Wm. Dudley a member of the FOMC was out speaking this morning and added more conviction that another QE is coming. Dudley, known as a dove on the FOMC, actually mentioned a number for the easing at $500B over a six month period. The Fed has been canvassing primary dealers on an easing move and CNBC has run its own poll of economists and dealers, according to the CNBC poll dealers are looking for what Dudley suggested, $500B. Not as much as markets were thinking so now we have QE Light. Dudley isn't Bernanke so his comments need to be taken with some grain of salt; however, the Feds likes to "leak" out what it is thinking at times to test the waters.
Taking it chronologically this morning; over night China’s manufacturing expanded at the fastest pace in four months in September, adding to signs that economic growth is stabilizing. The purchasing managers’ index rose to 53.8 from 51.7 in August, according to China’s logistics federation and statistics bureau, like the US manufacturing indexes, over 50 is expansion. At 9:00 the 10 yr note traded off 13/32 at 2.56% up 4 bp, mortgages -4/32 (.12 bp) and the DJIA +53 on the China news, Dudley's comments and the August income and spending. At 9:30 the 10 yr -14/32 2.56% +4 bp and mortgage prices -7/32 (.22 bp) on 30 yr FNMA's.
Next up this morning, at 9:55 the U. of Michigan consumer sentiment index was expected at 67.0 frm 66.6, as released sentiment increased to 68.2; the 12 month outlook on expectations at 61.0 frm 59.0. The initial reaction added a little to the DJIA but the bond and mortgage markets held steady. While a better index reading it is still on the historically low end. With the ISM hitting five minutes later markets were generally steady but weaker in rates and stronger in equities.
At 10:00, August construction spending, expected down 0.4%, was up 0.4%; July spending however was revised lower, from -1.0% to -1.4%.
Also at 10:00 the Sept ISM manufacturing index, expected at 54.5 frm 56.3, was right on at 54.4. New orders index at 51.1 frm 53.1, employment index at 56.5 frm 60.4 and prices pd at 70.5 frm 61.5. The ISM report overall was weaker than thought with declines in employment and new orders. The initial reaction dropped the DJIA from +66 to +27 and falling; the 10 yr note was -14/32, the knee jerk at -6/32; mortgage prices improved a little. On the margin the ISM was a disappointment for equity markets and should support the bond and mortgage markets through the session.
Technically; that the 10 yr note has failed to push into new low yields after testing them the last three days, isn't encouraging in the near term. The 10 yr low at 2.42% on an intraday trade is seen by investors as a level that must be violated to keep the interest rate rally moving forward. That it is running into selling suggests the note may increase in yield and pull mortgage rates up a little along with it. Support for the 10 yr if it continues to increase will come at the 2.65% area.