BondSquawk

December 28, 2010

House prices measured by the S&P/Case-Shiller index declined by 1.0% m/m in October below market expectations for a 0.6% decline. This pushed the annual growth rate of the index covering the 20 largest metropolitan areas down to -0.8% on a y/y basis, first annual decline since January of this year. Out of the 20 cities included in the composite index only the Washington DC and Denver indexes rose. The S&P/Case-Shiller index is calculated using a 3-months moving average and has been lagging declines in other HPI measures that are not smoothed in this way. The CoreLogic HPI used to benchmark real estate values in the Flow of Funds, have already declined for five consecutive months causing a substantial decline in real estate values and partially offsetting an increase in household net worth in Q3. Going into the next year, prices should remain under pressure due to housing oversupply.

By Maulik Mody – Bondsquawk.com

December 27, 2010

Stocks ended mostly flat today and Treasuries advanced as the 2-yr notes met with good demands. The dollar fell slightly, crude prices declined and metals rose in price. Volumes were lower across the American markets as the blizzard that arrived post Christmas made travelling difficult for many.

Economic Data

The Dallas Fed manufacturing index came in lower than expected at 12.8 for December, falling from 16.2 in November. Manufacturing activity increased as seen by the positive reading, but failed to meet expectations of 17.0. Production was positive but declined from previous month and new orders fell in the last month of the year. Capacity utilization index increased from 10 to 15, and labor market conditions improved.

Interest Rates

Treasuries rallied pushing yields lower across the curve. The 2-yr gained slightly as its yield fell a basis point to 0.64%. The belly flattened as the 5-Yr traded 3 bp lower at 2.02%. The benchmark bond rallied considerably as its yield fell 6 bp to 3.33%. The Long Bond traded 7 bp lower at 4.40%.

Inflation expectations, as indicated by the yield differential between the 10-yr Treasury and inflation-indexed bonds having similar maturity (TIPS), narrowed 3 bp to 2.29%.

Across the Capital Markets

The S&P and NASDAQ gained less than 0.1% to 1257.54 and 2667.27 respectively. Dow Jones eased 0.2% to 11555.03. The VIX Volatility index jumped higher to 17.67.

The dollar index fell slightly to 80.244. The euro gained against the greenback to 1.3165. The cable (GBP/USD) traded slightly lower at 1.5421. Gold spot price inched higher to 1383.75. Crude prices fell to an even 91.00.

December 23, 2010

Today’s economic releases indicate that the economic recovery might be gaining momentum as it enters 2011, improving sentiments right before the holidays. Consumer spending, which makes over two-thirds of the economy, grew for a fifth time during November. Capital equipments ordered by companies also increased last month. Personal incomes gained more than expected, hinting that slightly stronger spending can be expected going ahead.

Although missing economists’ expectations of 0.5%, the 0.4% gain in consumer spending last month suggests that the economy continues to improve, albeit at a moderate pace. The recent rally in stocks and growing income during the holiday season has stimulated spending recently, which is likely to continue in the first quarter next year.

The durable goods headline index fell more than expected while durable goods ex-transport surprised strongly to the upside. The headline index fell by 1.3% m/m in November as transportation orders dropped 11.9% m/.m on a 53.1% drop in nondefense aircraft. In contrast, ex-transportation orders picked up by a healthy 2.4% m/m in line with recent strength in other manufacturing indicators. Ex-aircraft orders strength partially owes to a 16.3% m/m increase in defense orders. However, stripping out defense and aircraft, core capital goods orders also increased, partially rebounding by 2.6% m/m following a 3.6% drop in the month prior. Core capital goods shipments which closely tracks business investments in GDP, increased by 1.0% m/m after a negative 1.2% m/m reading in October. On a 3-month annualized basis core capital goods shipments slowed down to 5.9% through November, compared to a much stronger 10.2% reading in Q3. Economists expect equipment and software investment to slow to 7.0% q/q AR from 16.8% in Q3. Nonetheless, today’s reading is still consistent with a positive contribution to GDP from continued investment in equipment and software going in Q4.

