The Shirmeyer Report's blog

Treasuries and mortgages had a soft day yesterday; all night last night treasuries rallied and the 10 yr note at 8:30 this morning back to 2.90% after hitting 2.96% yesterday. Mortgage prices at 8:30 this morning +8/32 (.25 bp); the stock indexes early were trading a little weaker after a huge rally yesterday. Continued choppy markets with uncertainty this morning as to what the Fed may do after comments from a few Fed officials over the last few days that the Fed should think about more quantative easing by buying treasuries. Although rte markets improved early there is still strong resistance when the bellwether 10 yr note yield falls to 2.90%/2.88%. At 9:00 this morning the 10 yr note yield traded at 2.93% up from 2.90% at 8:30, mortgage prices +5/32 (.15 bp) and weaker than at 8:30; the DJIA futures -15, up frm -35 at 8:30. At 9:30 the DJIA opened -34, the 10 yr +13/32 at 2.92% -4 BP and mortgage prices +7/32 (.22 bp).

A big day in equities; the better than expected ISM manufacturing index in July, an unexpected increase in construction spending and Bernanke speaking in S. Carolina added to one of the strongest stock market rallies in weeks. Although construction spending was +0.1% with estimates at -0.5%, all of the increase came on government construction with still no private construction. The July ISM overall index was down to 55.5 frm 56.2 but the decline was less than what most economists were thinking; the e index has been over 50 (expansion) now for over 12 months.

Stock indexes this morning started stronger and pushed prices lower in mortgages and treasuries. Nothing significant, just the continuation of the choppy market conditions. On the rate markets, the 10 yr note yield fell 10 basis points last week to run to the lowest levels seen in the past six weeks but didn't break the resistance at 2.88%, closing at 2.91% on Friday. This week has much to think about with many data points through the week, but the key this week that should keep a lid on any significant changes is Friday's July employment report. Between now and Friday data interest rates may increase slightly but in choppy trading as estimates of employment are soft with lots of talk but not much conviction.

Not a good week for the economic bullish view; durable goods orders in June lower than expected, weekly jobless claims still running at 450K a month, Q2 GDP +2.4% a big decline from Q1 revision to +3.7%, U. of Michigan and the Conference Board's consumer measurements hanging at multi-year lows and the Fed's Beige Book trying to make that silk purse out of the pig's ear. Treasury sold another $104B of debt to fund the budget deficit. With all the not-so-good news interest rates continue to fall with the bellwether 10 yr note ending today about to test its recent low yield at 2.88% where it ran into resistance twice in the last month. Mortgage markets had a good week, a shame home buyers are on strike; can't sell to move up, can't qualify with the rigid underwriting, and most important, don't want to buy with the economy teetering.

The bulls on the economic recovery have a huge hurdle to spin this morning; the advance Q2 GDP report at 8:30 showed the US economy grew at 2.4%, not much lower than 2.5% consensus. The devil however lurked in Q1; in the data released this morning Q1 was revised from +2.7% to +3.7%, the revision took markets by surprise and made the economic decline in Q2 that much worse. In 2009 GDP was revised from -2.4% to -2.6%; 2008 revised from +0.4% to unchanged and 2007 revised from +2.1% to +1.9%. Will the lowered GDP revisions finally wake up markets and media that unless consumers spend the economy will not grow? Or will this data be swept under again in favor of corporate earnings as the economic driver?

After the very strong 5 yr auction yesterday most were expecting another strong bid for today's $29B 7 yr note. That wasn't the case however, the yield hit about 2 basis points higher than trading in the when-issued market this morning at 2.394%, the cover was 2.78 with indirect bidders taking 42.3% of it while the direct bidders were a non-factor taking just 9.0%. The market had been highly optimistic heading into the auction with trade looking for 2.375% right on the "when issued" mark. The previous, larger, $30B 7 yr auction saw a record 3.01 bid-to-cover ratio and an indirect bidder participation rate of 51% while seeing an about average 9.8% in direct bids. The 10-auction averages are 2.81 on the cover, 52.3% indirect bidder take and 9.7% for direct bids.