MMRecap for Feb. 8
The yield on the benchmark 10-year note, which moves in the opposite direction of price, rode the rollercoaster last week. U.S. Treasuries sold on strong economic and quarterly reports and concerns about an improving economic outlook.
But a flight to quality on Thursday, spurred by concerns about “fiscal imbalances” in some European countries, boosted prices and sent the yield down 10 basis points. Debt problems in Spain, Greece and Portugal are the main focus and could hinder global economic recovery. The rise in first-time claims also drove the yield down.
Wall Street sold on Thursday’s disappointing jobless claims for the week ended Jan. 30. They jumped by 8,000 to 480,000 — the highest level since Dec. 12 — and spawned worries about Friday’s employment report.
Analysts predicted 20,000 jobs would be added to nonfarm payrolls in January. Instead, 20,000 jobs were lost. But the unemployment rate fell to 9.7% from 10%. These two numbers were offsetting and Treasuries settled near breakeven in the early going.
The week began on an optimistic note, when the ISM index on manufacturing rose to 58.4, its highest since Aug. 2004. Although 13 of 18 industries surveyed grew, the index fell short of expectations. But it set off selling in bonds, as did President Obama’s plan to reduce the debt by $1.2 trillion over the next 10 years.
Personal income in December rose 0.4% — a little higher than expected, while personal spending rose 0.2% — somewhat less than expected. Separately, construction spending in December fell 1.5%, matching November, but coming in higher than predicted.
On Tuesday pending home sales for December rose 1.0% after November’s 16.4% decline; that put some pressure on bonds.
Treasuries on Wednesday had a tough day, as the service sector ISM rose to 50.5 in January versus 49.8 the previous month. Serious concern over $81 billion in refunding on top of auctions to be held (this week) and signs of an economic upswing also worried traders.
Prices rose and yields fell on the 10-year on Thursday due to the rise in first-time claims and on foreign debt fears. Other reports, such as a 1.0% increase in December factory orders and 6.2% growth in production combined with a 4.4% decline in costs had little impact.
Even though mortgage rates were on a par with the previous week, mortgage applications soared during the week ended Jan. 29. According to the Mortgage Bankers Association, refis jumped 26.3% and purchase apps climbed 17.5%.
This week is an odd one. Although bond traders will be reacting to the auctions and news regarding foreign markets, domestic reports won’t be a factor until Thursday.
Two early reports Thursday will likely shape trading. Retail sales for January are expected to rise 0.4%, which is far better than the 0.3% loss in December. And, excluding autos, the 0.4% gain is expected to hold versus December’s 0.2% loss. If analysts are correct, selling would likely ensue because spending consumers boost the economy.
On the other hand, first-time unemployment claims for the week ended Feb. 6 could turn things around — or not. Another increase in claims could counteract a strong retail sales report, but a big decline would add fuel to the selling fire. Both reports are due at 8:30 EST. Later in the morning business inventories for December will be released and should show a 0.4% increase, the same as in November. But no one will notice.
Prior to that we’ll get wholesale inventories for December on Tuesday which are expected to rise 0.6% and the U.S trade deficit for December on Wednesday. It should narrow to $35 billion from $36.4 billion. Neither generally has much influence on the markets.
The week ends with Friday’s Reuters/University of Michigan preliminary consumer sentiment survey. It is expected to nudge up to 74.8 from 74.4. Two weeks ago it rose sharply and analysts appear to believe that it wasn’t a fluke, as they see the upward trend continuing. Because it’s the only report due Friday it could weigh in a bit more heavily, but traders will also be focusing on economic events outside the U.S. that could move the markets.
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