Money Market Recap and Forecast

February 27th, 2012

Written by Todd Crampton

The curtain closed on Act 2 of the Greek tragedy entitled “Will Greece Default?”  The final act focuses on Greece’s ability to get financing from the private sector.  This must be accomplished before any bailout money is released.

The bailout package as approved last Monday was presented to the Institute of International Finance, representing private investors.  The IFF director said his target is 95% approval, but he fears a number of investors will not sign off on the deal.  Should this happen, it would be back to the drawing board for the bailout package, and Greece would stand on the brink of a disorderly default.

Stocks jumped early Tuesday morning on encouraging news regarding the bailout, with the Dow Jones passing the 13,000 mark for the first time in four years.  The 10-year Treasury note yield, which moves inversely to price, rose to its highest level in two months.  But with no economic reports released to provide a motive for buying stocks, the Dow slid prior to the closing bell, short of 13,000.  The yield on the 10-year edged down to 2.04%.

Existing home sales in January improved on several levels.  Wednesday’s report saw sales climb to an annual rate of 4.57 million units from a revised 4.38 million units in December, with the catalysts being rock-bottom mortgage rates and low home prices.  The median home price fell 2% to $154,700, the lowest price in more than 10 years, due to the fact that 35% of all home sales were distressed properties.  However, inventories fell to a six-month supply of 2.3 million homes — down 20% from one year ago.

In spite of that report, stocks remained in negative territory as continuing concerns about Greece were the main influence on Wall Street.  Others sat on the sidelines, content with the big run-up in stock prices over the first seven weeks of the year.  Some investors headed to U.S. Treasuries, pushing the yield down to 2.00%, its lowest close in six days.

Thursday’s report on first-time jobless claims for the week ended Feb. 18 remained at 351,000.  Any number below the 400,000 mark indicates growth in the job market.  So far this year, claims have come in below 400,000 in all but two weeks.  The four-week average hit its lowest level since March 2008.  Stocks edged up on the news, while Treasuries lost some support.  Treasuries are also being challenged by a flood of corporate bonds that pay higher interest rates than government bonds.  Separately, the Federal Housing Financial Agency reported that home prices rose 0.7% in December versus a 1.9% increase the previous month.

Greece didn’t hog the morning headlines, so the markets continued to watch and wait.  In the afternoon an auction of 7-year Treasury notes showed strong demand, which gave a lift to other government offerings.  The 10-year note closed at 1.98%.

Two economic reports were released Friday morning, but neither had the power to impact the markets.  New home sales in January beat forecasts, rising to an annual rate of 321,000 units.  December sales were also revised upward by 6%.  In addition, inventories fell for the 11^thstraight month to a record low of 151,000 units.  The median price edged upward to $217.000.

The final February consumer sentiment survey from Thomson Reuters/University of Michigan also exceeded expectations, rising to 75.3 when 73 was expected.  Normally this survey affects both stocks and bonds, but neither showed much interest.

At close on Friday, the yield on the 10-year note again closed at 1.98%.

Mortgage applications moved in opposite directions again during the week ended Feb. 17.  The Mortgage Bankers Association reported that applications to purchase fell 2.9% from the previous week, while refis surged 4.8%.

Ten economic reports are due this week, with nine of them falling between Tuesday and Thursday.  A few market movers are included in the mix.  On Monday the pending home sales report for January is due.  There are no estimates available, but they fell 3.5% in December.  With the sales surge in January, that number could increase.

The big report Tuesday will be consumer confidence for February.  It is expected to rise by more than two points (63.3 from 61.1).  Should that happen, it would likely discourage investors from buying Treasuries.

Durable goods orders in January are expected to decline by 0.8% after rising 3.0% the previous month.  That would be a substantial decline and could spark buying in Treasuries.  What we don’t know is if the estimates were made before or after Boeing scored it largest order ever.

The final report is the Case-Shiller index on December home prices in the nation’s 20 largest cities.  Prices fell 1.3% in November, but this survey usually doesn’t weigh on trading.

On Wednesday the 1^strevision on 4^thquarter GDP will be released.  It initially rose to 2.8%.  Economists are calling for a decline to 2.7%, which shouldn’t be enough to stir the markets.  If it changes two percentage points or more either way there would likely be movement in the markets.  The Chicago PMI index on manufacturing conditions in February could be a yawner.  It is predicted to fall to 60.0 from 60.2, which would not likely stir up trading.

There’s a full slate on Thursday, beginning with first-time jobless claims for the week ended Feb. 25.  There has been no change over the past two weeks, so a moderate move in either direction could impact Treasuries.

That will be followed by personal income/personal spending in January.  Income should rise 0.3% versus a 0.5% gain in December, while spending should increase by 0.5% — much better than 0.0% the previous month.  This report could slow investing in Treasuries, as it would be a sign of potential economic growth.  The core rate, which looks at inflation, is forecast to rise 0.2%, the same as in December.

The ISM index on nationwide manufacturing conditions in February is expected to rise to 54.5 from 54.1, which could also slow buying in Treasuries.  Expectations do not favor bonds, but the economic news regarding jobless claims will likely steer the direction of the markets.

The final report of the day and the week is construction spending in January.  It should increase 0.4%, but that would be down substantially from December’s 1.5% gain.  Either way, this report generally does not impact trading.

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Money Market Recap and Forecast

February 6th, 2012

Written by Todd Crampton

Word that Greece did not come up with a resolution regarding its debt crisis sank stock markets around the world on Monday, with financials taking the biggest hit. Greece is looking to private sector creditors to fund its bailout, but so far no bites.

