Money Market Recap and Forecast
August 23rd, 2010
Written by Greg Frost Jr.
Categories: Economy, Frost Mortgage Monday, Monday Money Market Recap & Forecast
Worries about a double-dip recession, disappointing earnings results and a handful of weaker-than-expected economic indicators resulted in another week of strong buying in U.S. Treasuries.
The 30-year bond and 10- and 5-year note yields, which move in the opposite of price, fell to their lowest levels in 16 months — or more. And the yield on the 2-year note hit a record low.
Almost every day last week traders found reasons to put their money in the safe haven of government debt.
Monday began with the homebuilders’ index, a measure of confidence, falling to 13 — a 17-month low. A reading of 50 or more indicates that at least half the builders view conditions as good. In addition, the NY Empire State index of manufacturing conditions for August rose to a less-than-expected 7.1 from 5.08.
Housing starts and building permits, released Tuesday, were mixed. Starts rose 1.7% to an annual rate of 546,000 units, while permits fell 3.1% to an annual rate of 565,000 — the fewest since May 2009.
Separately, the producer price index, which monitors wholesale inflation, rose 0.2% in July, while the core rate, which eliminates volatile food and energy prices, rose 0.3% — in line with expectations.
Industrial production was up 1.0% in July from -0.1% in June and capacity utilization increased to 74.8% from 74.1%. These reports left Treasuries idling in neutral, but a statement by the president of the Minneapolis Federal Reserve ignited a Wall Street rally and a big sell-off in bonds.
Alluding to the previous week’s posting-meeting Fed statement, which instigated a huge bond rally, he said it (the statement) made investors believe “things were worse off than they had imagined” and that the reaction was “unwarranted.”
With no news to guide them on Wednesday, both stocks and bonds closed nearly unchanged. On Thursday Treasuries roared back.
Initial jobless claims for the week ended Aug. 14 hit 500,000 for the first time since November, and the four-week average rose to 482,000 — up by 8,000. This report ignited buying in Treasuries, and the Philly Fed index of August manufacturing conditions added fuel. It fell to -7.7 from 5.10 (almost a 13-point drop), when +7.15 was expected. Any number below 0 indicates business is slowing.
The index of leading economic indicators for July rose by a less-than-expected 0.1% from -0.3%, but buying in bonds continued. The 10-year closed at 2.57% — its lowest level since March 2009.
No reports were released Friday, leaving bonds mostly unchanged, while Wall Street indexes headed for negative territory in the opening hours of trading.
Applications to purchase and refinance rose during the week ended Aug. 13, according to the Mortgage Bankers Association. The refi index was up17.1%, the highest since May 2009, while the purchase index climbed 3.4%. It’s 38.6% lower than it was a year ago.
This week has data on home sales and the second revision of 2ndquarter GDP, which could touch off strong buying in Treasuries, if analysts are on target. It doesn’t come out until Friday, but economic growth is expected to be revised downward to 1.4% from 2.4%. This would be a clear signal that the economy is not stagnating, it’s contracting.
Existing home sales for July are due Tuesday and another decline is expected. Economists predict sales will fall to an annual rate of 5.14 million units from 5.37 million in June. On Wednesday, however, a report on new home sales for July should show an increase to an annual rate of 338,000 from the previous 330,000.
That same day we also get durable goods orders for July. They are expected to rise 3.4% versus a 1.2% decline in the previous month. But when transportation is excluded, orders should fall 0.7%.
Thursday first-time jobless claims for the week ended Aug. 21 will be released. If they rise above 500,000, expect to see strong buying in Treasuries.
Friday’s last report, the University of Michigan’s final consumer sentiment survey for August, is expected to edge up to 70 from 69.6. This small increase would be totally ignored by bond traders if the revised 2ndquarter GDP declines by a full percentage point. They would probably be too busy buying.
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