Update 5/14/10
Risks favor: Floating
Current Price of FNMA 4.5% Bond: $101.47, +25bp
The problems in Europe continue to dominate the headlines, and influence market direction around the globe. Skepticism over whether Greek austerity measures will take root and if the European bailout plan is just a temporary band-aid rather than a solution, are pressuring the Euro lower once again. At $1.24 per each Euro, the price is well off where it was a few months ago, when it cost over $1.60 for each Euro. When the Dollar was weaker, it made our imports more costly, as well as travel to Europe more expensive. But it also made our exports far more attractive to foreign purchasers, and that has helped many of the large multi-national US corporations.
As this situation is now reversing, it will likely have an adverse effect on those same multi-national corporations, which is contributing to another Stock market decline today. As we know, when Stocks decline, Bonds are typically the beneficiary. Today is no exception, as Bonds are improving from a weaker Stock market and from the global viewpoint that the US is a safer and more stable place for Bond investments. Mortgage Backed Securities are starting the day sharply higher, but will still need to contend with strong ceilings of resistance.
You may have noticed that the price of gasoline at the pump has come down in the past week, and it may come down a little further still. This is a result of the strengthening US Dollar, as investors park their money in US Dollar denominated securities like our Treasuries. Again – this is being done as global investors see US debt and securities as a safe haven from the problems in Europe. Oil, which was trading at $86/barrel just last week, is now trading at $74/barrel.
Today’s economic headlines showed that Retail Sales for April rose by 0.4%, double the expectations of 0.2%, and representing the seventh consecutive monthly increase. When stripping out autos, the figure was 0.4%, just below the 0.5% expected. The report can be volatile month to month, but the recent string of improving reports does signal that the consumer is starting to spend more money.
Consumer Sentiment rose to 73.3 during early May, up from last month’s reading of 72.2 – and was essentially in line with expectations. By way of comparison, the historical average of the Consumer Sentiment is around 87. The lowest on record was 43, hit in December of 1974…and during the most recent recession, the index hit a low of 63 in April 2008.
Industrial Production and Capacity Utilization were both reported in line with expectations as 0.8% and 73.7% respectively. With the uncertainty in Europe driving the trading activity of late, this benign news did little to influence the market.
Bonds are off to the races today, so we will obviously continue our Floating stance. But a look back to last week shows that Bond prices pulled back intra-day from levels similar to where they are now. We’ll need to keep an eye on this as the day progresses.