Rates Higher on First Dose of This Week’s Data

Last Friday the technical models and momentum oscillators finally turned slightly bullish, but as I noted in our float/lock advice I was not completely comfortable with the way it occurred. The 10 dropped from 2.30% to 2.14% before it broke through, that kind of former move implied it was not a strong reversal. This morning markets got the first dose of this week’s key data. April personal income was better than thought but to me the more significant part of the report was personal spending, unchanged with forecasts of an increase. The May ISM manufacturing index was better than expected with both the new orders and employment components coming out better.

Tomorrow April factory orders and May auto sales. The expectation is a very low bar, anything better will add to the soft rate outlook. Auto sales will likely be better than March as it is the one sector where consumers continue to impress. Extremely easy financing and increasing terms setting the pace.

The Greek tragedy will see come Friday if the next deadline to make a payment to the IMF is made. Somehow it will come and go with nothing but rhetoric, as has been the case now for almost two years. Lots of talk but nothing but can-kicking. Signals from the Greek government have been mixed.

In summary, the trading Friday cut through a number of our resistance levels but there was no follow-through today.  I did not like the way technicals were violated so I am going back to my 30 day locking window. Today the 10yr, the driver for MBS rates (make no mistake about that), increased in yield to 2.19% up 7BPS from Friday’s close. Data this week will keep volatility at high levels. Rate markets do not look very encouraging now but in the longer outlook I continue to expect rates will decline as the year unfolds. The US economy so far has shown very little improvements regardless of pundits that still hold rates will increase substantially from these levels and equity markets will continue to make new all-time highs. When the music stops rotation into safety will drop interest rates very quickly. Building an economic foundation on sand. Timing and from what level we will see huge rate declines is completely a guess now - there is enough bullish bias to keep the ball in the air for a long time. Do not confuse longer term forecasts with near term bullish that dominates now.