The Lake Team

Mon MM Recap for Aug. 17th

U. S. Treasury securities had a good week, as prices rose and yields fell due to economic reports that disappointed Wall Street and created safe-haven buying opportunities.  News of low inflation and successful Treasury auctions indicate that demand for government debt remains strong.

On Monday bond prices moved off their two-month lows, and yields — which move inversely with price — fell from two-month highs.  Stocks, which hit 10-month highs the previous Friday, sold and some of those profits landed in bonds.

Tuesday’s productivity and costs report for July showed productivity soared to an annual rate of 6.4% — the biggest gain since 2003, while unit labor costs fell 5.8% — the biggest decrease since 2000.  This is good news, but it doesn’t bode well for employment.

The Fed held rates at 0% – 0.25% and said they would remain low for an “extended” period.  The Committee also offered a slightly more upbeat assessment of economic conditions.  It did, however, say that it would slow the pace of purchases of 10-year notes and finish its commitment by the end of October.  This disappointed traders, handing bonds their only losing session of the week.

Thursday got them back on track, as July retail sales posted their first decline in three months, falling 0.1% when analysts predicted a 0.8% increase.  Lower gasoline prices were partially responsible.  Excluding good auto sales, retail sales fell 0.6% although a 0.1% increase was expected.

In addition, first-time unemployment claims for the week ended August 8 rose by 4,000 to 554,000, and the four-week average, which eliminates volatility, climbed to 565,000.  But the number of people collecting benefits for more than one week fell by 144,000 to 6.202 million.  Treasuries, however, rallied on the weekly data and on a successful auction of 10-year notes.

Separately, business inventories fell again — this time by 1.1% in June versus a 1.2% decline in May — indicating that manufacturers are continuing to try to align production with demand.

Friday’s consumer price index (CPI) report for July verified the Fed’s contention that inflation is not a problem.  Retail inflation was flat, and has fallen 2.15 over the last 12 months — the biggest decline since 1950.  The core rate, which excludes volatile food and energy prices, rose 0.1%, down from June’s 0.7% increase.

Industrial production in July rose 0.5% as opposed to a 0.4% decline in June and capacity utilization, which has been sliding, edged up to 68.5% in July from the previous 68.1% reading.  Separately, the University of Michigan/Reuters’ preliminary consumer sentiment survey slid to 63.2 from 66, the lowest reading since March.

Higher mortgage rates during the week ended Aug. 7 dampened demand for refinances, according to the Mortgage Bankers Association.  Refis fell 7.2% while purchase applications rose 1.1%.

This week two key manufacturing indexes for July will be released: the NY Empire State and the Philly Fed index.  Monday’s New York index is finally expected to creep into positive territory with a 2.2 reading, up from July’s -0.55.  Thursday’s Philadelphia index should edge closer to breakeven with a -2.0, up from -2.5.  Any number above zero indicates sector expansion.

Analysts expect better results from Tuesday’s July producer price index (PPI) report than they got in June.  The July PPI, which measures wholesale price inflation, should fall 0.2% versus June’s 1.8% increase, while the core rate could rise 0.1% — more acceptable than the previous 0.5% increase.

Housing starts for July are expected to rise again, this time to an annual rate of 598,000 units, up from June’s 582,000 units.  Building permits should follow, rising to an annual rate of 576,000 from 570,000.

On Thursday we get first-time jobless claims for the week ended Aug. 15.  Who knows?  They’re so volatile.  

But we should get good news from the index of leading economic indicators.  This index, which looks at economic conditions six to nine months into the future, could rise 0.6% in July versus a 0.7% increase in June.  These numbers seem to reflect the consensus that the worst may be over.

Economists are looking for a substantial increase in existing home sales for July, due Friday.  They expect the annualized rate of sales to rise to 5 million units from 4.89 million.