The Fed meeting this afternoon could set the stage for rate market trends

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Published Date 4/29/2020

The Q1 advance GDP was thought to show a decline of about 3.7%, as reported showed the US economy shrank 4.8%. The decline was driven by the virus, especially in March. Economists estimated real consumer spending in Q1 at -1.5%; spending fell 7.6%. It is the biggest slide since 2008 and the first contraction since 2014, as the need to fight the coronavirus forced businesses to close and consumers to stay home. This quarter will be far worse, with analysts expecting the economy to tumble by a record amount in data going back to the 1940s. Bloomberg Economics has projected a 37% annualized contraction, but UniCredit is the most bearish with a 65% estimate. No stopping the stock indexes though, they were better before the 8:30 am ET report the indexes were better, but after the weak GDP, the indexes continued to climb, at 9:00 am ET DJIA +450 points. Earnings are stronger than some estimates driving stocks higher.

The DJIA is headed for its best monthly gain, up 10%, since October of 2002. The S&P 500 is on pace for its sharpest monthly rally, up 11.2%, since December of 1991. The Nasdaq is on track for its best monthly return, a gain of 12.4%, since April 2009. The small-capitalization Russell 2000 index RUT, +1.26% is headed for its best monthly advance since October 2011, with a rise of 15%, according to Dow Jones Market Data. Is it a case of fear of missing out, or FOMO, taking shape? The current bond king, Jeffrey Gundlach, CEO of DoubleLine, warned on Monday that a re-test of the index lows is possible. “People don’t understand the magnitude of...the social unease ... that’s going to happen,” Gundlach explained. “We’ve lost every single job that we created since the bottom in 2009.” With that in mind, he revealed that he just shorted the S&P at 2,863. “At this level, I think the upside and downside is very poor,” he said. “I don’t think it could make it to 3,000, but it could. I think downside easily to the lows or beyond.” The S&P hit a low of 2,192 on March 23 before rebounding about 30% as the Fed rolled out its historic stimulus measures.

The 10 yr note at 9:00 am ET unchanged from yesterday; MBS prices slightly higher. Earlier this morning, weekly MBA mortgage applications, the composite apps -3.3%, purchase apps +12.0% from the week prior week, and re-finances slipped 7.0%.

At 9:30 am ET, the DJIA opened +410, NASDAQ +184, S&P +54. 10 yr at 9:30 0.60% -2 bp. FNMA 3.0 30 yr coupon at 9:30 +8 bps from yesterday’s close and +15 bps from 9:30 yesterday.

At 10:00 am ET, March NAR pending home sales expected -10% after increasing 2.4% in Feb; as released sales dropped 20.8% (contracts signed but not closed). Year-over-year contract signings declined 16.3%. An index of 100 is equal to the level of contract activity in 2001. The Northeast PHSI dropped 14.5% to 82.3 in March, 11.0% lower than a year ago. In the Midwest, the index decreased 22.0% to 85.6 last month, down 12.4% from March 2019. Pending home sales in the South sank 19.5% to an index of 103.7 in March, a 17.8% drop from March 2019. The index in the West fell 26.8% in March 2020 to 71.4, down 21.5% from a year ago. The Northeast PHSI dropped 14.5% to 82.3 in March, 11.0% lower than a year ago. In the Midwest, the index decreased 22.0% to 85.6 last month, down 12.4% from March 2019.

This is Fed Day, the FOMC policy statement at 2:00 pm ET, Powell’s press conference at 2:30 pm ET.

Since April 16, there has been no noticeable change in MBS prices, and the 10 yr note yield has hovered in a 5 bp range. What occurs (or doesn’t) this afternoon may set the stage for the 10 yr to break that narrow range. We previously noted the 10 yr has very strong resistance at 0.58% to 0.60% (see chart). Technicals don’t carry as much weight with traders as normal under this unusual set of circumstances, but traders are paying attention.

Source: TBWS

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