MMRecap for May 24
Last week was brutal for stocks, so bonds had a great run. The debt crisis in Europe and the swift decline of the euro had a debilitating effect on investor confidence, and the flight to safety was on.
For the week, the yield on the benchmark 10-year note, which moves inversely to price, dropped about 20 basis points as of early Friday. The economic news, which was mostly supportive of bonds, took a back seat to global concerns.
News regarding housing starts and building permits for April was mixed, with starts climbing 5.8% to an annual rate of 672,000 units — an 18-month high. Permits, however, plunged 11.5% to an annual rate of 606,000 — a six-month low, while permits for single-family homes fell 10.7%.
Perhaps the best news was from the producer and consumer price indexes which showed no signs of inflation.
Tuesday’s April producer price index fell 0.1%, while the core rate, which excludes food and energy prices, rose 0.2%.
Wednesday’s more closely watched consumer price index, which monitors retail price inflation, also fell 0.1%, while the core rate was unchanged. The core has risen only 0.9% in the past year, the smallest increase since January 1966.
The release of the minutes of the Fed’s April 28 meeting caused a flurry of selling in Treasuries Wednesday afternoon. The upbeat report noted that the Fed raised its outlook for economic growth and reduced unemployment estimates. But, the economy is still vulnerable, according to the minutes.
That vulnerability was evidenced Thursday when the Dow fell almost 400 points, sending another wave of buyers into the safe haven of bonds. As the euro tumbled, concerns about European debt rose, and the yield on the 10-year note fell another 10 basis points to 3.26%.
An increase of 25,000 first-time jobless claims to 471,000 for the week ended May 15 was first increase in a month. The four-week average also rose, but continued claims, those collecting unemployment benefits for more than one week, dropped to 4.625 million.
The April index of leading economic indicators, which predicts economic conditions six to nine months ahead, fell 0.1% — the first decline since March 2009. The Conference Board, the index publisher, said recovery may “lose a little steam.”
The Philly Fed index on May manufacturing conditions rose to21.4 from 20.2, beating expectations. But buying was rampant, so traders hardly noticed. Earlier in the week the NY Empire State manufacturing index for May nosedived to 19.11 from 31.86. Bonds were already in rally mode, so the impact was moot.
Low mortgage rates during the week ended May 14 brought out refinancers, according to the Mortgage Bankers Association. Refis jumped 14.5%, but purchase applications dropped 27.1% — hit by the aftermath of the tax credit rush.
This week begins with existing home sales for April, expected to increase to an annual rate of 5.6 million units from March’s 5.4 million. How upset bond traders would be depends on what’s happening overseas.
On Tuesday, consumer confidence for May is expected to rise to 58.5 from 57.9, a minor increase. If it’s up more than one point, it could unnerve traders.
New home sales are due Wednesday but lack the impact of existing home sales. However, they are expected to climb to an annual rate of 420,000 units from the previous 411,000 mark. Durable goods orders for April should show improvement. Analysts predict a 0.9% increase, which would be up sharply from March’s 0.3% decline.
On Thursday, all eyes will be on the revised 1stquarter GDP, forecast to increase to 3.3% from 3.2%. Anything stronger than that would likely ignite some selling in bonds. First-time jobless claims for the week ended May 22 are also slated, and big moves in either direction could make waves.
On Friday, the report on personal spending in April should show a rise of 0.3% versus the previous 0.6%, while income should increase 0.5%, up from 0.3%.
The final reports should be non-events. The Chicago PMI index on May manufacturing conditions is expected to fall to 62.1 from 63.8, while the Reuters/University of Michigan consumer sentiment survey for May should hold at 73.3.
Once again, economic news from Europe will likely determine which way Treasuries will move.
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