July 1, 2020 - Market Update

Stocks – Stocks opened higher following positive coronavirus vaccine developments and data
indicating continued improvement in the labor market during June. FedEx announced potential signs of global economic recovery from the pandemic after shares jumped 16% following Christmas-like levels of online shopping and an increase in international cargo during their fiscal fourth quarter. During his testimony to Congress on Tuesday, Fed Chairman Powell announced that spending, among other economic activities rebounded faster than expected from lockdown measures though another outbreak of the virus would discourage public confidence and threaten the economy. The U.S. is now reporting 40,000 cases of the coronavirus a day though Dr. Anthony Fauci told a Senate committee that the figure could reach 100,000 if people continue to disregard social distancing and face mask measures. The monthly U.S. jobs report will be released on Thursday.

Treasury – Intermediate and long Treasury prices opened lower, as equity prices rebounded before fading mid-morning. The 10-Year Treasury is yielding 0.68%. U.S. companies added fewer jobs than expected in June as business reopening expanded, adding sign the economic recovery is cooling following a quick start. Businesses’ payrolls increased by 2.37 million in June following a revised 3.07 million gain in May that was previously reported as a decline, according to ADP Research Institute data. The hiring reflects a rebound in economic activity following shutdowns that brought an end to the longest-running expansion. While fiscal and monetary stimulus are helping the economy regain its footing, a gradual improvement in demand amid a pickup in Coronavirus cases indicates the job market will take time to recover to pre-recession levels. 

MBS – MBS had a strong session on Tuesday. 30-year Fannie 2s and 2.5s outperformed the 10-year note by 6 and 4 ticks, respectively, while fuller coupons outpaced 10s by 1-2 ticks. Ginnies also performed well, with GNII 2.5s and 3.5s outperforming their 10-year hedge ratios by 4/32s while 3s and higher closed 1-3 ticks ahead of 10s. 15-year Fannies were mixed, with Dwarf 2s and 2.5s outperforming the 5-year by 1-2 ticks while 3s and higher tracked the Treasury note. Trading activity perked up, with $255 billion in activity including $14.6 billion in specified pools. The MBA’s application indices ticked lower last week, with both purchase and refi activity easing by 1-2 percent.

Economic Data Ramps Up Ahead of Week’s Early Close:

After a very slow start on Monday, yesterday’s month-end trading session proved to be more consequential for Treasuries with yields ultimately rising enough to make it back to the doorstep of the uptrend they’d broken out of only 2 days prior. A picture is worth more than a sentence in that regard. See Pic on Page  3.

So is the new rally now over, and are we doomed to watch rates move steadily higher? Wouldn’t you like to know! Wouldn’t everyone like to know, in fact, because knowing the answers to such questions would mean knowing how the Coronavirus situation would play out in the near future. That’s been the key market mover on any given day, with very few exceptions.

When exceptions have been made, they were for things like Fed policy and big ticket economic data. The ADP employment report is occasionally treated like big ticket data due to its implications for the non-farm payrolls component of the big jobs report from the US government. That was the report that kicked off the alarming spike in bond yields in early June. But with today’s report released as I write, it doesn’t look like we’ll be seeing repeat performance (despite the positive implications for the economy). Perhaps the market will be more willing to react to tomorrow’s jobs report (coming out a day early due to 4th of July creating an observed market holiday on the 3rd). Or perhaps we’l see more willingness to react to ISM manufacturing at 10am.

Odds are, though, that last month’s data was staggeringly different than expectations, and it came at a time where markets weren’t yet confronting concerns about a 2nd wave of covid-19 cases in several states. We could also be seeing some strategic trades being made as part of “new month” strategies. This could bring some volatility to bonds regardless of today’s technical and fundamental data.

Lastly, there’s MBS. At the risk of jinxing it, they’re starting the day out just barely positive even as Treasuries are moderately weaker. Yesterday was a similar story. If Treasuries can avoid weakening too much, there’s a chance the mortgage market won’t even notice.