Posts Tagged ‘dow futures’

Rising jobless claims and Wednesday's much weaker ADP private jobs report have severely diminished forecasts for the all-important Nonfarm Payrolls employment report coming out at 8:30 ET. Predictions were already low at the start of the week - averaging 190k versus 244k the month before - and now it's more common to hear prayers for anything above 100k.

"Last week, we had penciled in a below-consensus 170,000 gain in nonfarm payrolls, but following this week's cast of dismal economic characters, we'll be happy to take any six-figure number," said BMO Capital Markets an hour before the report.

RDQ Economics commented Thursday: "We look for private payrolls to have risen 150,000 in May, which compares to an average monthly gain of 253,000 over the last three months (and we see total nonfarm payrolls up 140,000)."

Nomura Global Economics added: "We expect tomorrow's nonfarm payrolls to show employment expansion, but not at the levels required for a robust jobs recovery. Our forecast is for a 85k increase in nonfarm payrolls; 110k rise in private payrolls; 10k decline in manufacturing employment; and, an unchanged unemployment rate (9.0%)." 

The Unemployment Rate is still widely expected to inch down to 8.9%.

Thirty minutes before the report, the benchmark 10-year Treasury yield is at 3.02%, versus 3.03% at Thursday's close. The two-year note remains at 0.46%, and the 30-year yield is down one basis point at 4.24%. Like Treasuries, mortgages are mostly flat. The FNCL 4.0 coupon is +3/32 at 96-28 and the 30 year FN4.5 is +1/32 at 100-27.

Equity trading is equally cautious: S&P 500 futures are 5 points lower at 1,307.50 and Dow futures are 32 points down at 12,207.

Commodity prices are lower. Light crude oil fell 0.79% overnight to $99.61 per barrel, and gold prices dropped 0.29% to $1,528.20 per ounce.

At 10am ET, the ISM Non-Manufacturing Index is supposed to do better in May compared to April, when a sharp drop-off pulled the index down 4.5 points to its lowest level since August. The median estimate puts the index at 54, up from 52.8 in April but below the 57.3 recorded two months before. The modest improvement would draw a start contrast with its manufacturing cousin, which on Wednesday plummeted to 53.5 from April's 60.4.

"The ISM non-manufacturing index likely gave up a bit more ground in May on some sogginess in the economy," said analysts at IHS Global Insight. "The services side of the economy and distribution are still growing, but the economy has lost momentum."

Economists at Citigroup pointed out that markets normally focus on the employment component of this report, but with the nonfarm payroll report coming out ninety minutes earlier, it probably won't command much attention.

Also at 3:30pm ET, Eric Rosengren, president of the Boston Fed, speaks to the Stanford Finance Forum in Stanford, California.

Benchmark Treasuries begin the U.S. session slightly worse than yesterday's best levels after weak econ data pushed the 10-year Treasury yield down 11 basis points to 2.939% while equity markets shed more than 2%.

The benchmark 10-year Treasury yield remains below the 3% mark at 2.96% in early trading, versus 2.939% at the previous close. Wednesday marked the first time the yield had dipped below the 3% mark since December. The two-year note remains at 0.437% and the 30-year yield is three basis points softer at 4.173%.

Bond Market Repeating History. False Start Fuels Rally

Mortgages performed well yesterday, keeping up with Treasuries and even outperforming in some cases thanks to a lack of loan supply and steady buyer demand. Reprices for the better were reported. Loan pricing hasn't been this aggressive since late November 2010. Loan pricing does however look to weaken a bit this morning as TBAs are backing up a few ticks. The FNCL 4.0 is currently -3/32 at 101-06.

S&P 500 futures are 2.00 points higher at 1,314. That compares with a 31 point drop Wednesday - the worst single day since last August. Dow futures are 6 points up at 12,283, versus a 280 points descent on Wednesday.

Global equities have been bathed in red following the U.S. sell-off. Markets in Asia fell between 1.40% and 1.70%, and the ongoing session is in Europe is about as bad: France's CAC-40 is down 1.12% and London's FTSE 100 is off 0.75%.

"Global equities are on shaky ground this morning following yesterday's steep declines in North America after the weak ADP print spooked investors and put into question the strength of the U.S. economy," said economists at BMO Capital Markets. "Despite a downgrade to Greece's credit rating by Moody's - three notches lower to Caa1 - late Wednesday, taking it deep into junk territory, the EUR is bouncing back this morning following strong demand at a Spanish bond auction." 

Commodity prices are relatively flat. Light crude oil rose 0.12% overnight to $100.42 per barrel, and gold prices rose 0.10% to $1,544.70 per ounce.

