The Day Ahead: Personal Income & Outlays, Pending Home Sales, Factory Orders
Good Morning Good Morning...
The slow summer trade is in full effect ahead of what is setting up to be a directionally significant event this Friday: NonFarmPayrolls. If the Employment Situation Report, specifically the private payrolls portion, fails to impress, stocks will not react favorably and interest rates will say "I told you so". This implies the ADP Report, which will be released tomorrow morning, may recieve a bit more attention from investors.
Benchmark interest rates are lower this morning, led by the belly of the curve. The 5 year note has rallied 8.1 bps to 1.561% and the 7-year note has shed 8.0bps, falling to 2.275%. Further out the duration spectrum, 10s are trading 6.0bps lower at 2.909%. Also, the 2-year note set a new record low yield last night: 0.526%
Meanwhile, in stocks, S&P futures are basically flat (-1.75 at 1120) after hitting a ten-week high yesterday.
Rate sheet influential TBA MBS price levels are higher and current coupon yield spreads are wider to start the session. This is normal behavior for embedded call paper and not indicative of localized weakness, although MBS really needed a break from constant spread tightening rallies.
Key Events Today:
8:30 ― Personal Income & Outlays are each expected to rise a modest 0.1% in June, as is the core PCE price index, often called the Fed’s preferred measure of inflation. The expected gain in income marks a slowdown from the 0.4% and 0.5% advances in May and June, respectively. The anticipated rise in spending is in line with the 0.2% and flat reading for the prior two months. Lastly, the slight gain in core inflation confirms that pricing policy can remain on the back-burner.
“Personal income is expected to rise for the eleventh consecutive month, but at a slower pace given the decline in June’s non-farm payrolls. As income firms, so will personal spending,” said economists at BBVA. “However, June’s decline in retail sales and sluggish consumer confidence point to slow growth in this arena. The key driver of consumer spending will be employment ―while consumers now feel more secure in the jobs than during the recession, those that are unemployed are still struggling to find work. Given our expectation that the labor market will continue to improve at a slow pace, consumer spending will follow suit.”
10:00 ― The NAR’s Pending Home Sales Index fell by almost one-third in May to the lowest level in its history. The index declined 33.3% in the South, 32.1% in the Midwest, 31.6% in the Northeast, and -20.9% in the West. Whatever the index does in June, it won’t regain earlier levels; economists are looking for a 4.1% rise.
“One effect of the tax credit is that people who may have been planning to buy a home during the summer months accelerated their purchases in order to receive the tax benefit. As a result, post-tax credit demand is low,” said economists at BBVA. “Nevertheless, the environment remains favorable to buyers — the employment situation is improving, home prices are low and mortgage rates are favorable. Given this setting, we expect housing demand to gradually improve throughout the year.”
10:00 ― After posting their sharpest month over month decline since March 2009, economists expect Factory Orders fell further in June, signaling a continued slowdown in the manufacturing sector. Reuters consensus calls for a print of -0.5%.