U.S. Treasury securities, however, benefited big time as investors sought a safe haven for their cash. The benchmark 10-year note yield, which moves in the opposite direction of price, fell to 1.83% early in the session but closed at 1.84%. Stocks recovered most of their early losses as Wall Street became hopeful that the European Union leaders gathering for a summit will provide encouraging news.
The report on personal income and spending for December had little impact, even though income rose sharply. It jumped a better-than-expected 0.5% from 0.1% the previous month, while consumer spending was unchanged from November’s 0.1% increase. The PCE (personal consumption expenditures), a major inflation gauge, rose by an expected 0.1%.

On Tuesday the Dow dropped by more than 100 points at opening due to weak economic reports and news that Greece again did not yet come to an agreement with possible creditors regarding its debt. The news kept buying steady in the Treasury markets.
The first report showed that home prices are still falling, according to the S&P/Case-Shiller index on November house prices. Prices declined in 19 of the largest 20 U.S. cities surveyed (Phoenix dodged the bullet) by 3.7% versus a 3.4% drop in October. That was followed by two additional declines. The Chicago PMI index on manufacturing conditions in January dropped to 60.2 from 62.2, while consumer confidence plunged to 61.0 from 64.8 — a major disappointment.

The final report of the day was the 4thquarter employment cost index (ECI), which edged up to 0.4% from 0.3% in the 3rdquarter. The title is almost self-explanatory, as it charts total compensation by industry, ownership and occupation. It is watched for trends.

When the markets closed the Dow showed a 20-point loss, while the yield on the 10-year note dropped four basis points to finish at 1.80%.
February began on a positive note, as financial and tech stocks rose due to Facebook’s pending IPO. Wall Street is hoping when this happens it will push the markets in a positive direction.

Stocks rose early due to upbeat manufacturing data from countries around the globe. U.S. data, however, were a disappointment. The ISM index on January manufacturing conditions rose to 54.1 from 53.1, but analysts predicted an increase to 55.0, which made the actual gain less than acceptable.

ADP, the payroll company, said it added 170,000 jobs to private payrolls in January, which was far below the 212,000 added in December. This was also regarded as a negative regarding Friday’s January employment report.

Construction spending in December offered good news. It rose 1.5% from November’s drastically downwardly revised 0.4% increase. Originally, it showed as a 1.2% increase.
Stocks held gains throughout the session, discouraging buying in U.S. Treasuries. At close, the yield on the 10-year note hit 1.85%, up from the previous 1.80% reading.

Mixed news released Thursday morning provided little incentive for the markets to move. True, first-time jobless claims for the week ended Jan.28 fell to 367,000, down 12,000 from the previous week. That was far fewer than the 375,000 claims analysts expected.
Countering that news, however, was Fed Chief Ben Bernanke’s testimony before Congress. As he previously admitted, economic recovery has made some upward progress, but added that the pace of recovery is “agonizingly slow.” This, he believes, leaves economic recovery in the U.S. “vulnerable to shocks,” including those coming from overseas. Bernanke also indicated, as he has before, that the Fed will take further steps to aid economic recovery as needed. Most analysts believe that could include QE3.

That testimony stirred buying in Treasuries, sending yields down. They got a further push downward when Challenger, Gray and Christmas, an international outsource firm, announced that planned job cuts in December totaled 53,000 — the most since September.
Preliminary reports on 4thquarter productivity rose 0.7%, down from the 4thquarter final of 1.9%. Unit labor costs, however, jumped 1.2% from the previous -2.1% reading. The markets appeared to ignore the information.

Friday morning Treasuries took a severe beating after the far-better-than-expected January employment report was released. A whopping 243,000 jobs were added to nonfarm payrolls, dropping the unemployment rate to 8.3% — its fifth straight decline. These jobs were spread across many categories, from manufacturing to retail to factories.

Household surveys conducted by the U.S. Census Bureau suggest that hiring was probably stronger than the employment report showed.
Nonfarm payrolls were forecast to have added 155,000 to 200,000 jobs and the unemployment rate was expected to hold at 8.5%. The Dow Jones soared by more than 150 points, closing at a four-year high. The yield on the 10-year note also rose sharply, surging 12 basis points to 1.95%.

Two additional reports were released, but it is difficult to measure their impact due to the spike in employment. The ISM index on the service sector jumped to 56.8 from an upwardly revised 53.0, which is a significant increase. Separately, factory orders in December rose 1.1%. The previous month rose by an upwardly revised 2.2%.
Mortgage applications fell during the week ended January 27. The Mortgage Bankers Association said purchase apps were down 1.7%, while refis fell 3.6%.

This week is “economic indicators light.” There is nothing on the docket until Thursday, when first-time jobless claims for the week ended Feb.4 are released. Last week they fell considerably, but it isn’t clear yet whether it was volatility rearing its head or the way it will be as we move through 2012.

Wholesale inventories for December are also on tap. Briefing.com, which follows the markets closely and makes forecasts, rates this indicator as D- in importance. It doesn’t reflect anything regarding the consumer, so it is largely ignored. Those inventories rose 0.1% in November, but no current forecasts are available.

Friday closes with the preliminary survey on consumer sentiment for February. Released by Thomson Reuters/University of Michigan, this can affect the markets because consumer sentiment is believed to have strong ties to consumer spending. If consumers feel confident, they spend money. If they feel things aren’t going well, they shut their wallets. In January the index closed at 75 — the fifth straight increase. No estimates are available for this release.

The U.S. trade balance for December is also due and it is expected to widen a bit. Economists predict the trade gap will hit $48.1 billion, up from the previous $47.8 billion. Unless there is an extenuating circumstance, however, the markets ignore this report.

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