Rates Worse On China’s Europe Support, Paltry Treasury Auctions. GDP Analysis Last 2.5 Years.

3-Week Rate Dip Ends On China’s European Commitment
After enjoying a multi-week rally that brought mortgage rates to record lows since the Greek bailout-induced stock crash May 6, mortgage bonds are down significantly today (currently -44 basis points). As of now rates are up about .125% with mortgage bond pricing suggesting worse if today’s trading holds.

Stocks are the beneficiary of this mortgage bond selloff, with the Dow up 205 and the S&P up 25. The main catalyst was an announcement that China would continue to support and invest in Europe, and Europe fears have driven stock decline and bond rallies for the past three weeks—China’s announcement has reversed this pattern today. Also paltry Treasury auctions this week have added to supply concerns that are also adversely affecting mortgage trading. And finally, the second of three 1Q2010 GDP readings came in today at 3%, which is 0.2% lower than the first reading, and meaningfully lower than 4Q’s +5.6% reading. More on GDP below.

Closer Look At GDP Last 2.5 Years
The consumer spending component of GDP was +3.5% vs. +1.6% in 4Q. Last quarter, it became official that we’ve had two consecutive quarters of GDP growth—following four consecutive quarters of economic contraction (a 60yr record for consecutive GDP declines). Now this second 1Q2010 number adds to that trend—but today’s other market issues discussed above have overshadowed this. Other key contributors to positive GDP reading (besides consumer spending) were private inventory investment, exports, and nonresidential fixed investment. These were partly offset by decreases in state and local government spending and in residential fixed investment.

The 0.2% correction to this reading vs. the first 1Q2010 GDP reading (about $6.5 billion), and is due to an upward revision to imports and a downward revision to personal consumption expenditures that were partly offset by an upward revision to exports.

As for the consumer spending component of GDP, we’ll get another read on that tomorrow when the Personal Income & Outlays report is released. All GDP figures are ‘real’ or inflation-adjusted, and the final GDP reading for 1Q10 will come on June 25. The last 10 quarters of GDP are at the bottom of this post, and you can also visit our Data section to see historical GDP figures, graphs and download data.

As of November 25, 2008, -0.5% GDP was the largest quarterly decline since the tail end of the last recession in 2001. Six days after that release, the NBER declared a recession had been in effect since December 2007 and also countered the popular definition of recession as two consecutive quarters of negative GDP growth, saying that they evaluate many factors in addition to GDP. This falls well in line with the beginning of the credit crunch in August 2007 and the multi-layered factors that have led to the recession that’s lasted 2.5 years. Recession beginnings and endings are always officially called after the fact, and while 4Q09 and 1Q10 GDP suggest a recovery, 9.9% unemployment suggests otherwise. Here is the press release for today’s figures.

GDP Figures Last 2.5 Years
4Q2007: -0.2% (final)
1Q2008: +0.9% (final)
2Q2008: +2.8% (final)
3Q2008: -0.5% (final)
4Q2008: -6.3 (final)
ALL 2008: +0.4% (final)
1Q2009: -6.4% (final)
2Q2009: -0.7% (final)
3Q2009: +2.2% (final)
4Q2009: +5.6 (final)
ALL 2009: -2.4% (final)
1Q2010: +3.0 (2nd of 3 readings)