By Maulik Mody – Bondsquawk.com
September 27, 2010
Treasuries continued their rally on increased concerns about the economic recovery after the Federal Reserve Bank of Chicago indicated that economic activity in the U.S. fell in August. The Chicago Fed National Activity Index, which tracks 85 leading economic indicators, came in at -0.53 in August, after a downwardly revised reading of -0.11 in July. Some of the important indicators that the index draws upon include the Labor Department’s report on unemployment and ISM Manufacturing Index, which comes in later this week.
A negative reading of the index indicates slowing growth in the economy and easing inflation pressure. This is the fourth consecutive negative reading which brings the three month moving average to -0.42, from -0.27 in July. When the three month average falls below -0.70, it is assumed to be highly likely that recession has begun.
The Dallas Fed also indicated a slowdown in the recovery as the Fed manufacturing activity index for September came in at -17.7, disappointing expectations of -6.0. This reading continues to be in the depressing zone, following a reading of -13.3 for August, and being the fourth consecutive number sub zero.
Breaking down the general business activity number indicated that some factors improved during the month. Production increased from -0.1 to 4.0 in the previous month, while capacity utilization index jumped from -3.1 to 3.9, suggesting that factory manufacturing activity is improving. Orders growth rate also increased from -13 to 0, hinting that the pace of orders is stabilizing.
Raw materials prices index remained stable at near 24, while prices received jumped into positive territory from -5.7 last month. Labor markets also showed improvement as the employment index turned to positive 1.8 from a negative 5.1value in August. Capital expenditure suffered the most, falling to -12.1 from 1.0 last month.
As a slowdown indicated by the Fed reports increased concerns about the recovery, investors bid up Treasury prices, pushing yields lower. The yield on the 10-Yr note slipped 7 bp to 2.53 in morning trade, while the yield on the Long Bond shed 8 bp to 3.71%. Stocks reversed their gains as the S&P shed 0..4% to 1144.03. The NASDAQ wakened 0.45% and was last seen at 2370.50.
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