Money Market Recap and Forecast
August 30th, 2010
Written by Greg Frost Jr.
Categories: Economy, Frost Mortgage Monday
MMRecap for August 30
Continued concerns about the economy, focused on jobs, manufacturing and bleak economic reports, kept dollars flowing into U.S. Treasuries most of last week.
Reports began Tuesday when existing home sales ignited a big bond rally. Sales in July fell by a whopping 27.2% — the biggest one-month drop ever. No one saw this coming in spite of the ongoing impact of the tax credit, the slow economy and a lack of jobs.
Sales plunged to an annual rate of 3.83 million units from 5.26 million in June, and inventories rose to 3.98 million units — a 12.5-month supply.
Also fueling the flight to safety was a steep decline in the European markets, which also have global economic concerns. The 10-year note yield, which moves in the opposite direction of price, shed 10 basis points.
A 12.4% decline in July’s new home sales, released Wednesday, pulled more money into bonds, and the flow didn’t stop there. Durable goods orders in July rose 0.3% — far short of an expected 3.0% gain. When transportation was excluded, orders fell 3.8% when a 0.5% increase was forecast. These reports sent the 10-year yield down to 2.45% — its lowest level in 20 months. But that didn’t last.
Wall Street was looking at a fifth straight losing session, then bargain hunters moved in and saved the day. Money left Treasuries, and yields climbed back 2.54%.
First-time jobless claims fell during the week ended Aug. 21 — the first decline in a month. Claims were down 31,000 to 473,000. The four-week average, which smoothes volatility, rose to 486,750.
Stocks fell again, with investors jittery over Friday’s revised 2ndquarter GDP. The Dow closed below 10,000 for the first time since July 6, while Treasuries benefitted.
The GDP revision wasn’t as bad as feared. It was lowered to 1.6%, instead of the predicted 1.4%, from 2.4%. This fired up Wall Street and ignited heavy selling in Treasuries. The 10-year yield shot up 14 basis points to 2.64% by mid-day.
The University of Michigan’s final consumer sentiment survey for August was all but ignored. It fell to 68.9 from 69.6.
The Mortgage Bankers Association said that during the week ended Aug. 10 the refinance index rose 5.7%, reaching its highest level since May 1, 2009. For the second straight week, purchase apps climbed 0.6%.
This week we get typical month-end/month-beginning reports, climaxing with Friday’s August employment report. Current thinking is that 120,000 jobs will be lost from nonfarm payrolls — less than July’s 136,000. But private sector payrolls should increase by 44,000 jobs — also less than the 71,000 added in July. The unemployment rate, however, is expected to rise to 9.6% from 9.5%.
Later that morning the ISM index on the service sector for August is expected to edge down to 53.0 from 54.3. If these estimates are on target, the yield on the 10-year note should fall.
The week begins with Monday’s report on personal spending/income for July. Both categories are expected to show 0.3% increases, while the PCE core — a key inflation indicator — should rise by a bond-friendly 0.1%.
Tuesday features two indexes: the Chicago PMI on August manufacturing conditions and the consumer confidence index for August. Confidence should edge up to 51.3 from 50. The PMI could be more worrisome. It’s predicted to fall to 57.5 from 62.3 — another sign that manufacturing is struggling.
An even larger sign is due Wednesday when the ISM index on nationwide manufacturing is released. It, too, is expected to fall to 53.3 from 55.5. Any number over 50 indicates expansion, but the margin between flat and expanding is shrinking.
Thursday begins with initial jobless claims for the week ended Aug. 28. Will there be a repeat of last week?
Revised data on 2ndquarter productivity and costs could contain hints of inflation, if predictions are correct. Productivity could be downwardly revised to 1.5% from 0.9%, while costs might be revised upward to 1.0% from 0.2%. When costs grow faster than productivity, that’s a bad sign.
The final report, July factory orders, should show a 0.5% increase, up from a 1.2% decline in June. This is generally not a market-mover, but numbers like that might get noticed.
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