Safe play is to lock

Stocks are pressing right up against high levels of 2016, fueled in part by a stronger than anticipated earnings report from JP Morgan.  Today’s stock market strength is surprising, considering that Retail Sales were reported this morning to be weaker than anticipated.  The report showed a decrease of 0.3% for the month of March, which was weaker than the +0.1% anticipated.  Retail Sales, less Autos and Gas, were reported at +0.1%, which was also less than expectations of +0.3%. 

The Producer Price Index (PPI) for the month of March was reported to be -0.1%.  This was well below the markets’ expectations of +0.3%, and shows that inflation is still dangerously low.  Core PPI, which strips out food and energy, was also reported to be -0.1%, which was also below estimates of +0.2%.  The year over year PPI is at -0.1%, with Core PPI at +1.0%. 

The significant news of today will be the announcement of the results of a 10 Year Treasury Note auction, scheduled for 11:00 am. MST.  Of key importance will be the level of foreign participation.  Given the lack of yield available in many competing countries, we should see a stronger than typical demand.  When you consider that many countries are only paying 40 basis points, with some actually charging investors to hold on to their money, the current 1.78% yield offered by the US 10 YTN appears relatively attractive.  While a strong demand will result in lower yields, a lack of demand could potentially drive interest rates higher.  Watch closely at 11:00 MST to see the results. 

Mortgage bonds remain within a sideways trading channel, with support just beneath current levels.  We are hopeful that bonds will be able to remain above the support level.  However, if they do break, things could get worse in a hurry.  If you aren’t able to watch the markets closely, the safe play will be to lock.  If you are able to keep your eye on the market, be ready to pull the trigger should the market soften from here.