What a week it was! Last week the benchmark 10-year note yield, which moves inversely to price, made its biggest two-day gain in two years on Tuesday and Wednesday.
The yield surged to 3.24% on Wednesday -- up from Monday's 2.94% close. The cause was the agreement on the tax package worked out by President Obama and Republican leaders that was assumed to be a "done deal." Of course, we learned Thursday that there might be no deal at all.
But Treasuries sold due to concerns that the $800-$900 billion that would be added to the nation's deficit would put more Treasuries on the market, which would lead to their devaluation.
Treasuries got a boost on Monday due to Fed chairman Ben Bernanke's "60 Minutes" interview that aired Sunday evening. He said that it could be four to five years until employment returns to normal and that fears of long-term inflation are "overstated." He also didn't rule out a third round of quantitative easing. Uncertainty sent investors back to bonds.
On Tuesday the two-day sell-off began.
On Thursday the markets took a breather. Although first-time jobless claims for the week ended Dec. 4 fell by 17,000 to 421,000, Treasuries held their ground. Economists noted that during December employment numbers are unusually volatile.
Wholesale inventories in October rose by a stronger-than-expected1.9%, which raised a few eyebrows but didn't have long-term effects.
Friday's report showed the U.S. trade balance shrank 13% in October. Strong demand for U.S. goods and services could add to 4thquarter GDP.
Friday's final report showed the University of Michigan's preliminary consumer sentiment survey for December rising to higher-than-expected 74.2 from 71.6. This and the prospect of a higher GDP put selling pressure on Treasuries. The 10-year note yield, which closed at 3.22% on Thursday, rose to 3.26% by midmorning.
The Mortgage Bankers Association reported that, for the week ended Dec. 3, purchase applications rose for the third straight week, increasing 1.8%. Refinances, however, fell 1.4%, the fourth consecutive decline.
This week is the polar opposite of last week, as there are a number of potentially influential economic reports due, with most being released between Tuesday and Thursday.
Retail sales for November could disappoint, as they are expected to rise 0.5% versus a 1.2% increase in October. When auto sales are excluded, however, sales should rise 0.6%, which would pass the 0.4% increase the previous month. Like most reports, if they're on target the markets don't react strongly.
The other major report is the November producer price index, or PPI, which looks at wholesale inflation. It's expected to rise 0.6% after rising 0.4% the previous two months. The more closely watched PPI core, which eliminates food and energy costs (the one the Fed watches) is predicted to rise 0.3% after falling 0.6% the previous month. Separately, business inventories for October should rise 0.8% versus the previous 0.7% increase.
Tuesday afternoon the Fed will announce its decision on rates, which will be "no change," but attention will be paid to the comments made afterward.
Wednesday the all-important inflation gauge, the consumer price index, will be released. It's expected to have risen 0.2% in November -- the same as October. The core rate could rise by a tame 0.1%. It was flat in October.
Two manufacturing reports should show some improvement. Industrial production for November is expected to rise 0.4% versus a flat reading in October, while capacity utilization should edge up to 75 from 74.8. And the NY Empire State index for December is expected to increase to -3.0 from -11.1. These reports could encourage selling in Treasuries.
A third manufacturing index, the Philly Fed, due Thursday, is expected to decline to 15 from 22.5. But the more likely influence will be the first-time jobless claims for the week ended Dec. 11. Another substantial decrease in claims could bring out the sellers. In addition, housing starts/building permits for November are expected to improve. Starts should climb to an annual rate of 550,000 units from 519,000, while permits could rise to 570,000 from 550,000.
The index of leading economic indicators, Friday's only report, should rise to 1.2% from 0.5% in October.
☺
Matt
Toll Free: 888-NCFIXER (623-4937)
Toll Free Fax: 888-FAX-4020 (329-4020)
Local: 860-282-6181
330 Roberts Street Suite 402
East Hartford, CT 06108
Comments(2)