Money Market Recap and Forecast
January 16th, 2012
Written by Greg Frost Jr.
Categories: Economy, Frost Mortgage Monday, Monday Money Market Recap & Forecast
There was little action in the markets Monday. The beginning of 4thquarter corporate earnings season began after the closing bell. These quarterly reports can lead to volatility in the stock indices but they generally don’t impact U.S. Treasuries.
As has been true for months, Europe’s debt problems continue to be the primary movers of U.S. stocks and bonds. It was reported that the German chancellor and the French president said they are continuing work on a proposed pact that will require stronger budgetary restraints on eurozone countries. It could be signed this month and go into effect in March — emphasis on “could.”
The benchmark 10-year Treasury note yield, which moves in the opposite direction of price, was unchanged at 1.96%.
Stocks rose early Tuesday due to good corporate quarterly reports, more encouraging comments from Europe regarding the debt crisis and strength in the financial sector.
The only economic news showed wholesale inventories in November rose by a less-than-expected 0.1%. Even though it was a huge decline from October’s 1.2% increase, this indicator has little bearing on the markets. The 10-year note yield edged up to 1.97% at close.
Stock prices waffled Wednesday morning due to (what else?) concerns about Europe’s debt problems. This left investors with only one place to stash their money — U.S. Treasuries. The yield on the 10-year note fell to 1.93%.
The Fed’s beige book, which looks at economic conditions in the nation’s 12 federal districts, was released in the afternoon. It showed the economy expanded moderately in all districts, led by strong December retail sales. Real estate, however, was down across the board.
The yield on the 10-year note fell again in the wake of a strong auction of the benchmark Treasury. This was the first time ever that the government sold a 10-year note with a yield below 2.0%. The yield fell to 1.90% by the time the market closed.
Successful bond auctions in Europe, held early Thursday morning, indicated that the eurozone economy might be taking baby steps toward recovery. Pre-market data suggested a surge in stock prices. But poor U.S. retail sales in December and an increase of 24,000 first-time jobless claims for the week ended Jan. 7 pulled stocks into negative territory. The yield on the 10-year note edged up.
Retail sales in December rose a mere 0.1% from a revised 0.4% increase in November. Online sales fell 0.4%. Retail sales excluding autos fell 0.2%. This turned out to be not the happiest of holidays for merchants. Sales, however, were up 4.1% from one year ago.
First-time claims almost hit the key 400,000 mark again, rising to 399,000. The Labor Department admits that there is a great deal of volatility due to seasonal hiring but said the post-holiday surge in claims should smooth out by month’s end. Separately, business inventories in November rose by a weaker-than-expected 0.3% versus a 0.8% increase the previous month. The inventory-to-sales ratio held at 1-to-27.
Before the markets closed, strong demand for bonds and bills from Spain and Italy bolstered confidence not only in the new leadership of those countries but in the belief that they will not default. However, we are only two weeks into the New Year and there are many auctions to come. The more positive look at the European situation slowed buying in U.S. Treasuries and pushed the 10-year yield up to 1.93% at close.
The European situation didn’t look so rosy Friday morning. ”Good sources” said that Standard & Poor’s could lower the credit ratings of several European countries, excluding Germany. Topping the list of possibilities are France (almost a sure thing) and Austria. Investors sold stocks and piled into Treasuries.
An unexpected increase in consumer sentiment for the first half of January, as reported by Thomson Reuters/University of Michigan, didn’t slow the buying of Treasuries. The index rose to 74.0 from 69.9 due to an improved labor market, lower gas prices and stock market gains. This indicator is used to get a handle on consumer spending.
The other two reports, the U.S. trade balance for November and the import/export price indices for December, had no impact on trading. The 10-year again closed at 1.85%.
Mortgage applications climbed during the week ended January 6, according to the Mortgage Bankers Association. Purchase applications were up 8.1% and refis rose 3.3%.
This week is the third four-day week we’ve had in the last four weeks, due to Martin Luther King Jr. Day. Although the week is short, several reports could impact the markets.
Tuesday features the NY Empire State index of manufacturing conditions in January. No economists or analysts have offered predictions on this index, which rose to 9.5 in December. It has been climbing lately, as the October reading was 0.61. A big increase could provoke selling in Treasuries.
Wednesday and Thursday feature some heavy hitters. Wednesday’s first report is the producer price index (PPI) for December, which looks for inflation in wholesale prices. A 0.3% increase is expected, the same as the previous month. The PPI core rate, which eliminates volatile prices on energy and food, is expected to duplicate November’s 0.1% increase.
Industrial production could rise 0.5% in December versus a -0.2% reading the previous month. A leap like that could encourage selling in Treasuries, as manufacturing has been struggling to recover. Capacity utilization should creep up to 78.1 from 77.8. Separately, the homebuilder index, which reflects how confident builders are regarding January sales, is due. After remaining steady for several months, it has been climbing one step at a time over the past four months. In December the index hit 21.
Thursday features a host of market movers, with first-time jobless claims for the week ended January 14 up first. If most of the post-holiday layoffs are behind us, claims should more accurately reflect what’s going on regarding job.
This will be followed by the consumer price index (CPI), which checks on inflation at the retail level. It is expected to have risen 0.1% in December after showing no gain in November. The core rate could increase 0.2%, the same as in the previous month. Bond traders should be pleased with these numbers — if they are correct. Inflation robs fixed-rate assets of their value over time.
Housing starts in December are expected to hold at an annual rate of 685,000. This would be a victory of sorts, as starts rose by 57,000 units in November. There is no estimate on building permits, but they, too, increased to an annual rate of 681,000 the previous month.
The Philly Fed index on January manufacturing conditions in the mid-Atlantic region is Thursday’s final report. Although there are no estimates, this index has slowly climbed out of a deep hole. In August 2011, the index read -30.7. Last month it hit 10.3. This is one of the key manufacturing indices, so if it keeps climbing it could slow buying in Treasuries.
The final report of the week is existing home sales in December. Economists believe they will increase to an annual rate of 4.7 million units, from 4.42 million in November. That’s an increase of 28 million units, which would likely spark selling in Treasuries and push the 10-year yield higher.
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