Money Market Recap and Forecast
January 9th, 2012
Written by Greg Frost Jr.
Categories: Economy, Frost Mortgage Monday, Monday Money Market Recap & Forecast
The New Year began with a bang. On Tuesday, the Dow surged well over 200 points at opening on strong manufacturing data from China and India. Then the December ISM index of manufacturing conditions in the U.S. vaulted stocks even higher. The ISM climbed to a better-than-expected 53.9 from the previous 52.7 reading. Any number above 50 indicates sector growth. In addition, the index showed employment was up, as were backlogs of orders.
Even though we entered 2012, however, the economic problems of 2011 remain. In addition, manufacturing growth in Asia is expected to slide. These scenarios will negatively affect U.S. growth.
Construction spending in November rose 1.2% from a revised -0.2% the previous month, which was more good news. In the afternoon, the minutes from the Federal Open Market Committee’s Dec. 13 meeting revealed that its members will begin releasing their individual interest rate forecasts this month. That news was well received, but the committee remains divided on the question of further easing.
Tuesday’s big Wall Street rally, which declined slightly in the afternoon, put a big hurt on bonds. The 10-year note yield, which moves inversely to price, jumped 11 basis points to 1.96% and closed there.
Wednesday was a quiet day trading-wise. The only report, factory orders for November, jumped 1.8% from the previous -0.2%. It was, however, lower than the 2.1% gain analysts expected. Some believe that a strong rebound in factory orders was responsible for the three basis point increase in the 10-year yield, which closed at 1.99%.
Thursday brought mixed news, but concerns about Europe’s never-ending problems outweighed any upbeat economic reports.
First-time unemployment claims fell by 15,000 to 372,000 for the week ended Dec. 31 — slightly below expectations. Continuing claims, those receiving benefits for more than one week, held near 3.6 million.
Payroll company ADP said it added 325,000 jobs to the private sector in December, when 180,000 were predicted. The ADP estimate is usually far higher than the actual count. In addition, outsource firm Challenger, Gray and Christmas said expected job cuts for December rose 30.6%. Separately, the ISM index for the service sector rose to a less-than-expected 52.6 from 52.0. This report, however, seldom moves the markets.
The positive economic news was neutralized by ongoing problems in Europe. The focus is now on Italy, Greece, Spain, France and Hungary, countries currently posing a threat to economic stability. When the final bell rang, the 10-year yield again closed at 1.99%.
A good employment report should have sent stocks up and put pressure on Treasuries, resulting in higher yields. But no! Positive news about the jobs market was unable to calm worries about Europe. That’s how deep concerns run.
In December 200,000 jobs were added to nonfarm payrolls, which beat expectations of 150,000. And the unemployment rate fell to 8.5% instead of rising to 8.7%, as forecast. Earnings and average hours worked also made small gains. When more people work, more money is spent and the economy grows.
Economists, however, believe that 250,000 jobs will have to be added every month to get the GDP back up to a healthy 3%, and that could take years, but it’s a good start. The most recent reading on GDP showed growth at 1.8% for the 3rdquarter of 2011.
Fears about Europe’s economy and a recession in eurozone countries led investors to seek the safe haven of U.S. Treasuries. When the market closed, the yield had dropped back to 1.96%.
The Mortgage Bankers Association, which was closed during the holidays, issued a two-week update on mortgage applications. Between Monday Dec. 19 and Friday Dec. 30 purchase apps fell 9.7% while refis were down 1.9%.
A number of economic indicators are due this week; only three of them might have a major impact on trading. But any day of the week news from Europe could push the markets up or down.
Wholesale inventories for November is due Tuesday. Because the data do not reflect consumer buying, they have little power to sway trading. The results are usually ignored.
Wednesday offers the release of the Fed’s beige book, which looks at economic conditions in the nation’s 12 federal districts. Significant improvement in the majority of districts would likely encourage selling in the bond market. The opposite, however, would also be true.
Thursday two possible market movers are due. The all-important retail sales for December will be released. Analysts, however, are not looking for strong sales. The forecast is for a 0.2% increase, which would be the same as in November, barring revisions. Excluding autos, sales should be up 0.3% — just a tad higher than they were the previous month. Although many stores and online sellers reported strong holiday sales, these predictions don’t bear them out. Should sales exceed expectations, Wall Street would get a boost. If they come in below forecasts, Treasuries would likely benefit.
First-time unemployment claims for the week ended Jan. 7 are also due and often move the markets. Last week claims dropped, but a number of reports kept the selling of bonds in check.
Friday features the preliminary Thomson Reuters/University of Michigan consumer sentiment survey for January. Analysts believe it will climb to 71.0 from 69.9. The survey showed sentiment at 64.1 at the end of November, so a move above 71.0 would be substantial enough to put downward pressure on Treasury prices, which would cause yields to rise.
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