Beginning The Second Half

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Today begins the second half of the year; time flies when we are not having fun. The bond and mortgage markets continue their bearish outlook, unable to improve to even get close to testing our technical models that remain bearish. The economic outlook among economists, analysts and investors is expected to gain momentum albeit slowly as the Fed has been saying. There is no change in sentiment from two weeks ago that the Fed is moving closer to winding down its three year QEs that have driven rates down and ‘forced’ investors into equity markets. The Fed has done a yeoman’s job saving the economy while politicians have simply ignored the reality of needed reforms.   China’s manufacturing fell in June, underscoring a sustained slowdown in the nation’s economy as policy makers seek to rein in financial speculation and real-estate prices. An official Purchasing Managers’ Index dropped to 50.1, the lowest level in four months, from 50.8, the National Bureau of Statistics and China Federation of Logistics and Purchasing said today. Spain’s manufacturing index increased, Germany’s economy continuing to improve although today its manufacturing sector showed a little weakness, U.K. government bonds fell for a second day as reports showed Britain’s manufacturing output expanded while mortgage approvals rose, reducing demand for the safety of fixed-income securities. In Japan, where the central bank is rolling out unprecedented stimulus, the quarterly Tankan survey showed big manufacturers turned optimistic in June for the first time since September 2011. Just about all the recent data from around the world are beginning to improve, slowly but improving. With optimism increasing here and overall globally the outlook for interest rates is losing momentum with expectations that rates will continue to increase.   This is employment week; always critical but even more so these days as investors and the Federal Reserve sweat over each data point to assess what the Fed will do and when it will do it. Consensus now ahead of this week’s key data is that the Fed will begin to reduce its monthly purchases of MBSs and treasuries. As Bernanke pointed out at his press conference on the 19th what the Fed will do is dependent on how the economy performs over the next few months. This week’s June employment data takes on additional significance in terms of the Fed’s market support. Starting the week; June non-farm jobs are expected +161K, non-farm private jobs +179K and the unemployment rate down to 7.5% frm 7.6% in May. Not bad but not gaining either; job growth is tepid at best averaging about 175K a month.   At 9:30 the DJIA opened +88, NASDAQ +30, S&P +11; 10 yr at 2.51% +2 bp with mortgage prices generally unchanged. Early this morning 30 yr MBS prices were down 25 bp but did recover ahead of the 10:00 economic data.   Two key reports at 10:00; May construction spending was expected to be up 0.6%, as reported up 0.5%. The June ISM manufacturing index was expected at 50.5 frm 49.0, as reported the index increased to 50.9, pretty much as forecast; the employment component though fell below the pivot 50 to 48.7 the first time under 50 since 2009, new orders component at 51.9 frm 48.8 in May. The ISM manufacturing data, a mixed but generally in line with estimates improved the stock indexes and minor improvement in MBS prices. Not much but the data didn’t encourage any increase in the economic outlook; stocks and bonds improved fractionally based on data not strong keeping the Fed’s tapering frm increasing in importance.