Among other independent releases, the University of Michigan Confidence index for December was revised up slightly to 74.5, caused by a revision of the economic outlook gauge to 67.5 from 66.8. New home sales increased 5.5% during November after falling 8.1% the previous month.

Stocks were trading lower in the afternoon. The S&P eased 0.3% and was last seen at 1255, while NASDAQ was also 0.3% lower at 2663. Treasury prices fell as yields pushed higher with the 10-Yr trading 4 bp higher at 3.39%.

December 22, 2010

Overall GDP growth was revised up to a 2.6% q/q saar in the third release from 2.5% in the second release, a little less than consensus expectations. A more robust upward revision was expected based on the upward revisions to retail sales and inventory investment, which were indeed reflected in the data. However weakness in source data on consumer service spending, which are not publicly available and are usually the biggest driver of the third revision, more than offset the upward revision to retail sales and overall consumer spending growth was revised down to 2.4% from 2.8%. Inventories contributed 1.6%, up from 1.3% in the prior estimate while other revisions were minor. On balance the report is weaker than expected despite the upward revision as final demand rose just 0.9% in contrast to the prior estimate of 1.2%.

In addition, the core PCE price index was revised down to 0.5% q/q saar from 0.8% leaving the annual pace at a record low 1.2% from the prior estimate of 1.4%. The release provides our first read of corporate profits, which rose 1.6% in Q3, down from 3.0% in Q2 and 10.5% in Q1. The annual pace of profit growth remained robust at 26.4% but has slowed from the recent peak of 42.5% recorded in Q4 2009. Overall the report is not a view changer and confirms the economy remains on a modest growth track. The revisions to consumer spending confirm that when consumers boost spending on one category, they have pulled back in others in order to maintain a higher rate of saving which continues to track close to 6.0%.

Existing home sales rose 5.6% during November but failed to match expectations of a 7.1% increase as sales of condos and co-ops fell during the month. The West and Mid-west regions saw the biggest increase in sales. Mortgage applications fell 18.6% for the week ended Dec 18, the most since almost a year. A recent increase in mortgage rates caused refinancing to fall 24.6%, while new purchases fell 2.5% last week on a seasonally adjusted basis. High unemployment and sluggishly growing personal incomes will serve as barriers to the housing market recovery, which may not bounce back until the end of next year.

December 21, 2010

In an article on Bloomberg, Caroline Baum gives her opinion on the effectiveness of QE2, and clarifies the difference between quantitative easing and purchasing Treasuries. While the former is aimed at increasing bank reserves, the latter is done to decrease long-term interest rates. Ever since the Fed announced another round of stimulus, Treasury yields have been rising across the curve, more so on the further end. While some economists say that this expansionary steepening of the curve indicates the economy is improving, Carline points out that the improvement has not been due to the Fed aid. The economy improved in a very small time frame after the announcement, while monetary policy changes usually take effect after some time lag. The complete article can be read here.

By Maulik Mody – Bondsquawk.com

December 20, 2010

US government bonds became cheaper and stocks recovered after the Fed finished purchasing about $15 billion of Treasuries today. This is the highest amount of securities purchased in a single day after the Fed announced $600 billion of asset purchases in November. Trading volume was lower as compared to last week. Commodities and energy prices advanced and the dollar strengthened.

Interest Rates

Treasuries pared gains after the Fed’s purchase as part of the added stimulus to sustain the recovery. The yield on the benchmark inched up 2 bp to 3.34%. The 2-yr was flat at 0.60%, while the 5-Yr advanced slightly as its yield fell a basis point to 1.95%. The Long Bond weakened and traded a basis point higher at 4.44%.

Inflation expectations, as seen by the difference in yields of the 10-Yr Treasury and 10-Yr inflation indexed bonds (TIPS), narrowed by a basis point to 2.28%.

