MMRecap for June 7
Compared to the past few weeks, last week was uneventful — until Friday. Although concerns about economic growth here and abroad remain, and trouble spots in the Far East lurk, U.S. Treasuries held steady. The yield on the benchmark 10-year note, which moves inversely to price, barely moved during the first three days of the trading week. It rose only three basis points.
Then the employment numbers for May were released. Although a total of 431,000 jobs were added to nonfarm payrolls, 411,000 are temporary census workers leaving a gain of only 20,000 private sector jobs. And the unemployment rate dropped to 9.7%, but that number is also a questionable one because 322,000 dropped out of the labor market. Buying in Treasuries was fast-paced, dropping the 10-year yield to 3.24 from 3.33, before the opening bell.
The short week began with Tuesday’s release of the ISM index on May manufacturing conditions which fell to 59.7 from 60.4. There was, however, a big gain in employment. Construction spending in April beat expectations by a wide margin. Spending rose 2.7% when a 0.1% increase was predicted. In March, spending rose 0.4%.
The session allowed traders to study May’s events and their effect on decisions to be made in June. There are also investors on the sidelines troubled about economic growth in Europe and China, the oil spill, Spain’s debt and the euro.
On Wednesday stocks rebounded big time. Bargain hunters were snapping up deals in the wake of big losses on Wall Street the previous day. But there was also enough good news to encourage investors to leave the safe haven of Treasuries and make some riskier investments. This pushed bonds prices down and sent yields up — a little.
Thursday’s first-time unemployment claims for the week ended May 29 fell by 10,000 to 453,000. But the more accurate four-week average rose to 459,000, and continued claims — those collecting benefits for more than one week — climbed to 4.67 million.
This was followed by the ISM index on the service sector, which held at 55.4 for the third straight month. Sixteen of the 18 industries surveyed showed gains (health and education didn’t) and employment rose above 50 for the first time in 25 months.
Factory orders jumped 1.2% in April, led by huge orders for civilian aircraft. When transportation was excluded orders dropped by 0.5%.
Stocks rose on early economic reports, riding the coattails of Wednesday’s big rally, but slowed in the afternoon leaving stocks and bonds almost unchanged for the day.
With the tax credit influence in the rearview mirror, mortgage activity was less volatile, according to the Mortgage Bankers Association. For the week ended May 28, refis rose 2.4% and purchase apps fell 4.1%, in spite of near historically low mortgage rates.
This week features little in the way of economic indicators, with nothing of importance coming until Thursday.
On Wednesday, the Fed’s beige book will be released, and it can move the markets. The report, which profiles economic activity in each of the 12 federal districts, often influences trading. Lately, news of economic growth in many of the districts has put selling pressure on bonds. Wednesday’s other report, wholesale inventories for April, should show growth of 0.5%.
As usual, first-time unemployment claims for the week ended June 5 have the potential to influence trading. But the other report, the U.S. trade balance for April, is a non-event for Treasuries. It’s expected to shrink to $40.0 billion from $40.4 billion.
Friday’s report on retail sales for May has the most market-moving potential, but analysts expect small gains in spite of some chains reporting strong same-store sales for the month. Sales are expected to increase 0.1% versus a 0.4% gain the previous month. Excluding auto sales, they could decline 0.1%, versus a 0.4% increase in April. This would be good news for bonds.
The Reuters/University of Michigan’s preliminary consumer sentiment survey for June could erase any gains in bonds resulting from the retail report. It’s expected to come in at 75, up from the previous 73.6 — enough to stir up selling.
The final report, business inventories for April, should show an increase of 0.5%, but it will likely be ignored.
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