Neutral Economic Performances
MBS prices had another relatively flat day yesterday, struggling mightily around the unchanged mark for much of the day before notching a very modest 9 basis point gain at the close of trading. Economic data was largely neutral, except for consumer confidence, which came in much lower than expected at 71.2 as consumers expressed their doubts about the future health of the economy. This resulted in a bit more strength in fixed income prices which also led the 10-year Treasury yield to close down slightly to 2.51%. Overall, though it was another day of largely range-bound trading.
A second measurement of Spain’s economic growth in the 3rd quarter confirms an earlier measurement that saw that economy growing a scant 0.1% on the quarter, although that is far better than the nation has seen for growth of late. The interesting component to this growth is that it has come largely on the back of exports, as Spain has recently switched into a trade surplus for the first time in recent memory. Inflation there is a non-issue; nationally prices are 0.1% lower year over year. The country still has a way to go to be in good shape, as the public deficit is still among the Euro-zone’s highest. Growth may be cooling in Germany, if unemployment figures are any reflection of it. 2000 additional workers reported being unemployed, bringing that nation’s total unemployed to 2.97 million in October, although this was not enough to move the jobless rate from its former reading at 6.9%. More of the unemployment is concentrated in the formerly Communist East Germany where the official rate is 10.3%, while West German unemployment is just 6.1%. European Economic Sentiment improved modestly in October, up 0.9 points to 97.8 as both consumer and industrial confidence rose modestly. The reading beat expectations by 0.6 points. German consumer prices declined 0.2% in October’s preliminary report, up just 1.2% for the past year.
In US data today, we have several consequential reports, starting with the ADP employment report. Employers added 130,000 jobs in October, fewer than the already weak 138,000 analysts had anticipated, and further weakened by the downward revision of September’s result by 21,000 jobs. This has set the initial estimate for next week’s release of the official employment figures back, with just 126,000 positions expected. US consumer prices rose 0.2% overall, 0.1% at the core level in September, in yet another indication that the Fed need not fear inflation. Prices are up 1.2% overall and 1.7% at the core level in the past 12 months. This afternoon the Fed will make an announcement. I don’t anticipate much of any change in sentiment there, with the most likely change to the announcement being an expression of disappointment at the inability of Congress and the White House to lead the country.
MBS prices are modestly better this morning, up 15 basis points in early trade, as the weak employment numbers are bolstering expectations for the Fed to continue its support of bond prices. The 10-year Treasury yield is down slightly to 2.49%. It’s possible, but not too likely, that the Fed announcement this afternoon will seriously impact MBS trade. The Fed statement is already almost a foregone conclusion. There is nothing holding up the US economy right now except the Fed’s willingness to pump money into the system, as leadership inaction is impacting trader willingness to do much of anything. For the moment, we have a little more wiggle room to go on floating, with some industrial numbers due Friday that might impact pricing, but not much else.
<15 days: lock
15-30 days: consider locking
30-45 days: consider floating
45+ days: float