A quiet start this morning in the bond, mortgage and stock markets. At 900am the 10-Year Note was up +3/32 at 2.04% (unchanged), MBS prices on 30-Year Fixed up +2/32 (.06 bps) and the DJIA index up +9. By 930am the 10-Year Note yield was up +5/32 (-1 bps) and MBS prices on 30-Year Fixed was up +5/32 (.15 bps). The DJIA opened down -20 points. European stocks fell to a two-month low and Asian equities retreated on concern growth is slowing after China’s imports missed economists’ forecasts. Bernanke said in a speech yesterday that the U.S. was still “far from having fully recovered.” The Bank of Japan kept its key interest rate unchanged today and no policy maker proposed extra stimulus. China reported a trade surplus for March as import growth trailed forecasts. March exports rose 8.9% from a year earlier, after an 18.4% increase in February. There is growing concerns that China’s economy is slowing as imports slide.
The German 10-Year Note yield sits at 1.67%. Spain’s 10-Year Note yield is at 5.94%. The spread the largest since late November as Spain struggles to cut expenses. Spain’s 10-Year Note is up 18 bps from last week. The euro regions the debt problem hasn’t gone away despite the liquidity support from the European Central Bank, a strong support for U.S. treasuries as safety moves increase to treasuries.
Today begins earnings season for Q1 with Alcoa reporting late this afternoon. There is concern that earnings in Q1 may be lower than in Q4 when very strong earnings dominated. Economic slowing in China and Europe will likely push earnings lower. The U.S. economy will accelerate 2.2% this year, up from 1.7% in 2011, according to the average of 72 estimates compiled by Bloomberg.
10-Year treasury yields would have to rise about 120 basis points to track the estimated price-earnings ratio for the S&P 500 as they did during the first three quarters of 2011. The differential primarily reflects the Federal Reserve’s plan to keep its benchmark interest rate close to zero at least through late 2014.
Last Friday’s very soft employment data for March is continuing to dominate traders’ thoughts. Was the data a one and out thing with job growth likely to bounce back in April? Or was it the beginning of a downturn in job growth that will continue as the global economic outlook declines. Europe’s economies, with the exception of Germany and France are declining as cost cutting and job losses widen. Talk of QE 3 increased immediately on the employment data. While still uncertain about what the Federal Reserve will do, the momentum is building for another easing. The Federal Reserve however isn’t likely to move
quickly, wanting to see more key data and possibly the April Employment Report on May 4th. Whether or not the Federal Reserve does ease again, the outlook for another easing has increased in the rate markets.
The only data point today, February Wholesale Inventories were expected up +0.5% but reported up 0.9%. Sales were up 1.2%, the inventory to sale ratio of 1.17 months was unchanged from January. Stock indexes sold off while the bond andmortgage markets gained a little on the report.
This afternoon at 100pm the Treasury will begin three days of auctions with $32B of 3-Year Notes. The auction is expected to see strong bidding.
