Money Market Recap and Forecast

Europe’s economic problems jumped back into the news last Monday, as did concerns about high gas prices, which could slow domestic economic growth.  The German parliament is set to vote on its contribution for Greece’s second bailout, which is not a done deal.  In addition, the G20 won’t increase funding for the IMF until the eurozone nations do more to help themselves.  They want more rescue funds to keep the eurozone debt crisis from spreading.

These concerns opened the door for investors who want to avoid uncertainty, so they bought bonds.  The 10-year note yield, which moves in the opposite direction of price, fell six basis points to close at 1.92%.

Pending home sales in January rose 2%, which was its best gain since April 2010.  Pending sales are also up 8% from one year ago.  Although this report generally does not affect the markets, it is yet another indication that recovery in the housing market continues to inch ahead.

Tuesday the Conference Board released a way-better-than-expected consumer confidence survey.  The index soared to 70.8 in February from the previous 61.5 reading.  Analysts expected 63.5.  Normally, those numbers would push stock prices up and cause heavy selling in bonds, but not this time.

The seemingly good news was countered by a 4.0% drop in durable goods orders in January — the biggest one-month decline in three years.  Orders rose 3.2% in December, and were expected to drop by only 1.3% this time around.  Some chalked up the poor numbers to the expiration of the tax credit.  Excluding transportation, orders fell 3.2%.

The S&P Case-Shiller housing price index, which surveys home prices in the 20 largest U.S. cities, fell 4.0% in the 4thquarter to levels not seen since mid-2002.  This was the fifth annual loss in prices and the biggest single loss since mid-2008.

Stocks were heartened by a small dip in gasoline prices before the markets closed, which sent the Dow and S&P to their highest levels since 2008.  This put slight downward pressure on the 10-year note.  The yield edged up to 1.93%.

Wednesday was busier than expected.  Fed Chairman Ben Bernanke testified before Congress and hinted that there would not be a third round of quantitative easing, i.e., QE3.  Disappointed investors sold, pushing the 10-year yield up by six basis points.  He also said higher gas prices could reduce consumer spending and fire up inflation, which erodes the value of fixed-rate investments.  The Chairman added that he anticipates slow growth in housing and doesn’t think unemployment will drop much lower this year.  There was good news on inflation, which is expected to hold between 1.4% and 1.8%.  This is below the Fed’s 2% maximum.

An upward revision on 4thquarter GDP also affected bonds.  It came in at a higher-than-expected 3.0%, up from 2.8%.  Commercial construction, consumer spending and fewer imports were largely responsible for the increase.  In addition, the Chicago PMI index of February manufacturing conditions beat projections, jumping to 64.0 from 60.2.

And finally, the Fed’s Beige Book, which looks at economic growth in the nation’s 12 federal districts, reported that home sales and banking conditions improved across the country, with New York being the single holdout.  Manufacturing and nonfinancial services showed moderate growth, while consumer spending was positive.  Prices held in check, and there was no sign of wage pressure.

After big gains on Tuesday, the three major stock indices took a substantial hit, with the Dow again falling below 13,000.  The 10-year closed at 1.99%.

A number of economic reports came in stronger than expected on Thursday, pushing the yield on the 10-year note up.  First-time jobless claims fell to 351,000 for the week ended Feb. 25.  Personal income and personal spending in January were also on the rise.  Income increased by 0.3% and spending rose 0.2%, which was an improvement over the 0.0% reading for December.

Strong car sales in February, which could result in the auto industry’s best month in four years, and a 4.7% increase in retailers’ same-store sales, also rallied stocks.  Financials led the charge, and kept investors away from bonds.

Two reports disappointed, but not enough to encourage buying in bonds.  Construction spending in January dipped 1.0% and the ISM index on February manufacturing conditions fell to 52.4, when analysts expected 54.7.  Any number above 50 indicates sector expansion, but this number has been edging down for the past four months.

When the closing bell rang, stocks had maintained some of their gains and so did Treasury yields, with the 10-year note rising to 2.04%, its first close above 2.0% since Feb. 21.

There was no economic news released Friday, so it appeared that Wall Street indulged in a little profit taking.  And it looks like some of that money headed for Treasuries, as prices rose and yields fell.

Some news from Europe was promising.  Twenty-five of the 27 countries in the European Union signed a fiscal compact requiring stricter monetary discipline, which will hopefully avoid future economic crises.  The Czech Republic and United Kingdom held out.  The jury is still out on Greece receiving money for its second bailout because loans from private creditors are not yet a done deal.  March 9 is the deadline.  A couple of weak economic reports from Spain and Germany also encouraged safe-haven buying in U.S. Treasuries.

When the markets closed, the yield on the 10-year note had fallen below 2.0%, to 1.97%.

Mortgage applications were mixed during the week ended Feb. 24.  Purchase apps rose 0.9%, while refis fell 2.2%.

This week features a number of indicators, but none as important as Friday’s February employment report.

Monday begins with the ISM index on the service sector in February.  It is expected to fall to 55.0 from 56.8, which is a fairly sharp drop.  This indicator does not move the markets like the manufacturing index sometimes does, even though it employs a huge percentage of the labor force.

No reports are on tap for Tuesday, but on Wednesday ADP, the huge payroll company, releases the number of people added to private sector payrolls in February.  This information can often move the markets.  If the ADP number is high or low, the markets generally move on the news.  No estimates are available.

The other report scheduled is 4thquarter productivity and costs.  It is unlikely to rattle the markets because analysts expect little change.  Productivity could edge down to 0.6% from the previous 0.7% reading.  Labor costs, however, are expected to rise 1.2%, the same as in the 3rdquarter.

Thursday opens with the first-time unemployment report for the week ended March 3.  Claims have been holding anywhere from 350,000 to 360,000.  Should they rise or fall significantly, Treasuries would likely move accordingly.  The other report on tap comes from Challenger, Gray and Christmas, an outsource firm.  In January it reported that employers said job cuts could rise as high as 38.9%.  No advance numbers are out for February.

Friday’s employment report could disappoint.  After months of big additions to nonfarm payrolls, economists expect only 208,000 people will have been added to the working force.  Even though the number is the lowest since November 2011, the number of unemployed should remain below the key 400,000 mark.  Generally, if the report comes in as expected the markets’ responses will be minimal.  It’s when the data are far above or below the predicted outcome that Treasury yields move.

The final two reports are on the U.S. trade deficit and wholesale inventories — both from January.  The trade deficit is expected to edge up to $49 billion, which is just a hair more than the previous $48.8 billion.  There are no estimates on inventories, which rose 1.0% in December.  Neither of these indicators are market movers.  Their chances of being ignored are even higher when they are followed by the employment report.

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