This Week:After a huge drop in interestÂ ratesÂ last week, this week should see some consolidation.Â The stockÂ marketÂ and the bond markets are both technically over-extended.Â That said, we still donâ€™t expect interestÂ ratesÂ willÂ increaseÂ much even if there is some reversal this week.Â The overall trend is remarkably bullish on increasing U.S. economic weakness and the never-ending debt problems in Europe.Â Spain has serious problems in its banking sector and unemployment is increasing.Â Â Greece willÂ hold elections on the 17thÂ to determine whether Greek citizens want to stay in the European Union or leave it.Â A Greek exit of the EU would generate additional fears that Ireland and Portugal might follow.Â Presently there is little belief one way or the other that Europe will solve its debt and deepening economic crisis, leaving the U.S. bond market as a place to parkÂ money.
The Federal ReserveÂ Beige Book will be released on Wednesday.Â There isnâ€™t much this week on the data withÂ the May ISM Services Sector IndexÂ out tomorrow and Weekly Jobless Claims on Thursday are the only key data this week.
Early activity this morning had the bond andÂ mortgageÂ markets trading lower after the explosive rally onÂ FridayÂ on the weak May employment report.Â The 10-Year Note and 30-Year Bond are falling in rate on increasing global moves to safety. Â Obviously Europe is leading the parade to safety as there is little progress in dealing with its debt and rapidly declining economy.Â Â China is slowing quickly and India is now showing cracks in its economy.Â In the U.S. we are doing better for the moment but also being pulled down by the global softening.Â Investors of all sizes are simply parkingÂ moneyin sovereign debt, in the U.S., Germany and other AAA rated sovereign debt (the U.S. rating is AA+).Â Investors are no longer lookingÂ for aÂ returnÂ on investment, just return on the principal.
As euro-area unemployment reached its highest level onÂ record,Â manufacturing output contracted for a 10th straight month in May and the currency plunged close to a two-year low against the U.S. dollar, leaders continued to wrangle over the details of support for the currency bloc.Â There is an increasing cry in Europe from the debt ridden countries to institute euro bonds.Â With markets bracing for further deterioration in Spainâ€™s finance sector and a possible Greek departure from the 17-member euro area, there are calls for a â€œbanking unionâ€ in Europe involving a centralized system to re-capitalizeÂ lenders.Â Germanyâ€™s Merkel shut off another crisis-fighting avenue the same day as she toughened her opposition to euro-area debt sharing, saying that â€œunder no circumstancesâ€ would she agree to euro bonds. Â Germany holds most of the cards, so far unwilling to play many of them fearing the inevitable,Â declineÂ in Germanyâ€™s economy and its own debt if it has to back euro bonds.
Treasuries andÂ mortgageÂ markets are technically overboughtÂ while the U.S. equity market is oversold.Â A bounce back is not unusual with short term oscillators and momentum indicators at extreme levels.Â Traders will be reluctant to step in now until markets can consolidate and test the underlying demand at current levels in financial markets. Â There is however no reason to expect interestÂ ratesÂ will increase much given the underlying fundamentals.
The DJIA opened up +15, NASDAQ up +18; the 10-Year NoteÂ at 930am down -20/32 at 1.53% (+7 bps) and 30-Year MBS prices down -6/32 (.18 bps).
At 1000am the data for the day, April Factory OrdersÂ expected up +0.1%, took another dive to -0.6% andÂ MarchÂ orders were revised to -1.9% from 1.5%.Â The reaction turned stock indexes down from slight gains.Â The 10-Year NoteÂ was -20/32, it bounced up to -14/32.
There arenâ€™t a lot of key economic measurements this week;Â Weekly Jobless Clams and the May ISM Services Sector Index lead the headlines. Â We expect a choppy bond andÂ mortgageÂ markets this week to ease the over-extended move we saw last week.Â Last Fridayâ€™s heavy buying in treasuries looked much like a capitulation from the bond bears after the 10-Year NoteÂ easily broke 1.50%.Â One media guru was out today conjecturing that the 10-Year NoteÂ could go to 1.00% before the rate markets turn around.Â We canâ€™t get on board with that however.Â Although Europe at the moment looks impotent in dealing with the economy and debt problems, it isnâ€™t unreasonable that in the next few months there will be a plan in place that will reduce risk off trades into bonds.Â If Europe canâ€™t come up with a fix that makes sense in the next few months, the entire EU may come tumbling down in a heap.Â That isnâ€™t an option so something will have to give In the present stalemates that have grid-locked all of the region.