Friday, May 29, 2015 - Article by: Bart Castelli - Homestar Financial Corporation NMLS #70864 -
Q1 GDP as I reported this morning came in as expected with little movement in the bond or mortgage markets though. The bellwether 10yr had already declined 8BPS since last Friday, discounting the GDP data. Now that is history (although the final will come late in June, but rarely is there much change from the preliminary). A soft quarter blamed mainly on weather as markets tend to do each first quarter, easier to side step any weakness. Q2 two two-thirds over, most of the April and May key data like retail sales, durable goods orders, consumer confidence and housing have not established much improvement - better yes, but still hardly impressive. This morning the U. of Michigan consumer sentiment index was the weakest this year.
The Fed, for all of the talk, is scared to move rates higher with the economy just muddling along. Now we are seeing the September date wavering again - you know what my thought is - not in 2015! Total data dependent. Yellen is not quite as hawkish about moving early. Markets becoming aggravated with the debate from every source imaginable about when the Fed will move. A quarter of a point increase in the FF rate will not have a dramatic impact on the economy or markets. The yield curve will flatten more, short term rates higher but longer term rates will likely hold and decline more. Handicapping markets these days is not only extremely difficult but for many of you who follow me - it is best to not get too caught up in longer term estimates or beliefs. Follow the markets - volatility will escalate rapidly over the next few months - everyone all in and fully margined will keep uncertainty at very high levels.
Next week will not be easy - expect wide swings in stock indexes and the bond market. It is employment week, May employment data on Friday. Between Monday and Friday very key measurements will likely set up big movements in both stocks and bonds. Monday personal income and spending for April, April construction spending, May ISM manufacturing. Tuesday April factory orders, May auto sales. Wednesday ADP May jobs, March trade deficit, May ISM services sector index, the Fed Beige Book. Thursday weekly claims, Q1 productivity and unit labor cost revisions. Friday the elephant, and consumer credit for April.
In summary, mortgage rates declined all week but I did hold my discipline and stayed flat. Now with today's additional improvement the models and technicals have finally turned. Not liking it though because the markets had to move so much before we boarded the train. The 10yr is trading below its 200, 20, and 40 day averages today and testing the 100 day average. Next week will be volatile and likely will take courage to hang on to floating positions - but I am somewhat nervous to predict such during Jobs week. The near term trade should pull the 10yr note down to 1.98%, the next strong resistance level as the support now for the 10yr is at 2.14%. If next week's data disappoints, the 10yr has a good chance to drop to 1.86% over the next couple of weeks. Greece is getting a lot of ink and safety trades into US treasuries - there will no default next week when the next debt payment is due. The summer calendar for various Greek payments is chuck full of key dates; no defaults because the EU and IMF cannot let it default. All the talk, threats and saber rattling - in the end Greece will stay in the EU.
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