MMRecap for Jan. 25
Disappointing economic indicators and some big losses on Wall Street resulted in a good week for U.S. Treasuries. Although reports were limited to two days during a short week, the benchmark 10-year note yield, which moves in the opposite direction of price, remained at near recent lows.
Wednesday’s December housing starts and building permits was the first to shake things up. Starts fell by a worse-than-expected 4% to an annual rate of 557,000 units. Building permits, however, rose 10.95% to an annual rate of 653,000, the most in 14 months. Single-family permits climbed 8.3% to an annual rate of 508,000, the highest level in 15 months.
Also released was the producer price index, which checks for wholesale level inflation. The index rose by a tame 0.2% in December, while the more closely watched core rate, which eliminates food and energy prices, came in flat. Buying ensued, as traders don’t have to worry (right now) about inflation eroding the value of long-term bonds.
These reports and disappointing quarterly earnings from three major banks had equities traders concerned about economic growth, so money flew to the safe haven of Treasuries.
The flight continued Thursday when first-time unemployment claims for the week ended Jan. 16 soared by 36,000 to 482,000, the biggest increase in eight months. In addition, the four-week average rose to 448,250 after 19 weeks of declines. It was noted, however, that delays in reporting may have occurred over the Christmas and New Year’s weekends.
The Philly Fed index of January manufacturing conditions also spurred buying in government debt, as it unexpectedly fell to 15.2 from a revised 22.5.
The only positive report showed the index of leading economic indicators (LEI) rising 1.1%. The LEI is supposed to predict economic conditions over the next six to nine months, but the markets didn’t buy it.
In addition to economic reports, President Obama’s plan to increase regulation of the nation’s biggest financial firms was not well received by Wall Street, and concerns remain about China’s halting lending to control growth.
Lower rates propped up mortgage applications for the week ended Jan. 15. Purchase apps rose 4.4% while refis jumped 10.7%, according to the Mortgage Bankers Association.
This week features the usual round of month-end releases — some important, some not. The Fed will conclude its meeting on Wednesday and most likely announce that short-term rates will remain unchanged.
Existing home sales for December come out Monday and are expected to have declined. Analysts predict an annual rate of 5.9 million units, which would be down substantially from the previous 6.54 million units. This report would be welcomed by bond traders, as would Tuesday’s consumer confidence report, if estimates are on target. Confidence could dip to 52.9 from the previous 53.3.
Wednesday’s new home sales release for December should indicate an increase. Analysts predict sales to come in at an annual rate of 362,500 units, up from 355,000 in November.
Thursday’s first-time claims for the week ended Jan. 23 could show a decline, if previous results actually were holiday-skewed. But that’s an unknown. Orders for durable goods in December are expected to increase 1.25%, which would dwarf November’s 0.2% increase. A drop in claims and strong durable goods numbers could rattle Treasuries.
Friday’s big report will be the advance 4thquarter GDP, and it’s expected to come in at 4.5%. That would be a huge increase from the 3rdquarter final of 2.2%. Although such an increase would likely worry traders who fear strong economic growth, they should remember that the advance 3rdquarter GDP came in at 3.5% and was adjusted downward twice after that.
The Chicago PMI on January manufacturing conditions could edge up to 73 from 72.8, which would be acceptable. A larger number could concern traders. The final January consumer sentiment report from the University of Michigan is similar to the PMI. It’s expected to edge up to 72.9 from 72.8, which would be a non-factor. If it were much higher or lower, it could affect Treasuries.
Speaking of non-factors, the 4thquarter employment cost index (ECI) should rise 0.4% — the same as in the 3rdquarter.
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