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Money Market Recap and Forecast

MMRecap for Oct. 26^th

Yields on U.S. Treasury securities, which move in the opposite direction of price, were up and down last week, reflecting volatility on Wall Street and some good news/bad news economic reports.  Despite volatility, the benchmark 10-year Treasury note yield held within a narrow range, until Friday, that is.

Tuesday's reports supported bonds, with the September producer price index (PPI) showing no signs of wholesale inflation, and housing starts and building permits coming in below expectations.  Signs of economic weakness can postpone rate increases.

The PPI fell 0.6%, while the core rate was down 0.1%.  And although housing starts rose to an annual rate of 590,000 units from 587,000, analysts expected 597,000.  Permits dropped to an annual rate of 573,000 from 580,000 when an increase was forecast.  This doesn't bode well for future construction.

Wednesday's release of the Fed's beige book put selling pressure on bonds.  It showed spotty improvement in the economies of most of the nation's 12 federal districts, led by residential real estate and manufacturing.

Thursday was another tough one for bonds.  Although initial unemployment claims for the week ended Oct. 17 rose by 11,000 to 531,000, the four-week average fell to 532,250 and continued claims dropped to 5.92 million.  Some analysts, however, believe the lower claims numbers reflect expiration of benefits -- not employment.

The index of leading economic indicators (LEI) for September rose by a strong 1%, pointing to an economy on the mend.  The LEI looks at the economy six to nine months ahead, and this is the sixth straight increase, with eight of the 10 indicators moving up.

Things turned ugly Friday morning when Fed Chairman Bernanke said, "the financial turmoil (is) abating," spawning fears of an early rate hike.  And then existing home sales in September jumped 9.4% to an annual rate of 5.57 million units -- a two-year high.  The tax credit was seen as a major factor for the increase.

Higher mortgage rates during the week ended Oct. 16 slowed applications.  Refis plunged 16.8%, while purchase apps were down 7.6%, according to the Mortgage Bankers Association.

Several reports are due this week, and some have market-moving potential.  Things get started Tuesday with the durables goods orders for September, and numbers are expected to jump, which could hurt Treasuries.  Orders should increase by 0.7% from -2.4% in August, while orders excluding transportation should rise 0.8% from 0.0%.  Although these data are volatile, the markets could react.

The consumer confidence index for October can pack a wallop, but little movement is expected this month.  Analysts believe it will rise to 54 from 53.1, but if it comes in much higher, that would deal another blow to bonds, as it could indicate consumer spending might rise.

Wednesday new home sales for September will be released, and like existing home sales, they too are expected to rise.  Analysts anticipate the annual rate of sales will increase to 440,000 units from 429,000 -- a nice bump for home builders but not for bond traders.  But this report does not have the impact of existing home sales.

Thursday we get the first look at 3^rdquarter GDP, which should show growth of 3.1% -- after four consecutive negative quarters.  If it's higher than that, bonds will likely sell on fear of an early rate cut; but if it's lower, buying should be aggressive.  Initial jobless claims for the week ended Oct. 24 come out at the same time as the GDP, and another rise in claims could soothe a GDP-inspired sell-off.

Some Friday reports might impact the markets.  For instance, the Chicago PMI index on manufacturing conditions in October could spur selling if it comes in above 50, indicating expansion.  A 48.5 reading, up from 46.1, is expected.  Likewise, the University of Michigan/Reuters consumer confidence survey could influence trading.  It should rise to 70 from 69.4, but like the PMI, if it moves higher, traders will likely sell.

Personal income/spending in September should come in flat-to-down; so say the analysts.  Income is expected to be flat, while spending could fall 0.4%.  This would be fine for bonds, but a 0.2% rise in core prices might kindle inflation worries.

Charles Stallions, CRS, CSP, CBR, CDPS, SREE, EREI - 800-309-3414, a leader in real estate investing, buying and selling. Lead Real Estate negotiator for several investment clubs as well as investors throughout the US. Call Charles for a list of references before buying or selling you what some consider being their largest investment.