There's very little on the economic calendar this week.
However, we will get new monthly reports on existing home sales and new home sales on Thursday and Friday, respectively.
Those measures have been among the various worrisome data points that led Goldman Sachs economists to slash their forecasts for housing and GDP growth on Friday.
It's worth mentioning that mortgage rates are at seven-month lows, which should help the housing market.
Speaking of interest rates, the 10-year Treasury note yield tumbled to 2.48% last week.
Here's your Monday Scouting Report:
Top Story
- 2.48%: The 10-year Treasury yield started the year at 3.03%. At the time, Wall Street's interest rate strategists were convinced that the yield would climb to around 3.4% by the end of the year. So, what happened?
"The recent strength in Treasuries that’s been impervious to incoming economic data is probably to a significant extent a result of positioning, but it seems to be increasingly spooking investors in other markets worried that there’s an underlying message being sent of the economy being in much worse shape than the economic data are indicating," explained Morgan Stanley's Ted Wieseman. Stifel Nicolaus' Dave Lutz has been warning about positioning for a while, specifically pointing out that short positions on 10-year Treasury futures contracts were at a four-year high. Cumberland Advisors' David Kotok had a nice writeup this weekend on why its about low growth and low inflation.
One of the few people to predict the yield would fall to 2.5% was DoubleLine Funds' Jeffrey Gundlach. Now that we're there, here's what he thinks: "If we go down [more] on Treasury yields, we will see one of the biggest short-covering scrambles of all time ... If for some reason someone has to cover these shorts, you could actually see the low yields of 2012 get taken out."
Economic Calendar
- Federal Reserve's FOMC Minutes (Wed): The Fed will publish the minutes from its April 29-30 FOMC meeting at 2 p.m. ET. From Credit Suisse: "About the only aspect of the April 30 FOMC policy statement that could be called a surprise was the relatively upbeat assessment of the economy that came on the heels of that morning’s disappointing +0.1% Q1 GDP print (although it is worth noting that growth did improve within the quarter) ... The minutes – to be released on Wednesday – may contain some points of greater interest, however, including any details of the April 29 Board Meeting that coincided with the beginning of the two-day FOMC meeting, at which the topic of discussion was 'Medium-Term Monetary Policy Issues.' We will be looking for discussion specifically relating to the exit strategy, and in particular plans for additional testing of the fixed-rate reverse repo facility ... Also, given Fed Chair Yellen’s subsequent public comments about the risks associated with sluggishness in the housing market, any discussion in the minutes about the housing sector would be of interest."
- Initial Jobless Claims (Thurs): Economists estimate jobless claims climbed to 310,000 from 297,000 a week ago. "Initial jobless claims probably were little changed, after a sudden drop," said Citi's Peter D'Antonio. "First filings have been extremely volatile over the last two months, bouncing around in a wide 50,000 range. Moreover, claims have averaged about 320,000 in each of the last three months, suggesting little change in the underlying trend. Conversely, the story for continuing claims has been unambiguously better."
- Markit US Manufacturing PMI (Thurs): Economists estimate the preliminary read on this manufacturing index will be 55.5, up from 55.4 in April. "So far in May, regional Fed manufacturing surveys have been consistent with a healthy trend in manufacturing output growth," said UBS' Kevin Cummins.
- Existing Home Sales (Thurs): Economists estimate sales climbed 2.0% to an annualized rate of 4.68 million. "Existing home sales have slumped since August of last year due to a low inventory of homes, less investor buying, and recently, the adverse weather conditions," said Nomura economists. "The pending home sales index, which tends to lead existing sales by one to two months, increased in March, for the first time in nine months, and suggests that the existing homes market might be stabilizing."
- Kansas City Fed Manufacturing Activity (Thurs): Economists estimate this regional activity index was unchanged at 7 in May. "The Markit PMI and the manufacturing ISM suggest a strong trend in factory output," said UBS' Cummins. "As mentioned, the NY and Philadelphia Fed surveys already reported for May were solid."
- New Home Sales (Fri): Economists estimate the pace of sales jumped 9.4% to 420,000 in April. "Lagged effects from the weather and ongoing supply and affordability issues likely prompted the sharp drop in new home sales in March," said Nomura economists. "Mortgage applications for home purchases increased in April, but the current sales of single family homes subindex within the survey declined in April, suggesting that there probably was little improvement in new home sales in April."
- *Fed Chair Janet Yellen will give the NYU commencement speech at 11:30 a.m. ET on Wednesday, May 21.
Market Commentary
Last Monday, the S&P 500 passed 1,900 for the first time ever, and it got as high as 1,902 before it ended the week at 1,877.
Despite the milestone, the index is up just 1.6% this year.
"One... item confusing investors is the strength of bond prices this year even as so many believe equities would be the better performers," said Tobias Levkovich, Citi Chief U.S. Equity Strategist. He noted that falling rates were "unexpected with various theories running around, ranging from foreign buyers trying to push down their own currencies to drive exports for domestic economic growth reasons to banks covering short positions given tighter risk controls amidst greater regulatory oversight. Indeed, some think that the regulatory environment has led to low inventories that exacerbate market moves in any direction. We have heard that strong stock price gains last year have forced pension funds to rebalance their portfolios from equities to bonds as equity holdings rose to uncomfortably higher levels due to last year’s index value appreciation. And, safe haven arguments have evolved as well to explain Treasury buying due to the Ukraine and other regional trouble spots."
Levkovich pointed out that while the outperformance of bonds relative to stocks may seem odd, it's not unprecedented.
"In any event, stock price relative gains versus Treasuries had been quite strong versus history (see Figure 6) and some backup is not all that shocking," he said. "Moreover, with no indications of inflation expectations shifting, one should not worry that much about a big imminent spike in interest rates."
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