Tuesday, January 04, 2011
Treasuries opened flat this morning, mortgages up 4/32 (.12 bp) at 9:00. Still trading in a 25 basis point yield range. The DJIA opening firmer again as most are now believing the economy will continue to improve this year. Technically, the 10 yr note still is unable to close below its 20 day average on the yield chart, but mortgages are performing better, now above its 20 day and possibly going to test the 200 day average.
Smaller U.S. companies are rallying the most since 2003 relative to the Standard & Poor’s 500 Index. That small companies are outpacing larger firms is a bet that the economy will strengthen and spur a third year of gains for investors. The Russell 2000 Index, comprised of stocks with a median market value of $528.5 million, rose 25% in 2010, beating the S&P 500 by 13%. Some analysts believe small companies are doing better because most of their sales are coming from US consumers rather than globally.
The Johnson Redbook retail sales for the week ending 1/1/11 showed yr/yr same-store sales rose 3.5% in the week, below the prior week but right in line with trend and pointing to a very positive 0.4% gain vs November. This latter reading points to a solid gain for the government’s December ex-auto ex-gas category in what would be substantial evidence of consumer strength. The sales report is supporting a better open in the equity markets.
The DJIA opened +20 at 9:30, the 10 yr note -3/32 and mortgage prices +4/32 (.12 bp). Support in the interest rate markets may be coming from the view that stocks are currently over-valued even though the indexes continue to increase. We still hold a slight bearish outlook for the rate markets, although the market isn’t as negative as it was in early Dec. Nevertheless, as long as the outlook remains positive for the economy it is unlikely that interest rates will decline much if at all.
The only data point today; Nov factory orders, were expected down 0.2%; as reported orders increased 0.7% frm -0.7% in Oct (revised frm -0.9%), ex transportation orders up 2.4%. The inventory to dales ratio at 1.28 months. Yet another data point stronger than expected. There was little immediate reaction to the report although rates have edged higher since 9:30.
At 2:00 this afternoon the FOMC minutes from the Dec meeting will be released. how the members debated the impact of QE 2 and what the Fed expects to do will get attention but not likely to have much impact on the markets.
Later this afternoon Dec auto and truck sales. 9.2 mil total is expected.