Bond and Stock Market Rally

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Yesterday the bond and stock markets rallied as the FOMC meeting gets closer. For the past month markets have been consumed with the belief that the Fed was about to begin reducing its purchases of MBSs and treasuries. As the meeting approaches (next Tuesday and Wednesday) those “rock solid” beliefs are not so solid. Not unusual when there is a major news event approaching investors and traders lessen their aggressiveness. Yesterday on the Fed primary dealers was out saying the Fed isn’t likely to taper as soon as had the increasing belief; Justin Lederer at Cantor said the Fed would not taper next week. His comment came about 3:30 yesterday and sent interest rates down and prices climbing. This morning the 10 traded down another 3 bps in yield prior to 8:30 when May PPI was reported; the overall PPI increased 0.5% on forecasts of a 0.2% but the core rate excluding food and energy was +0.1%. The initial reaction took a bp from the 10 frm 2.12% to 2.13%, down 2 bp frm yesterday’s close. At 9:00 the 3.5 July FNMA coup[on traded 23 bps in price better than yesterday’s close. At 9:15 May industrial production was expected up 0.2% was unchanged; April production originally reported -0.7% was revised to -0.4%. Manufacturing, which makes up 75% of total production, increased 0.1% in May after falling 0.4% in April. Manufacturing increased in May for the first time in three months, helped by a gain in auto production. May capacity utilization expected at 77.8% declined to 77.6%, April originally at 77.8% was revised to 77.7%. Although not a market mover, Q1 current account balance at -$106.1B was up 3.7% frm Q4 -$102.3B as imports in the quarter increased. The current account is the measure of all goods and services including income payments and government transfers; the forecast was for -$111.3B At 9:30 the DJIA opened -9, NASDAQ -2; S&P -1; 10 yr at 2.12% -3 bp and 30 yr MBS prices +29 bps. The final data this week; the mid-month U. of Michigan consumer sentiment index, expected at 84.5 unchanged frm the final April reading, the index was 82.7. No market reaction to the lower sentiment index. From now until next Wednesday afternoon the markets’ main focus will be on the FOMC meeting, its policy statement and Bernanke’s press conference following the meeting. As the days fall off the perception that the Fed will begin to ease away frm the present MBS and treasury buying is waning a little. Recent data and the unusually swift increase in long term interest rates including mortgage rates may not be to Bernanke’s liking. The debating within the Fed will likely to continue but it is possible the Fed will send a message that any reductions in purchases will not be as soon as had been thought over the last six weeks. Technicals still bearish in the bond and mortgage markets. The 20 day average for the 3.5 July FNMA coupon at 103.91, current price . The 20 day on the 10 yr yield at 2.09%, now at 2.11%. Floating is now appropriate but also has risks attached. If floating it is highly recommended to keep alert to changes through the day, So far today markets are doing well but there is a lot of day ahead.