by the equity markets and the cost of gasoline. At 10:00 April leading economic indicators, expected +0.3% increased 0.6% after declining 0.2% in March. The interest rate markets had a nice day yesterday after two weeks of strong selling that pushed the 10 yr from 1.63% on 5/2 to 1.97% on Wednesday. The bond market remains quite volatile, yesterday’s improvement was a momentary reaction to an oversold condition and hasn’t changed the bearish patterns, since there is no follow-through so far this morning the one day rally is less significant than what many were expecting. The stock market is the only game in town where investors have any chance of gaining a decent return; mostly driven by the Fed and other central banks flooding money into financial markets. The economy is still an uncertain picture; yesterday more weaker than expected data, increased weekly jobless claims and the May Philly Fed business index fell under zero (-5.2), another report weaker than thought. April manufacturing data and now May reports frm various Fed districts have been softer than markets were thinking. Another country out this morning reporting weak growth; Russia’s GDP increased 1.6% frm a year ago, declining for the fifth quarter. The economy of the world’s largest energy exporter is grinding to a halt as the recession in the euro area, which accounts for about half of Russian trade, extended into a sixth quarter. The GDP slowdown prompted the Economy Ministry last month to cut its 2013 growth forecast to 2.4% from 3.7% and last year’s pace of 3.4%. Most all the main global economies are wakening, but as long as the Fed and other central banks continue to keep interest rates at these extreme lows stock markets will continue to improve. But look out when the time comes for the Fed to begin unwinding of its QEs; unless there is a raid change in the economic outlooks and data supports that view, the global equity markets are set up for a major reversal. Technicals remain bearish in the bond and mortgage markets; the 10 yr note must decline and close below 1.80% before we would change that outlook. There is the likelihood now that the bond and mortgage markets will move in a tighter range, consolidating the recent spike in rates. At the moment we are expecting the 10 yr and MBSs to slow down while investors and traders consider the recent spikes; maybe 1.95% to 1.85% for a few sessions. Mortgages generally unchanged for the next week or so.