Bonds advanced across the Atlantic. 5-Yr German Bunds advanced as its yield shed 8 bp to 1.95%. 5-yr France bonds also gained pushing its yield 6 bp lower to 2.19%. 5-Yr UK Gilts gained slightly as yields fell a basis point to 1.95%.

Yields ended tighter among peripheral nations too. The benchmark Greece bond pushed higher and traded at 12.48%. Ireland’s bond yield fell 7 bp and traded last at 7.45%. Portugal’s bond gained slightly and ended at 5.24%. Yield on Spain’s bond fell 7 bp to 4.69%.

Capital Markets

Stocks ended slightly higher as investors gained confidence in the recovery towards year end. The S&P gained a quarter of a percent to 1247.08. NASDAQ also advanced by the same amount to 2649.56. The VIX volatility index gained to 16.41.

The dollar DXY index strengthened to 80.596. Euro fell 0.3% against the greenback to 1.3131. The British Pound eased slightly to 1.5513.

By Maulik Mody – Bondsquawk.com

December 15, 2010

Treasuries slid as investors gained confidence on the recovery and saw a reduced demand for the safe assets. Stocks eased slightly as the S&P bounced off its two year high and ended 0.5% lower than yesterday. Energy prices were broadly higher while metal prices weakened. Trading volumes were higher across the US markets.

Economic Data

Another set of economic releases today suggest that the recovery might be gaining momentum, fueled by expansion in manufacturing. After contracting last month (negative 11.1) for the first time in over a year, the Empire Manufacturing index jumped to 10.57 during December. The index, which reflects production in the New York region, increased more than economist forecasted, suggesting that manufacturing may contribute towards speeding up the recovery.

The Consumer Price Index grew less than forecast in November, gaining 0.1% after remaining flat for prior three months. Food and energy prices came in weaker than forecast, both gaining 0.2%, while the core index level was in line with expectations. Although gasoline prices increased 0.7%, the increase failed to transfer to the cost of other commodities. Cost of services rose 0.1%, while housing prices remained flat. Apparel retail prices gained 0.2%, while medical care inflation increased a modest 0.1% following a 0.2% gain in October and 0.6% the month before.

Industrial production increased 0.4% during November, beating expectations of a 0.3% increase. The reading follows a revised reading of a 0.2% fall in production, which was previously reported to be unchanged. Computer and electronic items’ production, which increased 1.1% during November, acted as the chief contributor to the recent gains. Utilities production also gained considerably, lead by a 1.3% and 6% expansion of electric and natural gas respectively. Capacity utilization increased to 75.2%, coming in stronger than expected.

Among other releases, mortgage applications fell 2.3% for the week ended Dec 10. Purchases fell 5% after a 1.8% rise the week before, while refinancing dropped 0.7%. The 30-yr mortgage rate rose for a fourth straight week, now at 4.84% as opposed to 4.66% the prior week. The National Association of Home Builder’s Housing index was unchanged at 16 during December. The flat readings indicate that new constructions will remain at the current depressed levels.

For more on today’s economic data release, click here.

Interest Rates

Treasuries ended cheaper as yields rose across the curve, lead by the further end of the curve. The Long Bond slumped as yield rallied 7 bp to 4.60%. Yield on the benchmark 10-yr note gained 6 bp on reduced demand for the security and ended at 3.53%. The belly of the curve widened as seen by the yield on the 5-yr, which ended 5 bp higher at 2.12%. The 2-yr bond yield inched up 2 bp to 0.67%.

Inflation expectations, as seen by the difference in yields of the 10-Yr Treasury and 10-Yr inflation indexed bonds (TIPS), widened 9 basis points on the inflation report to 2.32%.

Capital Markets

The S&P weakened 0.5% to 1235.23. NASDAQ ended 0.4% lower at 2617.22. Dow Jones eased slightly, closing 0.2% since yesterday to 11457.27. The VIX Volatility index gained higher to 17.94 from 17.61 yesterday.

