The Lake Team

MMRecap for July 6

U.S. Treasuries rallied big time last Monday, with aggressive buying sending the yield on the benchmark 10-year note, which moves in the opposite direction of price, down to 3.47%, its lowest close since May 21.  Traders were betting that the optimism over an early economic rebound was fading.

Buying continued into Tuesday when June’s consumer confidence index dropped to 49.3 from May’s 54.8, due to worry about jobs and the economy.  Analysts predicted a 56.  This report ignited selling on Wall Street, with bonds the beneficiaries.

The Chicago PMI index on June manufacturing stopped Treasuries in their tracks.  The index rose to 39.9 from 34.9, indicating a more positive outlook on the manufacturing sector.  A smaller-than-expected drop in April housing price also pressured Treasuries.  According to the S&P/Case-Shiller report, prices fell only 0.6% (the smallest decline since June 2008) versus a -2.2% decline in March.

Wednesday’s reports came in pretty much on cue, leaving Treasury yields little changed.  The ISM index on national manufacturing conditions was a tad weaker than expected, rising to 44.8 from 42.8.  Even though it missed the expected 44.9, it was a significant upward move.  And pending home sales in May rose 0.1%, Construction spending in May fell 0.9% from a 0.8% increase in April, but it was expected.

The big news came Thursday with the early release of the June employment report, which saw 467,000 workers lose their jobs — more than expected and much higher than the revised 322,000 jobs lost in May.  The unemployment rate rose to a lower-than-expected 9.7% from 9.6%.  All told, 3.4 million people have received pink slips since the first of the year.

The report gave Treasuries a boost.

First-time claims for the week ended June 26 erased the previous week’s increase, falling by 16,000 to 610,000.  However, continuing claims edged down to 6.7 million people who have collected benefits for more than one week — the third decline this year.  Separately, the final report of the week showed factory orders in May rising by 1.2%, bolstered by transportation orders.

In spite of a slight decline in mortgage rates during the week ended June 26, applications plunged.  Refinances dove 30% to their lowest level since November, and purchase apps were down 4.5%, according to the Mortgage Bankers Association.

It appears that the holiday weekend is extending into this week, looking at the dearth of reports on deck.  That can only mean one thing: tighten your seat belts for next week’s ride.

First up Monday is the ISM index on the service sector.  Although this sector employs more people by far than manufacturing, it’s not as economically important as last week’s ISM index.  However, ISM services could rise in June to 46 from 44 — yet another step toward 50, indicating sector expansion.

First-time unemployment claims for the week ended July 4 will be out early Thursday and we can only hope for another decline.  Also due, wholesale inventories for May, which are expected to fall 1.0% versus the previous 1.4% decrease.  Low inventories will eventually result in demand.

Prices indexes on imports and exports for June are also due, although the results have little effect on trading.  There are no predictions made on the outcomes, but we can tell you that in May export prices (excluding agriculture) rose 0.3%, while import prices (ex-oil) rose 0.2%.

The week ends with Friday’s report on the U.S. trade deficit for May.  It’s expected to expand to -$30 billion from the previous -$29.2 billion.  The huge drop in the deficit over the past several months clearly reflects global economic weakness both here and abroad, as demand for products and services are down on both sides.  In September the deficit was close to $60 billion — double what it was in April.

The final report this week comes from the University of Michigan/Reuters.  It’s the preliminary consumer sentiment survey for July, and little change is expected from the June final.  Analysts believe it will come in at about 71, a bit higher than the previous 70.8 reading.