Tuesday, February 01, 2011
More selling in the bond and mortgage markets this morning; at 8:30 the 10 yr note -15/32 at 3.43% +5 bp and mortgage prices -11/32 (.34 bp). Yesterday the 10 declined 11/32 to 3.38% +5 bp, mortgage markets held well against treasuries, off just 4/32 (.12 bp) in price. The stock market managed a gain yesterday after the 166 point decline in the DJIA on Friday; better economic data continues to fortify investors. Dec personal spending yesterday was better than what was thought and the Chicago purchasing mgrs index was the highest since July 1998.
At 9:30 the DJIA opened 43 points higher ahead of the ISM manufacturing report. The 10 yr note at 9:30 -16/32 3.44% +6 bp and mortgage prices -11/32 (.34 bp).
This morning two reports hit at 10:00; the Jan ISM national manufacturing index, expected at 58.0 frm 57.0 in Dec.The overall index increased to 60.8, the highest since 2004; the sub components were also much better. New orders index at 67.8 frm 62.0, prices pd really is increasing, 81.5 frm 72.5 and employment increased to 61.7 frm 58.9. Any reading over 50 is considered expansion. The initial reaction sent interest rate markets lower in price after already being substantially lower early.
U.K. manufacturing grew at a record pace in January as domestic and export demand boosted orders. The gauge based on a survey of companies by Markit Economics and the Chartered Institute of Purchasing and Supply surged to 62 from a revised 58.7 in December, like the US ISM manufacturing index, any read over 50 is considered expansion.
Also at 10:00 Dec construction spending, the estimate is an increase of 0.2%; late last week estimates were for a decline of 0.5%. As released spending fell 2.5%. Traders not concerned with it as the ISM data overrides the volatile construction spending.
Retail sales in Jan have been negatively impacted by bad weather; the Johnson Redbook US chain store sales for Jan were down 0.9% frm Dec, sales were up 1.8% however from a year ago. Another retail sales report, the ICSC-Goldman store sales confirmed the weather related decline in Jan; sales were 1.0% in Jan but up 1.6% from Jan 2010. The measure of comparable store sales at major retail chains, published by the International Council of Shopping Centers, is related to the general merchandise portion of retail sales. It accounts for roughly 10% of total retail sales. We were looking for Jan sales as confirmation of the pace of recovery, unfortunately weather has made the data less reliable.
Germany reported an increase in employment; unemployment fell to an 18- year low in January. The number of people out of work declined a seasonally adjusted 13,000 to 3.135 million, the lowest since November 1992, the Nuremberg-based Federal Labor Agency said today. Economists forecast a drop of 10,000, according to the median of 32 estimates in a Bloomberg News survey. The adjusted jobless rate fell to 7.4% from 7.5%. Friday we get the Jan US employment data, expectations now are for NFP jobs to have increased 150K with private jobs up 163K, the unemployment rate at 9.5% +0.1%.
Although the economy is gaining momentum there is no reason to fear inflation, the key reason US interest rates remain very stable over the past six weeks after the spike in Nov and early Dec. The Fed continues its $600B purchases of US treasuries and additional Treasury buying using the repayments from the $1.25T MBS buying binge a year ago. That the Fed is buying almost the equivalent of all recent Treasury borrowing has kept rates from increasing. Mortgage interest rates have kept within a narrow 10 basis point range for 30 yr rates; as long as the 10 yr note doesn’t move above 3.50% (currently 3.44%) mortgage rates will remain generally unchanged.