Stocks are lower, oil prices are a bit higher, but Mortgage Bonds are slightly positive to start the day, following some more disappointment out of the Iran/US peace deal negotiations. Balancing out the Bond market were some softer than expected GDP growth figures and cooler than expected monthly PCE inflation readings.
The US said that the memorandum of understanding, which included Iran opening the Strait of Hormuz to pre-war levels within 30 days of a deal being made, was a complete fabrication. Additionally, the US and Iran exchanged more strikes against each other last night, bringing into question the very fragile ceasefire. This caused oil to move higher and applied some pressure to Stocks and Bonds.
GDP Q1 (Second Reading)
The second look at Q1 GDP was a disappointment, falling from 2% to 1.6%. This report covers from January to March, but shows that the economy was already starting to slow before the full impact of higher oil prices. Let’s also remember that roughly half of the GDP figure is due to AI buildout, which means other sectors are doing much worse.
We have discussed several times how higher oil prices initially causes inflationary fears and yields to rise. But if oil prices remain elevated for a prolonged period of time, it can cause demand destruction, a slowdown in the globally economy, and potentially recession. Interestingly, this could help Bonds in the longer run.
Personal Consumption Expenditures (PCE)
The PCE inflation report for April showed that headline all-in inflation rose 0.4%, which was one tenth lower than expectations. Year over year, headline PCE rose from 3.5% to 3.8%, in line with market estimates.
The core reading, which strips out food and energy prices, rose 0.2%, also one tenth lighter than expected. Year over year, PCE core rose from 3.2% to 3.3%, as anticipated.
While the inflation figures rose and moved in the wrong direction, they were better than some feared, especially when considering the shelter anomaly that we discussed yesterday. Due to the shutdown, the shelter inflation figures were carried forward because they could not collect the data, which caused a temporary spike and double hit in the April CPI and PCE inflation reports. As a result, PCE shelter rose 0.5%, which is much hotter than the figures we have been seeing. Even still, Core PCE was only up 0.2% month-over-month, showing that other items were well behaved. Without the anomaly, which will not be there next month, core inflation would have come in even lighter.
Also within this report was the savings rate, which fell sharply from 3.2% to 2.6%. This is a reflection of people having to spend more and save less due to higher oil prices. The combination of weaker than expected growth, consumers feeling the pinch, and more well behaved core PCE than expected is helping balance the Bond market, even in the face of disappointing news out of the US/Iran peace negotiations.
Durable Goods Orders
Durable Goods Orders in April rose 7.9%, which looks like a blockbuster figure and was much stronger than estimates…but it was all due to very large aircraft orders.
The more important core reading, which strips out defense and aircraft spending, fell 1.1%, which was much worse than estimates.
This is another report showing a bit of a slowdown in the economy in April.
Initial Jobless Claims
Initial Jobless Claims, which measures individuals filing for unemployment benefits for the first time, rose 5,000 to 215,000. This figure remains very low, but once again, does not factor in those entering the gig economy or receiving a severance package when let go.
Continuing claims, or those who continue to stay on benefits after their initial claim, rose slightly to 1.79M.
Technical Analysis
Mortgage Bonds are trading in a very wide range between support at 101.68 and overhead resistance at the 25 and 50-day Moving Averages, which Bonds were unable to break above yesterday. While Bonds are flat, we must remain on guard for a turnaround, as there is a lot of room for Bonds to fall before reaching support.
The 10-year is right in the middle of a range between support at the 25-day and overhead resistance at 4.52%, which was tested and held earlier this morning.
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