The Lake Team

MM Recap for June 1

U.S. Treasuries took another beating this week thanks to some encouraging economic news, big rallies on Wall Street and continuing concern about the huge supply of government debt hitting the markets.

Last Wednesday the yield on the 10-year note, which moves inversely to price, hit its highest level since Nov. 13 of last year, pushing mortgage rates, which move in step with the yield, up.  On Thursday bonds staged a rebound after the previous day’s huge sell-off, but yields remain high.

Good news arrived Tuesday, with the consumer confidence index for May leaping to an eight-month high of 54.9 from 40.8.  The consensus was that business conditions, the labor market and incomes will improve in the coming months.

Wednesday brought more good news as existing home sales in April rose by 2.9% to an annual rate of 4.68 million units.  Most sales were at the low-end of the market, with foreclosures and short sales accounting for 45% of total sales.  First timers bought 40% of the homes.  But inventories rose 8.8% to a 10.2-month supply.

A 1.9% rise in durable goods orders in April gave stocks another boost Thursday.  Orders for vehicles, steel and communications equipment drove the gain.  Excluding transportation, durables — items meant to last more than three years — rose by a healthy 0.8%.

First-time claims for jobless benefits kept the ball rolling; falling by 13,000 to 623,000 for the week ended May 23.  Continued claims, however, rose by 110,000 to 6.79 million.  The number of people collecting benefits for more than one week has set a record every week since Jan. 24 and is double what they were a year ago.

New home sales disappointed but rose 0.3% in April, nevertheless, coming in at an annual rate of 352,000 units.  This is up from 351,000, but economists were looking for 360,000.

On Friday the first revision of 1^stquarter GDP showed the economy shrinking by 5.7%, with business investments, housing and exports taking their toll.  It is, however, better than the advance -6.1% reading and far below the -6.3% 4^thquarter final.  Separately, the Chicago PMI May index on manufacturing conditions fell to 34.9 from 40.1.  An increase was expected.  These reports gave Treasuries an early boost.

The University of Michigan/Reuters final consumer sentiment survey for May edged up to 68.7 from 67.9 two weeks ago and 65.1 in April, making this the highest reading since September.  The index hit an all-time low in November.

An 18.9% decline in applications to refinance for the week ended May 22 says mortgage rates are up.  But buyers were still out.  Purchase apps rose 1%, according to the Mortgage Bankers Association.

This week begins with Monday’s release on personal income and spending.  Both are expected to show a 0.2% decline in April.  Spending would be unchanged from March, while income would show a slight improvement — up from -0.3%.  Separately, construction spending is expected to fall 1.8% in April, which is disappointing after a 0.3% gain in March.

The ISM index of May manufacturing conditions is probably the day’s most important release and it’s expected to edge up to 42 from 40.1.  Like the PMI, numbers above 50 indicate sector expansion and hopefully that’s where we’re headed.

Wednesday features the ISM index on the service sector for May and it, too, is predicted to climb.  Analysts say it will hit 45, up from 43.7.  Factory Orders in April should rise 0.3% from -0.9%.  Although it’s a big improvement, these are older data that won’t likely stir things up.

Thursday brings first-time jobless claims for the week ended May 30.  Maybe we’ll see another drop, but there are no guarantees.  Revised 1^stquarter productivity should rise by 1.2% from the previous 0.8%, if projections are correct.  Labor costs are also expected to ease a little, dipping to a 2.9% increase from 3.3%.

Friday brings the May employment report and hopes for improvement.  Analysts believe 550,000 jobs will be erased from nonfarm payrolls.  While that’s more than the 539,000 lost in April, it’s a whole lot better than the 600,000-plus we saw earlier this year.  But the unemployment rate is expected to pierce the 9% mark, coming in at 9.2%.