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Fed on track to increase rates

FED ON TRACK TO INCREASE RATES DESPITE SOFT PATCH

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Early trade this morning had MBS prices a little lower, the 10 yr +2 bps at 2.23%. Stock indexes before the 9:30 AM EST open were trading higher in the futures markets.

Two data points at 8:30; weekly claims were as expected, +10K to 244K, the week average decreased to 243K from 247.25K last week. April Philadelphia Fed business index was thought to be 25.5 from 32.8 in March; as reported the index dropped to 22. The index lower has had a minor support for the bond market but didn’t have any noticeable impact on stock indexes that held their gains before the weaker index.

More Fedspeak that goes round and round; this time from Robert Kaplan, Dallas Fed. He remarked (again) that the Fed is still on track to move rates up two more times this year…unless the economy slows, he said the Fed has the flexibility to wait and see how the economy unfolds. “Three rate increases this year…is still a good baseline. If the economy develops a little more slowly, then we can do less than that, and if the economy is a little stronger, we can do more than that,” Kaplan said in an interview with Bloomberg TV. He affirmed that the Fed could take action to begin reducing the size of its $4.5 trillion balance sheet. The Fed has ramped up talk about its balance sheet recently. The take away from his interview; the Fed doesn’t know what the economy will do this year and will be willing to hold off rate increases if necessary.

House Speaker Paul Ryan warning that any tax reform this year will not likely happen until late this year, if then. “This will be done in 2017, that is our timeline, we would like to get it done as soon as possible.” Tax reform has been hindered by the inability to pass a new health care bill. Tax reform was one of the foundations for the now stymied Trump stock market rally.

It’s almost an annual event the last eight years; a potential government shutdown if Congress doesn’t increase the debt ceiling next week. No shutdown will occur, the debt ceiling will be increased. The Trump administration is trying to get more money to build “The Wall” ($3B), more money for a bigger military. It is a gamble for President Trump but at the end of the day, it is highly unlikely that there’ll be a government shutdown.

The first of two French elections coming on Sunday; the margins are razor thin between the candidates with pro-EU and anti-EU positions well staked out. Polls used to matter to determine the outlook before the actual voting, but after the misses on Brexit and the unexpected President Trump victory, not many are giving any credit to polls now. If Le Pen were to win the two elections, she has made it clear she wants France to leave the EU that would likely signal the eventual end of the 60-year experiment. The two leading candidates on Sunday will make it through to a second round run-off on May 7.

March leading economic indicators, not a major data point, expected +0.2% from +0.6% in February.

The bond and mortgage markets technically overbought at present levels, but our wider bullish bias remains. As long as any retracement in the 10 yr note holds below 2.32%, we expect better rates ahead. The Fed is currently waffling on its 2017 economic outlook with Fed officials talking the talk but suggesting it may not walk the walk. The extreme bullish economic outlook in the US and globally is wavering somewhat but still no major selling, just no new aggressive buying. This morning on the open stock indexes were better but no improvement in the first 30 minutes from opening levels. Geopolitical tensions have eased a bit for the moment leaving the rate markets focused on how equity markets traded.

Source: TBWS

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