Money Market Recap and Forecast
November 14th, 2011
Written by Greg Frost Jr.
Categories: Economy, Frost Mortgage Monday, Monday Money Market Recap & Forecast
Although no economic indicators were released during the first three days of last week, U.S. Treasury securities led off on a positive note. Serious concerns regarding the debt crises in Greece, Italy and now France sent worried investors piling into the safe haven of U. S. Treasuries.
Stocks were erratic on Monday, but buying in Treasuries was steady as concerns about Italy’s financial health rose. The yield on the 10-year note closed at 1.99%, down from Friday’s close of 2.05%.
Tuesday’s focus was on Italy, whose economy was deemed “too big to fail and too big to bail” by some observers. Early in the session U.S. Treasuries were under light selling pressure, but picked up steam when Italy’s Prime Minister Silvio Berlusconi said he would resign when the parliament passes economic reforms requested by the European Union, or EU. The 10-year yield closed at 2.06%.
Italy’s woes continued Wednesday when the 10-year bond yield hit 7.0%. The EU, however, said it has no plans to bail out Italy, due partly to a lack of confidence regarding its willingness to implement reforms. Italy will not receive aid unless those reforms are adopted.
Problems in Italy sent investors galloping to the safety of U.S. Treasuries again. The 10-year yield closed at 1.96%. Meanwhile Wall Street sold off, with the Dow Jones and S&P 500 giving back all their gains so far this year. Separately, wholesale inventories in September fell 0.1% when an increase of 0.5% was expected
Good news on jobs and better news from Europe turned the markets around Thursday. First-time jobless claims remained below 400,000 for the second straight week. They fell by 10,000 to 390,000 — a seven-month low. In addition, the markets appear to believe that Italy and Greece are taking positive steps to solve their debt dilemmas. The European Central Bank also purchased $3.5 billion in bonds from Italy, Greece and France to shore up their coffers. This positive news eliminated the need for safe-haven buying (at least for Thursday), which saw stock prices surge and the 10-year yield to revisit 2.06% at closing.
Other reports Thursday showed the U.S. trade balance dropping to $43.1 billion in September from $44.9 billion the previous month. This news was even more welcome, since economists were expecting the trade deficit to increase. A separate release showed U.S. export prices in October (excluding agriculture) dropping 2.1% — the largest monthly decline in almost three years. Import prices (excluding oil) dipped 0.6%.
It was a good thing that the Treasury market was closed Friday in observance of Veteran’s Day. It wouldn’t have been pretty.
Greece’s new prime minister, Lucas Papademos, was sworn in and is expected to form a new government that will pass the bailout package presented by European leaders last week. In addition, Italy’s senate passed austerity measures, paving the way for troubled Prime Minister Berlusconi to step down. A house vote on the measure was expected to take place this past weekend.
Good news from Europe sent stocks soaring. Treasury investors, on the other hand, would have sold off aggressively, pushing the yield up.
In addition, the preliminary consumer sentiment survey, released by Thomson Reuters and the University of Michigan, rose to 64.2 from 60.9 two weeks ago — its highest level in five months. This would have put additional selling pressure on bonds.
The downward trend for Treasuries will likely continue today, but France is still facing economic issues and remains a wild card.
During the week ended Nov. 4, falling mortgage rates spurred an increase in the number of mortgage applicants, according to the Mortgage Bankers Association. Purchase apps rose 4.8%, while refis were up 12.1%.
This week features a calendar loaded with market-moving economic indicators. That’s a nice change from last week, but we will also have to keep an eye on how Italy and Greece proceed with economic reforms.
No releases are due today, but Tuesday begins with a couple of big ones. Retail sales in October are expected to edge up 0.1% — a full point lower than September’s 1.1% increase. Released at the same time is the producer price index, or PPI, which tracks wholesale inflation. Analysts believe September’s high numbers will reverse. The index should fall 0.2% in October — a welcome relief from the previous 0.8% gain. The core rate, which eliminates food and energy prices, is expected to come in at 0.0%. September’s increase was 0.2%.
If these predictions are correct, Treasuries should benefit. Weak retail sales and no inflation are invitations to buy risk-free bonds. This would send the 10-year note yield down, as it moves in the opposite direction of price.
Later on Tuesday the NY Empire State index on November manufacturing conditions November is due. There are no estimates, but the index has been negative for several months. The October reading was -8.5. A big jump either way could affect the markets.
Wednesday is another big one, beginning with the consumer price index. It carries weight because it looks for inflation at the retail level. Consumer prices should show a 0.1% decline in October versus a 0.3% increase the previous month. The core rate is expected to be flat, after increasing 0.2% in September. The lack of inflationary signs should boost bonds, as inflation robs long-term investments of their value.
Industrial production in October showed a 0.5% increase, up from the previous 0.2% move. Capacity utilization edged up to 77.7% from 77.4%. Unless there is a big move in either direction, this report usually doesn’t affect trading.
First-time unemployment claims are due early Thursday. Will they stay below 400,000? If they do, Treasuries will likely sell.
Also on tap is the Philly Fed index of November manufacturing conditions. After lingering in negative territory for months, it finally broke into positive territory in October with an 8.7 reading. Will it stay there? No projections are available. This is an important index, so a big move in either direction could impact trading.
Housing starts and building permits for October are also due, with starts expected to slow to an annual rate of 605,000 units. That is a big drop from the annual rate of 658,000 in September. This indicator, however, does not move the markets like home sales do. An annual rate of 594,000 permits was issued in September, but no October estimates are available.
The week closes with the index of leading economic indicators, which attempts to look at economic conditions six to nine months ahead. Analysts believe it will rise 0.6% from September’s 0.2% increase. This report, however, doesn’t carry much weight.
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