Economic and Bond Market Summary – April 27, 2012
The Commerce Department released data suggesting that economic growth in the U.S. slowed in the first quarter of 2012 despite improved spending by the consumer. After a gain of 3.0 percent in the final quarter of 2011, the advanced estimate Gross Domestic Product increased by only 2.2 percent on an annualized basis in the first quarter of this year. Market participants were disappointed in the data release as the median of the 85 estimates was at 2.5 percent with a low of 1.2 percent and a high of 3.6 percent.
Despite the pop in Personal Consumption of 2.9 percent which may have been buoyed from the unseasonable warm weather that led consumers to spend more, other components of the economy failed to add to the momentum from the previous quarter. Gross Private Investment increased by only 6.0 percent after jumping 22.1 percent in the fourth quarter while Government Spending on both a Federal and State level continues to decline. In the first quarter, Government Consumption fell by 3.0 percent after declining 4.2 percent in the prior period.
While overall GDP growth was disappointing, homebuilding continues to be a bright spot along with the aforementioned consumer spending sector. Residential Investment grew by 11.6 percent and 19.1 percent in the fourth quarter of 2011 and first quarter of this year, respectively.
Price pressures remain intact for the most part which should ease hawks’ concerns of higher inflation expectations. The GDP Price Index, which is a comprehensive indicator of inflation, increased by just 1.5 percent which is lower than economists’ forecasts of 2.1 percent but slightly higher than the previous quarter of 0.9 percent. Stripping out food and energy, prices increased by 2.1 percent which matched surveys. Comparatively, the core price index increased by 1.3 percent in the final quarter of 2011.
Treasury Bond Markets
Despite the surge in equity prices, U.S. Treasury bond yields were generally flat on the day. The yield on the 10-Year note closed the day at 1.93 percent, a slight decline of a basis point from yesterday’s close. Yields on both the 5-Year and the Long Bond finished where it started by ending the day at 0.81 percent and 3.12 percent, respectively.
Shortly after yesterday’s market close in the U.S., Standard & Poor’s cut the long-term sovereign credit rating of the Kingdom of Spain from ‘A’ to ‘BBB+’ due to the deterioration of Spain’s budget trajectory as the country deals with economic contraction. The rating agency stated that there is “an increasing likelihood that Spain’s government will need to provide further fiscal support to the banking sector.” Furthermore, S&P added that the country faces “heightened risk that Spain’s net general government debt could rise further.”
As a result of this downgrade, 10-Year Spanish debt increased 4 basis points to end the session at 5.83 percent. Similarly, 5-Year Credit Default Swaps which can be considered as the cost to insure against a default, rose 22 basis points today to 475 basis points and is near the high of 510 basis points set earlier this month.
Earlier today, Italy’s borrowing costs continue to climb as the Italian Treasury sold a total of 5.95 billion euros in three different issues. The Treasury auctioned 2.5 billion euros in 10-year notes at a rate of 5.84 percent which is 60 basis points higher than the previous auction held in the first quarter. The bid-to-cover ratio, which is a gauge of investor demand, declined to 1.48 from 1.65 from the previous auction. In addition to the 10-Year benchmark, the Treasury sold two other bonds maturing in 2016 and 2019.
Across the Capital Markets
Despite the weaker economic picture, stocks across the board surged today on earnings results. The S&P 500 rose 0.2 percent while the NASDAQ gained 0.6 percent. The CBOE Volatility Index aka VIX was inched up by 0.08 points or an increase of 0.5 percent.
The Dollar Index which measures the general value of the US currency against other major world currencies, declined slightly. The index fell by 0.13 to 78.78 or a decline of 0.18 percent. The Euro closed higher at 1.3248 for a gain of 0.2 percent despite the downgrade in Spain while the British Pound increased by 0.5 percent to end at 1.6265 versus the dollar.
Oil closed at 104.80 or a gain of 0.2 percent while Gold increased by 0.3 percent to 1662.90.