Money Market Recap and Forecast
December 19th, 2011
Written by Greg Frost Jr.
Categories: Economy, Frost Mortgage Monday, Monday Money Market Recap & Forecast
On Friday, Dec. 9, Wall Street cheered news the European Union members reached agreement on how to solve its debt problems. Relieved investors sent the Dow Jones average up close to 200 points. But given the weekend to think about it, the conclusion was: not so fast. Monday’s trades gave back Friday’s gains. Investors are now less confident that Europe’s efforts to solve the debt crisis are workable. The saga continues¦
U.S. Treasury bonds, however, benefitted, with the 10-year yield, which moves inversely to price, closing at 2.01%.
Tuesday’s news was difficult to decipher. November retail sales missed expectations by a wide margin, but stocks rose. Sales were up 0.2%, when analysts predicted a 0.4% to 0.6% increase. Nevertheless, stocks jumped at opening and bond prices fell. An hour later stocks declined after German Chancellor Merkel axed a plan to increase Europe’s bailout funds. Separately, business inventories rose 0.8% in October, up substantially from the previous 0.0% outcome.
Stocks plunged after the Federal Open Market Committee meeting due to disappointment that no changes to the Fed’s stimulus policy were announced. In addition, the Fed warned that “strains in the financial markets continue to pose significant downside risks to the economic outlook.” As expected, no change was made to the prime rate, which should hold through mid-2013. The Committee also believes inflation will settle at or below acceptable levels. In addition, the 10-year note saw strong demand. It closed at 1.96%.
On Wednesday the euro fell to its key level of $1.30 — the lowest since mid-January. That in turn made the dollar stronger and raised prices of commodities. It also unnerved the U.S. markets, due to Europe’s financial problems and tight credit in the European banks. In addition, Fed Chairman Bernanke told Republican senators that economic problems in Europe would be detrimental to the U.S.
The only economic news was of little consequence. The import price index rose 0.7%, while the export index was up 0.5%. Stocks posted their third consecutive day of losses, but worried investors bought bonds. The 10-year yield closed at 1.90%.
Thursday could have been a terrible day for bonds, as four of the five economic indicators were better than expected. But investors, anxious about the lack of progress in solving Europe’s debt problems, kept gobbling up bonds — though at a slower pace. The International Money Fund has plans to ask countries outside the eurozone to contribute to the debt fund that will help trouble eurozone nations. But several of those countries have already said they won’t do it. The 10-year note yield tumbled to 1.86%, its lowest level since October.
First-time jobless claims for the week ended Dec. 3 fell to their lowest level since May 2008. There were 366,000 claims filed, down from 385,000 the previous week. Two regional manufacturing indices for December were also positive. The Philly Fed index rose to 10.3 from 3.6 in November, and the NY Empire State index climbed to 9.53 from 0.61. Like jobs and housing, manufacturing has been slow to recover.
The producer price index, which monitors wholesale prices, rose 0.3% from -0.3% in November, which is quite a jump. But the core rate, which eliminates volatile food and energy prices and is the one the Fed watches, rose 0.1% from the previous 0.0% reading.
Finally, industrial production in November dropped to -0.2% from 0.7% in October. Analysts, however, were expecting low numbers, so the markets were prepared. After digesting the economic reports, the 10-year yield closed at 1.91%.
Good news on the inflation front sent prices of stocks and bonds up on Friday — an unusual occurrence. The consumer price index, which tracks inflation at the retail level, saw little change in November. Prices were unchanged from October — always good news. The core rate, which excludes volatile food and energy costs, rose an acceptable 0.2% versus a 0.1% increase the previous month. Bond traders are especially wary of inflation, as it robs longer-term fixed-rate investments of their value.
Stocks took a dive around mid-session, as exhausted traders headed home. Clouds of doubt loom over Europe and its ability to work out of its financial troubles, leaving U.S. bonds and their low yields one of the few safe places to invest. The 10-year note closed at 1.85%.
News regarding mortgage applications has been volatile lately. According to the Mortgage Bankers Association, refinances rose 9.3% for the week ended Dec. 9. Purchase apps, however, fell 8.2%.
It’s the week leading up to Christmas, but that doesn’t affect the number of economic indicators on tap. There is a least one report each day, and some are market movers. Monday’s homebuilders’ confidence index for December is not one of them, but in November confidence hit a 17-month high of 20.
November housing starts will be released Tuesday, with a slight increase expected. Analysts believe starts will rise to an annual rate of 632,000 units from 628,000. Estimates on building permits, which are included in the report, are not available.
Economists believe November was a good month for existing home sales. The report, due Wednesday, should show sales rising to an annual rate of 5.10 million units. This would be a substantial increase from October’s rate of 4.97 million units. Depending on the news from Europe, this increase could weigh on Treasuries, pushing yields up.
Thursday and Friday are loaded with reports prior to the three-day Christmas break. First-time unemployment claims for the week ended Dec.17 are due, and they have been volatile. A big move up or down will likely affect Treasuries.
On the other hand, the final 3rdquarter GDP reading is expected to edge up to 2.1% from the revised 2.0% reading. A move like that would not likely influence trading.
The preliminary Thomson Reuters/University of Michigan reading on consumer sentiment, released two weeks ago, jumped to 67.7 — its highest level since June. If the December final tops that number, Treasury prices would likely fall.
Leading economic indicators for November are also slated, and are expected to show a 0.3% increase — down from the previous 0.9% jump. This indicator attempts to look at the nation’s economic growth over the next six to nine months. The Federal Housing Finance Agency releases its housing price index for September. This is not influential due to dated data. In August prices fell 0.1%.
Three reports close out Friday, beginning with personal income and spending. November income is forecast to rise 0.2%, which is down from the previous 0.4% increase. Spending, however, should be up 0.3%, versus 0.1% in October. More spending boosts the economy, but a drop in income hurts.
The final report estimates are very positive, which could send Treasury yields up if they prove to be correct. Orders for durable goods, items meant to last more than three years, are forecast to have increased 4.6% in November. The previous month they fell 0.5%. And new home sales in November should jump to an annual rate of 313,000 units. That’s up from 307,000 in October.
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