|Stocks rose sharply at opening last Monday following Europe’s lead. Spain proposed a budget and its banks passed stress tests, relieving major concerns. The eurozone’s manufacturing index rose to 46.1. Although any number below 50 shows contraction, it’s at a six-month high. Stocks climbed even higher when our own ISM index manufacturing rose to 51.5 in September. That’s the first reading above 50 since May.The other economic report showed construction spending in August fell for the second straight month. It came in at -0.6% versus a -0.4% in July.
In a speech to the Economics Club of Indiana on Monday, Fed Chairman Ben Bernanke pulled the rug out from under Wall Street, which had made big gains on news form Spain. In defending QE3, Bernanke said, “The economy simply has not been growing fast enough recently to make significant progress in bringing down unemployment.” He added that Congress must deal with the upcoming fiscal cliff. Even though the Dow closed up almost 80 points, it was half of what it had gained earlier.
The number of investors on the sidelines waiting for something good to happen increased on Tuesday. No economic news was released, but worries about Spain’s economic situation persisted. In addition, many believe the banks’ stress tests were not as stellar as initially thought. Stocks sold, but benefits to bonds were meager. The 10-year yield held at 1.61%.
On Wednesday there was a bona fide economic report. It said the September ISM index on the service sector rose almost one-and-a-half points to 55.1. There was little reaction in the markets from that piece of news, but stocks rose when ADP, the payroll company, said 162,000jobs were added to private payrolls in September.
The release of the minutes of the Fed’s Sept. 12 meeting did not affect trading. Stock closed with minimal gains, while the 10-year yield edged up to 1.62%.
Stocks jumped on Thursday, and the 10-year yield took a beating. It didn’t occur because of a great first-time jobless claims report. That was pretty bad. Bank stocks rose on word that ECB President Draghi reaffirmed that Europe’s central bank would, indeed, go forward with its bond-buying program so Europe can work its way through its sovereign debt problem.
In addition, two large regional U.S. banks are being reviewed for an upgrade, which bodes well for the domestic banking sector. Separately, first-time unemployment claims for the week ended Sept. 29 rose by 4,000 to 367,000. Claims can’t seem to break below that 350,000 mark.
The yield on the 10-year note closed at 1.66%.
Released on Friday, the unemployment report for September blew investors away. The rate dropped to 7.8%, its lowest level in almost three years. A total of 114,000 jobs were added to nonfarm payrolls. In addition, a household survey, which is far more volatile and less reliable than the survey of 141,000 businesses, showed 823,000 more people said they had jobs. Economists pay attention to the business survey.
The report did no favors to Treasuries. The yield on the 10-year jumped to 1.73% from 1.66%. However, stocks lost some of their enthusiasm. The Dow closed positive but the other two major indices ended in negative territory.
Historically low mortgage rates increased demand for applications to both buy and refinance, according to the Mortgage Bankers Association. During the week ended Sept. 28 the refinance index rose 3%, while purchases were up 1%. Applications to refinance accounted for 81.2% of total applications.
This week is short on news that could affect the markets. The first report doesn’t come out until Wednesday, and it’s not likely to stir things up. Wholesale inventories say nothing about consumer spending, so this August report will not be a factor.
In the afternoon, the Fed releases its beige book, which provides an economic picture of each of the nation’s 12 districts. A negative report from most districts could send the 10-year yield down a point or so, while positive news could have the opposite effect. But generally there is little reaction to the report.
Thursday, the big news is first-time unemployment claims. The previous week they rose to 367,000. Should claims rise again, Treasury yields would probably dip. If claims drop sharply, Treasury investors would likely see their yields rise.
Thursday’s other reports, the U.S. trade deficit for August and the import and export price indices for September, generally do not impact the markets.
Friday begins with the September producer price index which tracks wholesale prices at the wholesale level. In August the index showed a 1.7% increase, but it was largely caused by rising costs of food and gasoline. Since then gas prices have fallen sharply, so a 1.2% increase is predicted. The core rate, which eliminates gas and food prices, rose by 0.2% and will likely do so again. The core rate is the tell-tale inflation indicator, and it shows that inflation is in check.
The Thomson-Reuters/University of Michigan preliminary consumer sentiment survey for October is the week’s final report. It has shown that confidence is at a relatively high level of late. The final for September was 78.3. A sizable move up would likely send Treasury yields up, but a decline would have the opposite effect. It’s the size of the move that actually impacts Treasury yields.