The Day Ahead: Jobless Claims, Bond Auction, MBS Roll


Benchmark Treasuries traded a bit weaker in the overnight session but are gaining strength ahead of U.S. econ data and a 30-year bond auction.

The 10-year Treasury note yield is down another two basis points to 2.928% – its lowest level in 2011 – after closing at 2.949% Wednesday. The 30-year Treasury is down 2 basis points to 4.165%. By contrast, the two year yield is up two basis points to 0.401%. While mortgages are lagging benchmarks, MBS prices are in the green. The Fannie Mae 4.0 coupon is currently +2/32 at 101-17.

Stocks seem to be doing better based on their day over day change, but the reality is equities are hovering around the week’s worst levels and 3-month lows. The SP 500 looks to open 4.5 points higher at 1,281.25, a pretty modest gain relative to more than five weeks of straight losses, including the past six sessions. The Dow is poised to open 42 points higher at 12,060.

“The SP 500 has now fallen in six consecutive sessions, the longest losing streak since the depths of the financial crisis, though the damage to this point has still been a relatively modest 6.2% from the late-April high,” said economists at BMO Capital Markets.

Global markets have been mixed. The ongoing session in Europe has the FTSE 100 and CAC-40 up by less than 0.1% apiece, while in Asia shares in Japan and Hong Kong were relatively flat. The outlier was China: the Shanghai Composite snapped a three-day streak and tumbled 1.7% on concerns of further government tightening.

“Analysts said the Shanghai index may consolidate in the current range in the next few sessions as investors will move cautiously ahead of China’s May macroeconomic data, which are scheduled to be issued next week,” reported Dow Jones newswires.

Light crude oil is 0.69% higher at $101.46 per barrel, while gold is trading 0.14% downwards at $1,536.60 per barrel.

Key Events Today:

8:30 – Supply disruptions from the Japanese earthquake and tsunami should limit imports in April, while a weak dollar is helping exports to remain a key driver of second-quarter growth. Still, economists expect April’s Trade Balance to produce a deficit of roughly $49 billion, a slightly wider gap than March’s $48.2 billion figure. 

“Although April trade figures reported by Japan showed roughly a $2.5 billion decline in exports from a year ago, inbound container data reported by US ports pointed to a solid increase in goods imports in the month,” said economists at Nomura, who said there is ” much uncertainty” in their forecast given the disruptions from Japan. 

“Moreover, petroleum import prices were still on the march upward in April and should exert negative pressure on the trade deficit,” they added. “Against this backdrop, we forecast a $50.9 billion deficit for April, which is $2.7 billion wider than the previous month.”

Against the consensus, Citigroup expect the deficit to narrow to $45.5 billion.

“We expect that the April trade deficit narrowed substantially, after posting a large increase in March,” they wrote. “In the March report, both exports and imports jumped by record or near record levels. We suspect there will be some retrenchment. In addition, motor vehicle imports likely fell sharply due to the pullback in activity from the tragedy in Japan.”

8:30 – Initial Jobless Claims continue to remain above the 400k mark. The last report showed 422k new filings for unemployment insurance, with the four-week average at 425,250. This week’s number is forecast at 418k, which would push the four-week average to a six-week low, according to economists at Citi.

“We do not expect next week’s initial claims for unemployment insurance to be affected in any significant way by special factors, such as bad weather,” said economists at Nomura. “As a result, claims will likely fall to the lower end of the recent 410k-430k range in the coming weeks, but stay above the 300k-level of March.”

10:00 – Wholesale Trade Inventories are anticipated to rise 1% in April, in line with the 1.1% and 1% increases of the prior two months. Forecasts for the report, which isn’t exactly a market-shaker but does have implications for GDP, range from 0.5% to 1.5%.

“Wholesale inventories are largely affected by increases in commodity prices, and prices were still on the rise in April,” said economists at Nomura. “Sales, too, can be inflated by rising prices and we expect an increase of 0.5% in April on top of 2.9% in March.”

Once again, disruptions from the Japanese earthquake adds an element of uncertainty to the report, warranting downside risks for inventories and sales.

“Fundamentally speaking, however, the year-over-year growth in sales continues to outstrip growth in inventories, which implies the need for further inventory building on the horizon,” Nomura said.

11:30 – Janet Yellen, president of the San Francisco Fed, speaks to the Cleveland Federal Reserve Bank Policy Forum on housing.

Treasury Auctions:
1:00 – 30-Year Notes


Today is also Class A Notification Day in the MBS market. That means Fannie and Freddie 30-year MBS coupons will begin the settlement process this afternoon.  READ MORE ABOUT THE ROLL

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