The Lake Team

MMRecap for Oct. 5

Last week turned out to be a great one for U.S. Treasury securities, with the 10-year note yield, which moves inversely to price, closing at its lowest level since May.  Although economic news was mixed, underlying concerns about the viability of an economic recovery, as well as Iran’s nuclear testing program and weakness in the global markets kept money flowing into the safe haven of Treasuries.

A surprise drop in consumer confidence in September gave Treasuries an early boost Tuesday.  Confidence slid to 53.1 from 54.5, when analysts expected 57.0.  Concerns about the economy, jobs and income weighed on those surveyed, which doesn’t bode well for the upcoming holiday season.

But shorter- term Treasuries sold that afternoon when Dallas Fed President Fisher said fed funds rates could go up “with alacrity,” should the need exist.  That comment slowed buying in Treasuries for a couple of days.

Wednesday’s release of the final 2^ndquarter GDP showed a -0.7% decline, down from an advance reading of -1.2%.  Inflation held at 2%, and there were smaller declines in business investments and exports but an increase in government spending.  Separately, the Chicago PMI index of September manufacturing conditions slid back into negative territory.  It fell to 46.1 from 50, the dividing line between expansion and contraction.  It also raised concerns about prospects for employment.

Thursday was the best day for Treasuries, with the 10-year yield dropping to 3.18%.  The ISM index on nationwide manufacturing fell to 52.6 from 52.9, but economists were expecting 55 or better.  In addition, first-time unemployment claims for the week ended Sept. 26 rose by 17,000 to 534,000, indicating there are no signs of stability in the job market yet.  The four-week average fell to 548,000 and continuing claims dropped to 6.09 million.

Pending home sales in August rose 6.4% — the seventh straight increase — and personal spending was up 1.3% (the best in eight years), but stocks tanked on the jobs report, benefitting Treasuries.

Friday’s worse-than-expected employment report sent money flying into Treasuries as Wall Street sold.  In September 263,000 jobs were lost, the 22nd straight negative month, while unemployment rose to 9.8%.  But as the session wore on, trading leveled off, and both stocks and bonds closed with small losses.

Even though mortgage rates fell during the week ended Sept. 25, demand for mortgages declined.  According to the Mortgage Bankers Association, refis fell 0.8%, while purchases dropped 6.9%.

It’s (almost) a good thing that this week is especially quiet when it comes to economic reports.  There are few on tap and even fewer that will influence trading.  But this may give the markets a chance to digest what happened last week and consider future moves.

The first report is September’s ISM index on the service industry.  Due out Monday, it is expected to climb to 49.5 from 48.  This would be a welcome move as any number above 50 indicates sector expansion.  Although not regarded as important as the ISM index on manufacturing, the service sector is the nation’s biggest employer.

Consumer credit for August is due Tuesday, and although not very influential, it is watched to see if shoppers are opening up their wallets.  But credit is expected to fall sharply — down to -$12 billion from -$21.8 billion.

The next major report, first-time unemployment claims for the week ended Oct. 3, is due Thursday and it can influence trading, as it did last week.  Recent patterns have been volatile, but claims are expected to be unchanged.  This report is the wild card of economic data.

Thursday also brings wholesale inventories for August, which are expected to edge down again.  Analysts believe they’ll fall 1.1%, which is an improvement over July’s 1.4% decline.  Diminishing inventories will eventually result in a ramping up of production, which could result in capital expenditures and perhaps additional jobs.

The release of the U.S. trade balance for August on Friday is expected to show a slight increase: -$32.1 billion from -$32.0 billion in July.  The deficit has been creeping up, due mostly to rising oil prices.  This report, however, seldom moves the markets.