Weaker Than Expected

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April PPI was down 0.7%; the core (ex food and energy) +0.1%; both as expected and increasingly showing deflation is becoming an issue. The Fed’s target rate of 2.0% to 2.5% for inflation is lagging, annual inflation +1.8%. The NY Empire State manufacturing index for Mat was expected at +3.75, it declined to -1.4; any reading under zero is considered contraction. April industrial production was expected -0.2%, it declined 0.5%; April factory use was expected at 78.3%, use fell to 77.8% and March use was revised frm 78.5% to 78.3%. In Europe Q1 GDP was weaker than expected, at -0.2% after a 0.6% decline in Q4 2012; estimates were for a decline of 0.1%. The German economy expanded 0.1 percent in the first quarter, while France contracted 0.2 percent and Italian output dropped 0.5 percent. Euro-area unemployment has reached a record 12.1 percent. The ECB forecasts that the euro economy will shrink 0.5 percent this year. That compares with the European Commission’s projection of a 0.4 percent contraction. The reports this morning, here and in Europe, were weaker than expected; that has been the general case for the past two months with a few exceptions that were better, like the April employment report. Most of the economic measurements since March have been somewhat disappointing, at least from the perspective of estimates vs. actuality. Does the fact that the US and global economies are struggling have any impact on US and global stock markets? A resounding NO! This morning the 10 yr note eked out a little improvement, down 2 bp from yesterday’s close; the stock indexes opened down just 6 points, 30 yr MBS price at 9:30 +34 bp after the 37 bp loss yesterday. At 10:00 the final data today; the May NAHB housing market index was expected at 44 frm 41 in April it was right on at 44.   The Federal annual budget deficit is shrinking. According to the CBO the 2013 fiscal year that ends on Sept 30th is now projected at -$642B , down from its estimate of -$845B three months ago. After 4 yrs of annual deficits over $1 trillion the decline takes away much of the budget cut debates that has locked Congress up tight. Higher tax revenues and large dividend payments frm Fannie and Freddie are combining to bring the deficit down. Earlier this morning the MBA reported last week’s applications. A big jump in rates pulled down mortgage activity sharply in the May 10 week. The purchase index moved down from multi-year highs, falling 4.0%, with the refinance index showing an even steeper decline, down 8.0%. The average rate for 30-year fixed mortgages with conforming balances ($417,500 or less) rose a very steep 12 basis points in the week to 3.67%. Application activity, including purchase activity which is still near multi-year highs, is volatile week to week, but this week's dip is severe and raises the risk that further increases in mortgage rates could hold down seasonal activity in the housing sector. Technically speaking the stock market is very overbought now and the 10 yr and MBSs very oversold; that though isn’t making a lot of difference so far. In markets such as these when emotions are the drivers, technicals take a back seat. Not many care that the spike in rates has been so severe that normally there should be some correction, or that the climb in stocks isn’t based on much economic improvement but Fed policy. It is all about getting out of fixed income investments that won’t produce any real return and into the only investment that is sky-rocketing---stocks. In situations like these the technicals are less important until something rocks the sentiments.