Key Events Today:

8:30 - Initial Jobless Claims have surprised analysts by keeping above the 400k mark for the past seven consecutive weeks, and the most recent trends haven't been encouraging. Last week's report showed 424k new claims for unemployment insurance from 414k the week before; this week the estimate is 420k, with forecasts ranging from 410k to 440k.

"Nonstop extreme weather will likely keep claims elevated for yet another week," said economists at Nomura. "We continue to have confidence in a gradual labor market recovery, but doubt that claims will drop below 400k in the coming weeks."

8:30 - Not much is expected from the revised Productivity & Costs report for the first-quarter. As GDP was left unchanged in recent revisions, there's little to look out for.  Productivity should remain at +1.6% or perhaps tick up to +1.7%, while unit labor costs should keep near its +0.8% gain.

"Because the first quarter GDP revision was so small and compensation was not altered, we do not look for much change in productivity and costs," said economists at Citigroup. "Nonfarm productivity likely will be revised up slightly and unit labor costs will move in the opposing direction. Markets are unlikely to take note of these small changes."

11:00 - Treasury announces the terms of 3-year, 10-year, and 30-year debt supply to be auctioned next week.

Loan pricing is set to improve by 12 to 25bps this morning after disappointing ADP Private Payrolls survey results.

The ADP Employment Report showed U.S. private payrolls increased by 38,000 private sector jobs in May. This was well below economists' expectations for a gain of 175,000 jobs and is the lowest print since September 2010. While this report is not the "be all, end all" in terms of jobs data, it does provide a preview of things to come this Friday when the BLS releases the official Employment Situation Report.

From the release: A deceleration in employment, while disappointing, is not entirely surprising. In the first quarter, GDP grew at only a 1.8% rate and only about 2¼% over the last four quarters. This is below most economists’ estimates of the economy’s potential growth rate and normally would be associated with very weak growth of employment. While employment in the service-providing sector rose by 48,000, marking 17 consecutive months of employment gains, employment in the goods-producing sector fell 10,000 following six months of increases. Manufacturing employment fell 9,000 in May following seven consecutive monthly gains. Employment in the construction industry dropped 8,000 in May, completely reversing April’s increase. The total decrease in construction employment since its peak in January 2007 is 2,124,000. Employment in the financial services sector decreased 6,000 in May.

Rate sheet influential" MBS coupon prices are up 5 to 8/32 and the benchmark 10yr note is testing psychological resistance at 3.00% as stock futures fall. S&Ps are -5.50 (0.41%) at 1338.50. Dow futures are down 48 points (0.38%) at 12,511. 

A "down in coupon" shift is in progress after this report, but it will need to be confirmed by a poor Employment Situation Report on Friday before we start seeing lock desks hedge with 4.0 MBS coupons in size.

What does "Down in Coupon" mean?

Trading lower on the MBS coupon stack, i.e. going from a holding of 6.0s to 4.0s, or 4.5%s to 4.0%. The purpose of the trade in most instances is to buy a longer duration security to prosper as rates rally. That also infers a flatter yield curve, where longer maturities are gaining at a faster pace than shorter ones (10yrs outperforming 2yr notes for example). This trade reduces prepay risk as declining mortgage rates insinuate higher MBS coupons will be called out (prepaid) at par price. If you paid 102-00 and the coupon gets paid back at 100-00...you lose the premium you paid and the trade is upside down. Not good for your P&L!

This matters to loan originators because a "Down in Coupon" shift means increased investor demand for 4.0 MBS coupons, which makes it easier for lock desks to hedge loan pipelines with 4.0 coupons which in turn allows secondary to offer better pricing on mortgage rates below 4.625%. We could go as low as 4.25% before another shift "Down in Coupon" is needed to rally loan pricing further....

Key Events Today:

10:00 - The ISM Manufacturing Index slowed for a second month in April to 60.4, its lowest since December. But overall the reading was quite robust, marking the 21st month of expansion in the sector with 17 of the 18 industries surveyed posting gains. The May report is forecast to be considerably less optimistic - the median estimate is 57 - but many point out any score above 55 is no indication of weakness.

"The ISM manufacturing index should falter in May as the manufacturing sector loses momentum," wrote analysts at IHS Global Insight. "The expected May reading of 55.3 is still healthy, just less ebullient than the boom-like readings of over 60 recorded for the first four months of 2011."

"It is difficult to estimate the direct and knock-on impacts of the earthquake in Japan and its drag on motor vehicle output, but that is at least a part of the story," they added. "Vehicles and parts are about 6% of the manufacturing sector (not even including the steel, glass, and plastics used in their manufacture) so they can never be ignored."

Citigroup had a similar outlook.

