07.19
MMRecap for July 19
Last week began on the downside for U.S. Treasuries. Monday was almost a non-day, but then came Tuesday. Stocks went wild on better-than-expected profits from Alcoa and the rally was on. Investors regained confidence and safe-haven buying dried up.
The yield on the 10-year note zoomed to 3.11% from Monday’s 3.05%. Yields and prices move in opposite directions.
Weak retail sales in June ignited strong buying in bonds on Wednesday. Sales fell for the second straight month — down 0.5%. That afternoon the minutes of the Fed’s June 22-23 meeting showed the Committee lowered its GDP forecast for 2010 to 3% -3.5% from 3.2% – 3.7%, raising further concerns about the economy.
Treasuries continued their rise on Thursday, with four of the five reports supporting the theory of a slow economic recovery. The day began on an up note with first-time unemployment claims dropping by 29,000 to 429,000 — a two-year low. The four-week average also fell to 455,250. This had some economists thinking this may be the first in a series of declines.
The rest of the reports, however, were bond-friendly. The producer price index, which looks for signs of wholesale inflation, fell 0.5% in June, while the core index, which eliminates volatile food and energy prices, rose by an expected 0.1%. Traders had nothing to fear on the inflation front.
Manufacturing was also hard hit. The Philly Fed index of July manufacturing conditions fell to 5.1 from 8 in June. The May index hit 21.4. The July NY Empire State manufacturing index plunged to 5.1 from 19.6 in June.
Separately, nationwide industrial production rose 0.1% — weaker than May’s 1.3% increase. Capacity utilization was unchanged at 74.1%.
These reports renewed concerns about economic growth — pushing the specter of a rebound further into the future. Money headed back to the safe haven of bonds, and the yield on the 10-year fell below 3.0% again, closing at 2.98%.
Friday began with the consumer price index showing no signs of inflation in retail prices. The index itself rose 0.1%, while the more closely watched core rate rose 0.2% — slightly more than the predicted 0.1% increase. Bond prices remained flat.
The week’s final report showed consumer sentiment hitting its lowest level since August. The University of Michigan said that its preliminary July survey slid to 66.5, down from the June reading of 76. Buying in bonds picked up, driving the 10-year note yield down to 2.95%.
Mortgage applications continue to decline, according to the Mortgage Bankers Association. For the week ended July 9, the refinance index fell 2.9%, while the purchase index dropped 12.7%.
The recent trend of slow week/busy week continues, with only four economic reports on this week’s docket.
With earnings season heating up, Wall Street might influence trading in the bond markets as much or more than the reports would. Better-than-expected quarterlies from influential corporations can ignite buying in equities, and bonds will sell. But disappointing reports would likely have the opposite effect.
On Tuesday housing starts and building permits for June are due. Both categories came in far below estimates in May.
Starts are expected to fall to an annual rate of 563,000 from 593,000. Building permits, which shine a light on future starts, are predicted to fall to an annual rate of 555,000 from 574,000 in May. These two reports, however, are subject to huge revisions.
More housing data come out Thursday with the release of existing home sales in June. They are expected to drop to an annual rate of 5.10 million units versus a May rate of 5.66 million units.
First-time jobless claims for the week ended July 17 could be watched more closely than usual. Were analysts correct in thinking last week’s big decline in claims was the beginning of the long-awaited turn around in employment? Another big decline would no doubt bring about selling in bonds, but an increase would usher in a sigh of relief.
The final report, the index of leading economic indicators for June, is expected to fall 0.5%. It had been heading upward for months indicating good economic times ahead. This would be a setback. Although bonds would like it, this report isn’t a big mover.