07.06
MMRecap for July 5th
It was another banner week for Treasuries and mortgage rates.
A number of concerns regarding the global economic picture kept money flowing into the safe haven of U.S. Treasuries. In addition, a number of weaker-than-expected economic reports proved once again that we have a long way to go before we can say, “It’s over.”
On Monday the G20 nations pledged to cut deficits drastically. This cultivated fear that huge deficit reductions could slow economic growth, and heavy buying in Treasuries followed. The yield on the benchmark 10-year note, which moves inversely to price, fell to 3.03% from 3.11% the previous Friday.
Data on personal income/spending for May were released. Spending was up 0.2%, while savings rose 0.4% — the highest level in eight months. Income also rose 0.4%. But the PCE, a major inflation indicator, edged up only 0.2%, making happy bond traders even happier. Inflation is the arch enemy of fixed-income assets, like bonds, because it robs them of their value over time.
On Tuesday word that the consumer confidence index for June fell to 52.9 from 62.7 in May, brought out more buyers. The 10-year yield hit a 14-month low of 2.97% and the 30-year bond yield dropped to 3.93%, which economists interpreted as a sign of a real slowdown in economic activity.
The one piece of good news came from the Case Shiller 20-city house price index, which rose 0.4% between March and April and was up 3.9% from one year ago. Seventeen of the 20 cities surveyed showed price increases in April versus 10 in March and six in February.
Wednesday’s lone report was the Chicago PMI index of June manufacturing conditions, which fell to 59.1 from 59.7. The drop, however, was less than expected so no waves were created.
More bad news on Thursday gave investors additional reasons to head for the safety of Treasuries. After the release of the first-time jobless claims and the ISM index on June manufacturing conditions, the10-year yield plunged to 2.87%, but later rebounded to close at 2.92%.
First-time claims rose by 13,000 to 472,000 for the week ended June 26. And the more accurate four-week average rose to 466,500 — its highest level since early March.
The ISM index also disappointed, falling to 56.2 from 59.7. Analysts were expecting 59. The June index is at its lowest level since December and was especially disturbing after three straight gains.
Friday’s employment report showed a net loss of 125,000 jobs in June, but that was due to the termination of 225,000 census workers, which had temporarily jacked up totals. Business hiring was responsible for a slightly weaker-than-expected 83,000 jobs. The unemployment rate fell to 9.5%, but the decline reflected discouraged job seekers who gave up looking for work. Separately, factory orders in May fell 1.4% versus the previous 1% gain.
Treasuries saw mild selling after the employment report, with the 10-year yield rising to 2.98% by mid-morning.
The cessation of the tax credit continues to affect home purchases. The Mortgage Bankers Association reported that for the week ended June 25, applications to purchase sent the index down 3.3%. It’s been down seven of the last eight weeks. Low rates continue to encourage refinancing, however. The refinance index rose 12.6%, its highest level since May 22, 2009.
This is a holiday-shortened week and thankfully so, as there are only three reports on the schedule.
That will leave the stock and bond markets to react to global news, and Wall Street will gear up for another round of quarterly earnings.
On Tuesday the ISM index for the service sector in June will be released. Analysts expect it to rise to 55.5 from 55.4, which would definitely not affect the markets. A big move in either direction could wield influence.
Thursday starts off and ends with first-time claims for the week ended July 3. A rise in claims similar to what we saw last week could prompt buying in Treasuries, but if there were a big decline, selling could ensue.
On Friday wholesale inventories for May should rise 0.6%, which would be an increase from the 0.4% reading in April. But once again, it’s not a market mover.