"We figure that the May ISM measure of manufacturing activity slipped somewhat from readings that were among the highest in the past quarter century," they wrote. "We figure the national index cannot sustain such elevated levels. However, even with the expected retreat in May, the ISM index probably remained at a buoyant level consistent with solid growth of factory output."

10:00 - Predictions for Construction Spending could hardly be more diffuse. While the so-called consensus expects a 0.4% increase in April, estimates range from a 1.5% drop-off to a healthy 1% gain. Some of the uncertainty relates to the previous report, where a higher-than-expected 1.4% jump may have been "payback from weather-related dips in prior months," as IHS Global Insight put it. The public sector/private sector dynamic offers further uncertainty.

"Construction spending will drop in April, mostly on a decline in residential construction," said economists at IHS Global Insight, predicting a 0.5% decrease overall. "Nonresidential construction, up two straight months, may show a further small increase. With infrastructure spending declining, a small decline in public construction is likely.

10:20 - John Williams, president of the San Francisco Fed, speaks on economics instruction to a conference on teaching economics and research.

12:25 - Sandra Pianalto, president of the Cleveland Fed, speaks on labor markets and monetary policy to the Columbus Metropolitan Club Forum.

12:30 - Fed Governor Daniel Tarullo speaks on U.S. and international financial regulatory reform to the Peterson Institute in Washington.

Treasury Auctions:
11:30 - 4-Week Bills
11:30 - 52-Week Bills

Treasuries traded from a defensive position overnight amid slightly above average volume. The benchmark 10-year note moved in a range of between 3.32% and 3.36% after weakening two basis points in Wednesday's session to 3.35%. AQ and MG point out a breakdown of important 3.34% support but say 3.40% is a much more significant inflection point for 10s.

Rates were on their heels overnight because European stocks are seeing a boost including a 1.06% gain in France's CAC-40 and a 1.10% climb in London's FTSE 100.  U.S. equity futures continue to rally following a 67-point gain in the Dow Wednesday and an ongoing positive session in European markets.  S&P 500 futures are 9.50 points higher at 1,301 while Dow futures are 71 points higher at 12,092. The Asian session was mixed - stocks fell 0.06% and 0.15% in China and Japan, but rose 0.39% in Hong Kong .

The equity rally occurs despite contagion in the Eurozone debt crisis. Portugal moved one step closer to a bailout package after rejecting the Prime Minister's austerity plan Wednesday, a move that will bring down the current minority Socialist party, according to economists at BMO Capital Markets.

"For now, investors have taken comfort in the view that the beefed-up EU rescue fund is more than large enough to withstand a Portuguese bailout  - the third among the 17 euro nations to need one - and prevent systemic risk to Europe's banking system," they wrote. "Of course, this hinges on a belief that Spain - the fourth largest Euro-zone economy - is strongly committed to its austerity plan."

Continued uncertainty in the Middle-East helped drive light crude oil prices to their highest levels since September 2008 on Wednesday. Overnight they moved 0.61% higher and now stand at $106.37 per barrel. Gold prices continue to benefit too - up 0.28% at $1,442.20 per ounce.

Key Events Today:

Despite persistent turmoil in the Middle-East and Northern Africa, global markets appear stable Tuesday morning as external power has been reconnected to almost all six nuclear reactors at Japan's Fukushima power plant.

S&P 500 futures are flat at  1,293 while Dow futures are 9 points higher at 11,972. Both indexes jumped 1.50% Monday, rising for a third straight session following several days in the trenches after the fallout from the Japanese earthquake and tsunami. 

"Financial markets are breathing easier around the world this morning as fears over the fallout from Japan's downed nuclear plants subside ... for now," said economists at BMO Capital Markets. 

The 10-year Treasury yield weakened by four basis points to 3.32% Monday. Treasuries remained on the defensive overnight, though the session was quiet - the 10-year traded in a range of 3.32% and 3.35% while money flowed back into equities.  FNCL 4.5 MBS prices are 5/32 lower at 101-28.

Japan's stock market continues to recover overnight. Equities there rose 4.36% today following a holiday Monday, but remain 7.9% lower than prior to the earthquake. Chinese shares climbed 0.34% and Hong Kong shares moved forward by 0.76%. 

While western forces continue to enforce a no-fly zone in Libya, the world's 12th-largest oil exporter, oil prices remain in the triple-digit range. Light crude oil moved 0.16% lower overnight to $102.17 per barrel. Gold prices are 0.01% up at $1,426.60 per ounce. The Telegraph reports a U.S. fighter jet crashed in Libya overnight. Both crew members were able to eject. Only one has been recovered so far. Mechanical issues have been cited as the cause for the crash.

Key Events Today: