Dec

Bond Market Review and Forecast – for Week Ending 12/11

There was little economic news early last week, but releases on Thursday and Friday kept selling pressure on and yields, which move in the opposite direction of prices, on the high side.

When the markets closed Thursday, the 10-year yield was at 3.50% — a four-week high. Monday was an up-and-down day on Wall Street, which sent some investors to bonds. And Tuesday, after a wobbly start, bonds gained traction as the equity markets slid. A successful auction and mounting questions about an economic recovery sent yields down.

Wednesday’s report on October wholesale inventories had little impact. They rose 0.3% versus a 0.8% decline in September. Earlier in the day Treasuries benefited from safe-haven buying on a debt rating downgrade for Greece, but the problem was resolved and selling prior to the 10-year auction sent yields back up.

Thursday began with first- time unemployment claims jumping by 17,000 to 474,000. But the four-week average fell for the 14^thstraight week, hitting 473,000. Continued claims also dropped to 5.157 million.

The data had no lasting effect on Treasuries, which sold prior to the 30-year auction, and sold more heavily due to soft demand for long-term debt. This followed a poorly bid 10-year note auction on Wednesday, creating concern regarding demand and the budget deficit.

Strong November retail sales in November pushed Treasury yields higher. They rose 1.3%, when a 0.6% gain was predicted. Ex-autos, they were up 1.2%. November sales were up 1.9% from one year ago. Separately, the University of Michigan preliminary consumer sentiment survey for December jumped to 73.4, the highest since September. The index rose to 69.3 from 67.4 two weeks ago, sending the yield on the 10-year note to 3.56 — its highest level since August.

In other news, the U.S. trade deficit narrowed in October. It declined to $32.9 billion from $36.5 billion. Business inventories in October rose 0.2%.

The Mortgage Bankers Association reported an increase in applications for the week ended Dec. 4, in spite of a slight uptick in rates. Purchase applications rose 4.0%, while refis jumped 11.1%.

If the economists are right about the indicators due this week, it could be a tough one for Treasuries. Predictions for almost every report indicate that the economy is getting back on track, which would ignite more selling in 10-year notes. But the reports will fall by the wayside if the Federal Reserve, which meets Wednesday, indicates in any way that it is considering a rate hike. No one expects that, but traders will hold their collective breaths until the statement is read.

Tuesday’s November producer price index, which looks for wholesale inflation, should rise 0.9%, which would be leap past October’s 0.3% increase. And the more-important core rate should rise 0.2% versus a 0.6% decline in October.

Wednesday’s consumer price index, which looks at inflation at the retail level, might also indicate rising prices. But the more important core rate should only creep up 0.1% versus a 0.3% gain in October.

Although the Fed has repeatedly said it will control inflation, should there be any signs, traders are a wary bunch. Inflation robs fixed assets of their value over time.

Tuesday also should show an increase in industrial production for November. It’s predicted to rise 0.6% — much more than the previous 0.1% increase. And capacity utilization could step up to 71.7% from 70.7%.

Wednesday also features housing starts/building permits for November. Starts are expected to rise to an annual rate of 575,000 units from 529,000 units, while permits should jump to an annual rate of 570,000 from 552,000. Big numbers like this could signal a turnaround.

Thursday’s reports begin with the totally unpredictable first-time jobless claims for the week ended Dec. 12. The outlook for leading economic indicators in November is not as iffy. Analysts expect a 0.7% increase versus a 0.3% increase in October. This would indicate better economic times ahead.

The final report comes from the Philadelphia Federal Reserve Bank. Known as the Philly Fed index on manufacturing conditions, it queries manufacturers regarding their outlook on business conditions. This month’s results should find a 16.5 reading, which is just short of the 16.7 posted in November.