MBS up 11 bps on the morning. Stocks down 27

European PMIs were weaker overnight with the services sector in France and Germany leading the way (France: 48 vs 52.5 f’cast, Germany: 54.1 vs 57.2 f’cast). That data sparked a rally in EU bonds that spilled over into a 6bp rally for Treasuries.

Bonds pushed back in a slightly weaker direction at the 9:30am NYSE open. The 9:45am PMI data didn’t really contribute to any directional movement even though volume surged and modest selling continued.

S&P Manufacturing PMI = 46.3 vs 48.5 f’cast [48.4 prev]

S&P Service PMI = 54.1 vs 54.0 f’cast [54.9 prev]

Manufacturing is in a contraction, while services are still expanding. Inflationary conditions continue to ease, with with firms increasing prices at the slowest pace since

The Index of Leading Economic Indicators declined again in May, signaling that a recession is in the cards. Rising interest rates paired with persistent inflation will continue to further dampen economic activity. While we revised our Q2 GDP forecast from negative to slight growth, we project that the US economy will contract over the Q3 2023 to Q1 2024 period. The recession likely will be due to continued tightness in monetary policy and lower government spending.

Friday began with solid gains courtesy of weak PMI data in Europe overnight and some follow-through buying in early US trading.  Sellers surfaced at the 9:30am NYSE open and their numbers grew after US PMI data failed to live up to EU’s negative hype.  The net effect was the transformation of a strong rally into an uneventful rally by mid day.  Treasuries gave up just over half of the overnight gains and stayed flat into the 3pm CME close.  MBS were slightly more volatile, but only superficially (due to illiquidity).  The modest gains leave bonds in the prevailing range and they leave us waiting for a confirmed breakout from that range.

MBS up about a quarter point on the day.  Stocks lost 33 points.