Money Market Recap and Forecast

December 5th, 2011

Written by Greg Frost Jr.

Categories: Economy, Frost Mortgage Monday, Monday Money Market Recap & Forecast

Stocks turned around last Monday in the wake of strong Black Friday sales that continued through the weekend.  Sales were up 16% versus 2010, giving investors hope that a strong holiday shopping season will follow.

The Dow jumped 300 points at opening, as good news from Europe also kept investors busy.  Continued efforts to resolve the European debt crisis were well received, pushing European and Asian stocks upward early Monday.  In addition, eurozone leaders are working to craft a fiscal plan for its 17 members.

The only economic indicator showed new home sales in October rose 1.3% to an annual rate of 307,000 units.  Sales were up 8.9% from one year ago, with the median price at $212,300.  The inventory stands at 162,000 new homes, representing a 6.3-month supply.

Successful bond auctions by France, Italy and Belgium had a positive impact on U.S. Treasuries.  In spite of the Wall Street rally, the benchmark 10-year note yield, which moves inversely to price, fell to 1.96% — down one basis point from the previous Friday’s close.

Selling in Treasuries was brisk Tuesday due in part to the huge jump in consumer confidence November.  It rose to 56 from a sickly (revised) 40.9 the previous month, the highest level since July.  A reading of 90 indicates a healthy, growing economy.

The Federal Housing Finance Agency reported September home prices rose 0.9%.  But the S&P/Case Shiller index of home prices in the nation’s 20 largest cities showed only Detroit and Washington D.C. benefitted from price increases over the past 12 months.  In addition, 3^rdquarter prices fell 3.9% to 2003 levels.  The yield on the 10-year note ticked up to 2.0% at close.

Good news on several levels sent the Dow Jones up more than 400 points early Wednesday.  The payroll company ADP said 206,000 jobs were added to nonfarm payrolls in November, while other surveys estimate that about 125,000 new jobs will have been added.  Challenger, Gray and Christmas, an outsource firm, said that announced job cuts for November fell 12.8%.

A revised report on 3^rdquarter productivity showed a weaker-than-expected 2.3% increase in production, but at the same time labor costs fell 2.5%.  Pending home sales in October jumped 10.4% — the biggest monthly increase since Nov. 2010.

The main impetus for the Wall Street rally was news that the U.S. Federal Reserve and other countries’ central banks coordinated a plan to reduce the cost of borrowing U.S. dollars internationally.  This would lower interest rates, make more money available to borrowers and make it cheaper for world banks to trade in U.S. dollars.  This should also increase the banks’ ability to make loans to consumers and businesses.  In addition, eurozone finance ministers OK’d an increase to the region’s bailout fund, which may also receive IMF money.  And China said it would cut its banks’ reserve requirements to loosen up money for lending.

These events dried up the need for safe-haven buying but pushed the Dow up almost 500 points at closing, its biggest gain of the year.  The yield on the 10-year note edged up seven basis points to a still-low 2.07%.

Thursday’s release of first-time jobless claims for the week ended Nov. 26 climbed above 400,000 for the first time since Oct. 22.  Claims totaled 6,000 more than the previous week, coming in at 402,000.  The more-reliable four-week average rose by 500 to 395,000 and continued claims, those receiving unemployment insurance for more than one week, also increased.

The ISM index on November manufacturing conditions was higher than expected at 52.7, up from 50.8.  Construction spending rose sharply, posting a 0.8% increase, up from the previous 0.2% reading.

Traders on Wall Street took a breather prior to Friday’s release of the November employment report.  No news impacted Treasuries, either.  The yield held at 2.07%.

The November employment report showed 120,000 jobs added to nonfarm payrolls, while the unemployment rate plunged to a two-year low of 8.6%.  Initially, stocks jumped and Treasuries sold.  Although there is agreement that the economy is improving, a look behind the curtain revealed an employment picture fraught with problems.

As many people gave up looking for jobs last month as were hired.  Seasonal hiring also played a big part.  In addition, state and local governments cut 20,000 jobs and have eliminated 600,000 positions over the past two years.

After studying these data, investors reiterated that employment numbers must be higher (at least 250,000 jobs a month) to get the economy rolling.  The three major stock indices fell into negative territory, and buyers turned to the safety of Treasuries.  Stocks were also hindered by the possibility of financial problems for the U.S. as a result of revised eurozone plans.  The yield on the 10-year note, which jumped to 2.14% after the jobs report, fell to 2.05%, where it closed.

Mortgage applications fell sharply during the week ended Nov. 25 but, of course, it was Thanksgiving week.  Purchase apps dropped 18.2% from the previous week, while refis were off 15.3%, according to the Mortgage Bankers Association.

A handful of economic reports are due this week, and only two of them are likely to impact trading.  Eurozone nations, however, appear to be on a track that could lead to resolution on some of their economic problems.  If this comes to pass, it could put selling pressure on Treasuries, and yields would rise.

The ISM index on the service sector for November and October’s factory orders are due Monday morning.  The ISM service index does not have the weight of the manufacturing ISM, but it can move the markets.  Forecasts indicate that it will edge up to 53.5 from 52.9, which is good but not great.  Anything higher, however, could hurt Treasury yields.

October factory orders are expected to slide 0.6%, which would be a significant drop from the 0.3% increase in September.  This report, however, contains little new data; so its impact is minor.

No economic releases are due Tuesday or Wednesday, so the markets must wait until Thursday when first-time unemployment claims for the week ended Dec. 3 are released.  While these data can move the markets, which way they will go is anyone’s guess.  Separately, wholesale inventories for October are due, but no forecasts have been made.  Generally, this report is a non-event.

The Thomson Reuters/University of Michigan preliminary consumer confidence survey for December will be released Friday and could impact Treasuries in a negative way.  Although no formal forecasts are available, the strong Black Friday sales weekend should boost confidence.  The November final reading was 64.1.

The U.S. trade balance for October is expected to increase to $43.5 billion from $43.1 billion.  This should not disturb the markets.

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