Relief

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Finally the bond and mortgage markets may get a little relief from the unrelenting selling that has driven interest rates higher over the last nine sessions. At 8:30 weekly claims were expected to have increased 7K, as reported claims shot up 32K to 360K. The increase takes weekly claims to the highest in six weeks and adds another layer to the debate that is dominating these days; what really is the condition in the employment sector. The increase caught many by surprise and heightens the concerns about what state the economy is really in. The four-week moving average, a less volatile measure than the weekly figures, rose to 339,250 last week from 338,000. The data in March and February was weaker than estimates, some of the April data also weaker. Then the April employment report was so strong compared to estimates the bond and mortgage markets, as well as a sea change that the Fed would likely begin taking the punch bowl away sooner than thought. The 10 yr yield spiked frm 1.63% to 1.97% yesterday and mortgage rates increased 18 bp in nine days. Today’s claim’s rocked the boat once more, and claims were not the only surprise today. April housing starts were widely thought to have declined 6.4%, starts as reported declined 16.5%; permits were expected to have increased 5.0%, permits jumped 14.3% the highest permit level since June 2008. The decline in starts was the most since Feb 2011 and Mach starts were revised lower frm the original release. Construction of single-family houses fell 2.1% to a 610,000 rate from 623,000; multi-family starts declined 38.9%. The somewhat positive take-away is that the increase in permits suggests starts will increase in the months ahead. April CPI declined 0.4%, the core (ex food and energy) +0.1%. These days inflation reports are confirming inflation is not on anyone’s’ radar. The CPI decline is the biggest since Dec 2008, CPI was -0.2% in March. Yr/yr CPI increased 1.1%, the weakest since Nov 2010. The core yr/yr +1.7%, the least since June 2011. At 9:30 the DJIA opened -5, NASDAQ +3, S&P -2; the 10 yr note at 1.91% -3 bp and 30 yr MBS price +26 bps. The final data point today; at 10:00 the May Philly Fed business index. Forecasts were for the index to have increased to 2.2 frm 1.3. The overall index declined to -5.2, any number under 50 is considered contraction. The weaker report matches the Empire State manufacturing index released yesterday that also fell under zero to -1.4. Manufacturing data recently is clearly showing a slow down; April industrial production yesterday -0.5% and April factory use declined to 77.8% frm 78.5% in March. The Philly report added a little more selling in the stock market on the release. A little improvement in the bond market this morning and MBS prices are better. The recent trading in the MBS market has started stronger each day but has succumbed to selling as the days rolled on. So far today the pattern remains the same. The stock market so far has held well in the face of the weaker data and increase in weekly claims. As noted yesterday, the equity markets are currently in a win-win situation; weaker economic data keeps the Fed in play, stronger data fuels more positive economic outlooks. Meanwhile the swift spike in rates is providing an increasing view that the lows in the US and global bond markets have been achieved and the direction now is higher rates ahead. We have long said that the US bond market would find it extremely difficult to match the lows in rates seen last year and the low this year at 1.56% for the 10 yr note.