The dollar DXY index gained over a percent to 80.212. Euro fell against the dollar to 1.3214. The British Pound fell 1.5% against the greenback to 1.5544.

By Maulik Mody – Bondsquawk.com

December 15, 2010

Another set of economic releases today suggest that the recovery might be gaining momentum, fueled by expansion in manufacturing. After contracting last month (negative 11.1) for the first time in over a year, the Empire Manufacturing index jumped to 10.57 during December. The index, which reflects production in the New York region, increased more than economist forecasted, suggesting that manufacturing may contribute towards speeding up the recovery.

Big gains the prices paid component and shipments were the key contributors to the rise in the index. New orders also increased as did the prices of the goods sold. “Future indexes were generally at high levels – a sign that conditions were expected to improve over the next six months”, said the report released by the New York Fed. However, employment was weak as the number of employees gauge entered negative territory for the first time in a year. It is worth noting that in the latest Beige Book, New York was the only district where manufacturing activity was reported to have weakened, while manufacturing activity continued to expand in almost all Districts.

The Consumer Price Index grew less than forecast in November, gaining 0.1% after remaining flat for prior three months. Food and energy prices came in weaker than forecast, both gaining 0.2%, while the core index level was in line with expectations. Although gasoline prices increased 0.7%, the increase failed to transfer to the cost of other commodities. Cost of services rose 0.1%, while housing prices remained flat. Apparel retail prices gained 0.2%, while medical care inflation increased a modest 0.1% following a 0.2% gain in October and 0.6% the month before.

BNP Paribas said the following in an email to clients today. “Indeed it continues to be the case that softness in prices is coming from goods and services prices other than housing which had driven much of the downward trend over the past two years. On balance we think that core inflation will remain in the subdued territory it has been in given the lack of improvement in wages, employment and consumer purchasing power. We do look for headline inflation to be pushed higher by energy and food prices in coming months despite the downward surprise in those categories today.”

Industrial production increased 0.4% during November, beating expectations of a 0.3% increase. The reading follows a revised reading of a 0.2% fall in production, which was previously reported to be unchanged. Computer and electronic items’ production, which increased 1.1% during November, acted as the chief contributor to the recent gains. Utilities production also gained considerably, lead by a 1.3% and 6% expansion of electric and natural gas respectively. Capacity utilization increased to 75.2%, coming in stronger than expected.

Among other releases, mortgage applications fell 2.3% for the week ended Dec 10. Purchases fell 5% after a 1.8% rise the week before, while refinancing dropped 0.7%. The 30-yr mortgage rate rose for a fourth straight week, now at 4.84% as opposed to 4.66% the prior week. The National Association of Home Builder’s Housing index was unchanged at 16 during December. The flat readings indicate that new constructions will remain at the current depressed levels.

Stocks were trading higher as of noon. NASDAQ was 0.3% higher at 2634, while the S&P was flat at 1241. Treasuries pared some of its losses since yesterday as yields slipped. The 2-Yr traded 2 bp lower at 0.63%, and so did the benchmark 10-yr note at 2.36%. The Long Bond fell as its yield pushed 3 bp higher to 4.56%.

By Maulik Mody – Bondsquawk.com

December 14, 2010

Stocks gained slightly and Treasuries declined after the Fed announced that it will continue purchasing securities to sustain the recovery despite facing opposition by the Republicans. Stocks traded higher in the morning on improved retail sales during November but pared most of their gains after the Fed’s statement. The dollar appreciated slightly against other currencies while energy and metals price broadly fell. Trading volumes were lower as compared to yesterday.

Economic Data

Retail sales grew more than forecast in November in what appears to be the best quarter for consumer spending since the recession. Retail spending increased 0.8% in November after an upwardly revised 1.7% gain during October. Strong sales in the first of the two months considered as the holiday season suggest that consumer spending will play an important role in the recovery, which gains speed as the new year approaches.

