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Market Update

Posted by Kevin Connolly on April 7, 2014 at 1:10 AM

The NonFarm Payroll report today is creating a small rally. The economy added 192k jobs in March versus 200k surveyed and the unemployment rate held at 6.7%. The Underemployment Rate is up to 12.7% versus 12.6% in Feb and the Labor Force Participation Rate is now at 63.2%, up from 63.0%. Earlier in the week, the ADP report showed a payroll increase of 191k jobs in March versus 139k in Feb. That caused the S&P to rise to an all-time high of 1890. Bonds took a hit and the 10yr crossed over 2.80%. Today the 10yr stands at 2.75% due to the slight underperformance of today’s payroll report. It appears the ADP report caused too much optimism and now the NFP report is reversing the mood. For the week, the 10yr is up 3bps and exactly where it was 2 ½ months ago.

The data this week confirms that the economy is still moving forward, not like a race care, but rather like a large train with no ability to accelerate quickly. A train that must stay on a specific track with little flexibility and hopefully enough momentum to carry it up large grades and hopefully not too much speed that could cause it to crash. The conductor is the Fed and there is no data at this point that’s going to cause them to make any swift or sudden changes. Everything will be slow and methodical. At this point I would expect tapering to continue as planned. The market has been range trading for quite some time and feels very stale. Exactly what the Fed wants as it slowly escapes out the back.

Take a look at the chart below. For the last 7 months, the 10yr has traded between 2.5 and 3.0% generally. In the last 2 months it has bounced between 2.60 and 2.80%. The result has been positive for mortgages. With less interest rate volatility, investors in mortgages are more comfortable with long term bets on interest rates. Last week’s graph showed that mortgages are trading very tight to Treasuries. If this range holds, expect mortgages to continue to trade well. The general expectation that growth in the US will continue to advance at a slow but steady rate along with subdued inflation contribute to this low volatility environment. I don’t expect economic data to cause any change to those beliefs, at least without some warning signs. That means the market will likely continue to trade in this range if not for headline risk. Headline risk meaning some world event, outside of economic statistics, that affects the mood and attitude of the investment community. Financial crisis have run their course and the world is running out of headlines to move markets. Terrorist attacks, mother nature and unforeseen major bankruptcies or frauds are about the only events that still have the potential to unsettle markets. But until that day, we will sit on this train with very little disruption.

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