Depending on how long you've been watching market movements and keeping track of changes in mortgage rates, you may be well-acquainted with the general tendency for weaker economic data to coincide with lower interest rates. In the past, this was a much more linear relationship, but it's been thrown on its ear for quite some time now, but especially after the onset of the most recent bout of Euro zone collapse fears beginning in the second half of 2011. It's not that economic data hasn't moved markets in logical ways since then, simply that anyone expecting it to do so in line with past precedent now runs an increased risk of being disappointed.
We've tried our best to sort through what's important and what's not, even as that continues to change. You may have noticed a ramp up in the focus on Employment data > Non-Employment data over the past few months. This was due to the Fed laying out employment as the critical benchmark to further QE. The notion of further QE, we argued, would move markets MUCH more than the notion that economic data somehow spoke to improving or degrading economic fundamentals. In other words, markets moved on from reacting to the fundamental suggestions of data (i.e. "what does this report suggest about the direction of the broader economy?") and began reacting to what data suggested as the probable course of Fed action (i.e. "does this data increase or decrease the likelihood of further quantitative easing?").
Now that QE3 has arrived, and especially because it is open-ended, the adjustment in how we process economic data is fairly simple: "what does this economic data do to the expected timeline of QE3?" In other words, the Fed will discontinue the recently begun MBS buying when "stuff" gets "a little bit better than good enough." The fed has been clear in defining "stuff" as JOBS, and they've also been clear in saying they won't discontinue prematurely. All of the above is one possible explanation for bond markets being weaker today.
In the past, the stronger-than-expected Jobless Claims numbers would have been trumped by the unexpected weakness in Durables. But the Claims data is the most relevant to the QE3 outlook. The extent to which this accounts for the paradoxical response to the rest of the data is something we can only guess at. Certainly, there are other good reasons that bond markets would be weaker this morning, so much so, in fact, that we warned against a pull-back last night for the first time in two weeks (here) and even going so far as to say "we might have our first down day in several weeks" earlier this morning.
The rest of the story on this morning's weakness is in the 9:29am Alert below. It's a good read if you have time, but keep in mind that even without data, today looked like a good day for a pull-back. In other words, we're not reading too terribly much into the connection between the data and the movement in MBS, but wanted to offer a logical way to reconcile the seeming paradox. Even then, we're not faring too poorly as far as pull-backs go, and certainly aren't guaranteed to end the day in the red. It's still anyone's game, but a bit of consolidation here makes sense, both due to what appeared to be some exhaustion yesterday in the MBS rally as well as the recent bullish trends in Treasuries reaching their bullish target. Here's a chart of that since we've spoken about it a few times (we actually charted this last week, and these are the same trendlines from that chart. Even if the lower line doesn't cause a perfect bounce, it's definitely caused a pause for consideration of such things):
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The Pending Home Sales Index,* a forward-looking indicator based on contract signings, declined 2.6 percent to 99.2 in August from an upwardly revised 101.9 in July but is 10.7 percent above August 2011 when it was 89.6. The data reflect contracts but not closings.
Contract activity in July 2012 was at the highest level since April 2010 when buyers were rushing to beat the deadline for the home buyer tax credit.
Lawrence Yun , NAR chief economist, said some volatility can be expected in the monthly readings. "The performance in month-to-month contract signings has been uneven with ongoing shortages of lower priced inventory in much of the country, and across most price ranges in the West, but activity has remained at notably higher levels this year," Yun said.
In and of themselves, these trading levels aren't too shabby, and any time before Tuesday afternoon, these MBS prices would have constituted all-time highs.
The paradoxical reaction could be explained in a few different ways. First of all, GDP is pretty pointless. It speaks to Q2, and really, what's Q2? Given all that's transpired in the three months since the end of Q2 (especially the much more significant release of 3 informative Payrolls reports), what can it tell us that we don't already know? To reiterate a previous assertion, GDP--especially these latest revisions--is for the evening news more than it is to inform traders positions.
That leaves us with Jobless Claims and Durable Goods as the two other key reports at 8:30am. If we forgot Claims for a moment, a case could be made that a decent percentage of the Durables' miss can be accounted for if certain internals were disregarded. Even then, that would be a bit more "disregarding" than we'd want to do, and we doubt markets are turning a blind eye to it either.
A more plausible justification for the paradoxical reaction (or at least part of the justification, because we wouldn't presume to be 100% inside the market's collective head) is something that Fed has made ridiculously obvious for many months now and certainly beaten to a pulp in recent Fed Speeches: "It's The Labor Market, Stupid.™"
Even though Jobless Claims aren't the definitive labor market metric, they are the definitive labor market metric this morning, and Fed speakers are tripping over themselves trying to frame QE3's if's and then's in the context of payrolls and unemployment. This is stuff that seemed like farfetched speculation a year ago (this phenomenon of Fed speakers saying QE is tied to specific jobless targets).
In other words, labor market data is a big deal, and again, it's not necessarily that the Jobless Claims report itself is a big deal, but it's the ONLY "labor market deal" this morning, and it arrives on a morning following the longest winning streak (in terms of days in positive territory) for bond markets since 2008.
Additionally, we noted that we'd reached the boundary of our technical targets in 10yr yields yesterday and that MBS looked to be experiencing some exhaustion. So between that technical/tradeflow mumbo jumbo and the "labor market" thesis--whichever you want to give the most weight--we're much more willing to wrap our tiny little minds around the paradoxical reaction. Even then, it's not the worst sell-off in the world, and things even appear to be holding their ground for now, potentially waiting for this afternoon's auction or headlines out of Spain regarding austerity measures.
- Biggest percentage swings were in nondefense aircraft, which went from +51.1 pct in July to -101.8 pct in the current report.
- The biggest contributors to the headline in terms of change in dollars were the massive declines in Transportation Equipment and Capital Goods
New orders for manufactured durable goods in August decreased $30.1 billion or 13.2 percent to $198.5 billion, the U.S. Census Bureau announced today. This decrease, down following three consecutive monthly increases, was the largest decrease since January 2009 and followed a 3.3 percent July increase. Excluding transportation, new orders decreased 1.6 percent. Excluding defense, new orders decreased 12.4 percent.
The advance seasonally adjusted insured unemployment rate was 2.6 percent for the week ending September 15, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending September 15 was 3,271,000, a decrease of 4,000 from the preceding week's revised level of 3,275,000. The 4-week moving average was 3,295,500, a decrease of 15,000 from the preceding week's revised average of 3,310,500.
The GDP estimate released today is based on more complete source data than were available for the "second" estimate issued last month. In the second estimate, the increase in real GDP was 1.7 percent (see "Revisions" on page 3).
The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, nonresidential fixed investment, and residential fixed investment that were partly offset by negative contributions from private inventory investment and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased.
The deceleration in real GDP in the second quarter primarily reflected decelerations in PCE, in nonresidential fixed investment, and in residential fixed investment that were partly offset by smaller decreases in federal government spending and in state and local government spending and an acceleration in exports.
Motor vehicle output added 0.20 percentage point to the second-quarter change in real GDP after adding 0.72 percentage point to the first-quarter change. Final sales of computers subtracted 0.10 percentage point from the second-quarter change in real GDP after adding 0.02 percentage point to the first-quarter change.
MBS Market Alerts