Wholesale prices grew at the fastest rate in eight months as raw material prices inflated. The producer price index increased 0.8% in November, with food and energy price gains contributing to most of the gains. Excluding the more volatile food and energy prices, the index gained a modest 0.3%, after shedding 0.6% in October. High unemployment rates keep producers however from passing on these prices to retailers.

Along with sales, business inventories in the US also expanded, growing 0.7% in October. Manufacturers’ inventories grew 0.9% in October but despite increase in retail sales, retail inventories contracted by 0.6%, mainly due to a fall in automobiles stock. Goods held wholesalers increased 1.9%.

For more on today’s economic data, click here.

Interest Rates

Treasuries retreated, shedding gains from yesterday as good economic data and the Fed’s announcement of continued asset purchases reduced demand for the safe assets. The 2-Yr fell as its yield climbed 6 bp tp 0.64%. The 5-Yr fell considerably, as its yield gained 19 bp and crossed the 2% mark to 2.06%. Yield on the benchmark 10-yr note rallied 20 bp and closed at 3.47%. The Long Bond fell pushing its yield 11 bp higher to 4.52%.

Inflation expectations, as seen by the difference in yields of the 10-Yr Treasury and 10-Yr inflation indexed bonds (TIPS), widened 3 basis points for a second day to 2.23%.

Bonds fell across the Atlantic too. Yields on the 5-Yr bonds of Germany and France gained 7 bp to 2.06% and 2.26% respectively. Yield on the 5-Yr UK Gilts rallied 18 bp to 2.06%. Among peripherals, Ireland’s bonds suffered the most as yield on the 5-yr increased 15 bp to 7.07%.

Capital Markets

The S&P and NASDAQ inched up 0.1% to end at 1241.59 and 2627.72 respectively. Dow Jones pushed 0.4% higher to close at 11476.54. The VIX volatility index jumped back to 17.61 from 17.55.

The dollar index gained slightly to end at 79.396. The euro weakened against the dollar to 1.3378. The cable (GBP/USD) traded lower at 1.5775.

Gold price increased slightly to 1396.25. Crude spot price also advanced to end at 88.61.

By Maulik Mody – Bondsqauwk.com

December 14, 2010

Retail sales grew more than forecast in November in what appears to be the best quarter for consumer spending since the recession. Retail spending increased 0.8% in November after an upwardly revised 1.7% gain during October. Strong sales in the first of the two months considered as the holiday season suggest that consumer spending will play an important role in the recovery, which gains speed as the new year approaches.

Sales advanced for a fifth straight month in November, beating economists’ forecasts of a 0.6% increase. Excluding motor vehicles and parts sales which fell 0.8%, retail spending grew 1.2% last month. Sales increased in all major areas such as food and beverages, clothing and sporting goods. Sales at gasoline stations jumped 4%, while that at departmental stores gained 2.8%. Furniture and electronics were among the few commodities whose sales declined.

Wholesale prices grew at the fastest rate in eight months as raw material prices inflated. The producer price index increased 0.8% in November, with food and energy price gains contributing to most of the gains. Excluding the more volatile food and energy prices, the index gained a modest 0.3%, after shedding 0.6% in October. High unemployment rates keep producers however from passing on these prices to retailers.

Along with sales, business inventories in the US also expanded, growing 0.7% in October. Manufacturers’ inventories grew 0.9% in October but despite increase in retail sales, retail inventories contracted by 0.6%, mainly due to a fall in automobiles stock. Goods held wholesalers increased 1.9%.

As investors eagerly await the Fed meeting decision today, economists do not expect the statement to change a lot from last time. They will likely point to an increasing need to sustain the recovery as it gains momentum, and hence signal a continued commitment to QE2.

Stocks erased its losses from yesterday and were trading higher on increased retail sales. The S&P improved 0.4% and was last seen at 1245, and NASDAQ followed suit to trade around 2634 at about 11:40 AM EST. Yields climbed across the curve. The benchmark 10-Yr note traded 10 basis points higher at 3.38%, while the 2-yr yield gained 3 bp to 0.61%.