By Rom Badilla, CFA & Maulik Mody – Bondsquawk.com
September 1, 2010
Stocks continued to rise for a second day and Treasuries fell after pending sales of used homes and retail data came in better than expected. Investors bid up equities and sold Treasuries as they await Friday’s job data, which if disappointing can cause the markets to shed its gains since yesterday. The Euro ended slightly stronger while government bonds in European countries were mixed after ECB’s press conference earlier today.
Economic Data
The National Association of Realtors reported that more people signed contracts to purchase a home than the previous month. Pending Home Sales, which is a leading indicator of home activity and provides insight on economic growth, increased by 5.2 percent in July on a monthly basis. Economists were expecting sales to decline by 1.0 percent following a revised prior period drop of 2.8 percent. While the gain is encouraging, keep in mind that the sales level is improving off a low base and is far and away from offsetting the massive drop of 29.9 percent experienced in May. On a year over year basis, Pending Home Sales is down 20.1 percent.
Factory Orders, which provides insight on new orders on both durable and non-durable goods, increased just 0.1 percent in July versus surveys of 0.2 percent. The anemic increase follows the June reading which was revised upward from -1.2 percent to -0.6 percent.
The U.S. Department of Labor reported that Non-Farm Productivity in the second quarter was drastically lower than initial reports. Non-Farm Productivity, which allows for higher wages and faster economic growth, fell by 1.8 percent from an initial estimate of a decline of 0.9 percent. The drop was mostly in-line with estimates as economists expected productivity to show a decline of 1.9 percent. Unit Labor Costs, which reflect the labor costs of producing each unit of output, increased by 1.1 percent in the second quarter from an initial estimate of a gain of 0.2 percent.
Figures of people filing for unemployment benefits for the first time were in-line with expectations as Initial Jobless Clams for the week ending August 28 inched down to 472k from a revised prior period of 478k. The decline, which was slightly below surveys of 475k, results in the four-week moving average ticking down to 485,500 people. Despite the move downward, the four week moving average has been hovering between 450k and 500k since last November, which is more in-line with further job losses. A moving average of below 400k is more in line with a recovery.
Continuing Claims for the week ending August 21 decreased to 4456k versus surveys of 4450k and a revised prior period number of 4479k. Despite the decline, which can be attributed to the exhaustion of benefits, Continuing Claims remains relatively high which signals weak labor market conditions.
For more on today’s economic data, click here.
Interest Rates
Treasuries continued their fall as investors rejoiced the slightly improved data in today’s economic release. The near end of the curve fell as the 2-yr bond gained, pushing its yield down by a basis point to 0.49%. All bonds further out in the curve than the 2-Yr fell, pushing yields higher. The yield on the 5-Yr Treasury gained 2 bp to 1.42%. The 10-Yr sold off more as yields gained 5 bp to 2.62%.As concerns about the recovery eased, the Long Bond shed the most, pushing its yield 6 bp higher to 3.71%.
Inflation expectations, as indicated by the yield differential between 10-Yr Treasury and TIPS, widened 5 bp and to 1.60%.
Across the Atlantic yields were mixed. Germany’s 5-yr Bunds fell as yields climbed 2 bp to 1.28%. France’s 5-Yr gained slightly pushing its yields lower by a basis point to 1.58%. 5-Yr U.K. Gilts became cheaper as yields ended 3 bp higher at 1.72%.
Among the peripherals, yields ended lower after ECB announced higher growth forecast for the remaining of the year and extended its lending programs, indicating uncertainties about the economy. Portugal’s 5-yr bonds gained in price as pushing its yield lower by a basis point to 4.02%. Ireland’s 5-yr bonds ended higher as yields fell 3 bp to 4.54%. 5-Yr Italy’s bonds increased in price with its yield now at 2.59%, 2 bp lower than yesterday. Greece’s bonds rallied pushing yields 2 bp lower to 11.53%. The yield on Spain’s 5-Yr bond closed 4 bp lower at 2.95%.
Credit Markets
For performance of investment grade corporate bonds, check today’s iTB Corporate Bond Indices.
The spread of the BofA Merrill Lynch U.S. High Yield Master Index, which tracks high yield corporate bonds, narrowed 8 bp for a second day to close at 6.72% over Treasuries with comparable maturities.
The difference in yield between 30-Year Conventional Mortgage Backed Securities and the 10-Year Treasury tightened by a basis point to 0.77%.
Across the Capital Markets
Stocks ended in the green on the second day of the month. The S&P gained 9.81 points ot 0.91% to 1090.10. NASDAQ improved 1.06% to end at 2200.01, as DJIA advanced 0.49% to 10320.10. The CBOE VIX index shed 3.4% to 23.19.
The dollar index, which measures the performance of the greenback against six major currencies of the world, edged down 0.1% to 82.40. The Euro ended slightly higher against the dollar to 1.2825 from 1.2809 yesterday. The British Pound slipped 0.4% against the greenback to 1.5401.
Gold spot price advanced 0.5% to 1250.95. Crude oil spot price gained 1.5% to $75.02.
Posted by Maulik on 