The Lake Team

MMRecap for July 13

U.S. Treasuries turned in a good performance last week, with the yield on the benchmark 10-year note, which moves inversely to price, hitting a seven-week low on Wednesday and going even lower on Friday.  Mortgage rates, which follow the 10-year yield, also moved lower.

Buying in Treasuries stemmed largely from weakness on Wall Street, which may have gotten ahead of itself in terms of thinking economic recovery was around the corner.  Concerns about commodity prices, weak overseas markets and a continuing economic malaise sent buyers to the safety of bonds.

Of the few reports released last week, only the June ISM index on the service sector negatively impacted Treasuries.  The index rose to 47 from 44, with improvement in new orders, employment and prices paid moving it toward 50 — a place it hasn’t been in nine months.

Strong demand for Treasuries at several auctions renewed trader confidence in bonds.  This, paired with Wall Street’s fear that the recession will linger, pushed yields lower.

First-time unemployment claims for the week ended July 3 fell by 52,000 to 565,000 — its lowest level since January — while continued claims rose to 6.88 million, more than double what it was a year ago.  Separately, wholesale inventories in May were down -0.8%, which was better than the 1.3% decline in April.

Friday closed with the U.S. trade deficit shrinking close to a 10-year low in May, falling to -$26 billion from -$28.8 billion in April.  Separately, June trade price indexes were mixed, with imports (ex-oil) rising 0.2%, copying May, but export prices (ex-food) rose 0.8% versus 0.3% in May.  These numbers usually don’t impact trading.  However, the preliminary consumer sentiment survey for July did.  The index, released by the University of Michigan/Reuters, showed confidence diving to 64.6 from 70.8.  This fueled an already strong rally in Treasuries.

Mortgage activity picked up during the week ended July 3, according to the Mortgage Bankers Association.  Purchase applications were up 6.7%, while refis jumped 15.2%.

As promised, this week, which is loaded with economic news and quarterly earnings reports, should be interesting.  The big market-movers are crammed into three days beginning on Tuesday with retail sales.

June sales are expected to replicate May totals, with a 0.5% increase expected.  Excluding auto sales, analysts are looking for the same 0.5% increase.  If sales exceed those predictions, Treasuries might sell due to concern about an earlier-than-expected economic rebound.

The producer price index, which looks for inflation at the wholesale level, is expected to rise 0.8% in June versus a 0.2% increase in May.  But the more closely watched core rate, which eliminates food and energy prices, is predicted to increase by an acceptable 0.1%.  Separately, business inventories for May should decline 1.0%, which would be a tad less than the previous 1.1% drop.

On Wednesday the June consumer price index, which monitors prices at the retail level, could jump 0.6% versus a 0.1% increase in May.  However, the core rate should only rise 0.1%, the same as in May.  Bond traders will be watching this report, as inflation, which the Fed says is not a concern right now, does erode the value of fixed-rate assets over time.

Industrial production is expected to improve in June.  Analysts believe it will come in at -0.6%, which is up almost 50% from the -1.1% loss in May.  Capacity utilization, however, could continue its slide.  A 67.9% reading would be down from the 68.3% in May.

The NY Empire State index on July manufacturing conditions is expected to rise to -5.0 from -9.41.  This and the Philly Fed index are trying to work their way back to 0, because any number over that denotes expansion.  Thursday’s Philly Fed could disappoint, as analysts believe it will come in at -5, as opposed to -2.2 in June.

Thursday is also the day for first-time jobless claims for the week ended July 11.  Another 50,000-plus decline would be welcome.

The week ends with housing starts and building permits for June, and the outlook is split.  Permits are expected to rise to an annual rate of 523,000, up from 518,000.  But starts could slide to an annual rate of 530,000 units — down from 532,000.