Good Morning,
Here's an update on what happened last week. Last week was a non-event for the most part in the Mortgage Market. U.S. Treasuries, which weren't traded on Wednesday in observance of Veterans' Day, held their own in spite of major gains on Wall Street and a better-than-expected weekly employment report.
Prices, which move in the opposite direction of yields, ticked up Monday in response to a strong auction of 3-year notes and a feeling that the economy still has multiple hurdles to jump prior to recovery. That should keep money coming into bonds. Prices nudged up again on Tuesday in the wake of a successful 10-year-note auction.
Thursday's first-time unemployment claims for the week ended Nov. 7 was the first report of the week. It showed claims dropping by 12,000 to 502,000 -- the fewest since Jan. 3. The four-week average, which smooths volatility, fell to 510,750 and continued claims -- those collecting benefits for more than one week -- dropped to 5.63 million.
Action in the bond pits was minimal, but prices fell after a weak auction of 30-year bonds. Long-term debt is most susceptible to erosion caused by inflation. But the yield on the 10-year held in the mid-3.4% range.
Friday's early reports had no impact, as there is little reaction to import/export price indexes, which were up 0.4% (excluding oil) and 0.3% (excluding agriculture), respectively. The U.S. trade balance in September grew to a wider-than-expected $36.5 billion trade gap -- up from $30.8 billion.
The final report of the week, the University of Michigan preliminary consumer sentiment report, showed consumers are wary about unemployment and economic recovery. The index fell to 66 from 70.6. But Treasuries remained flat in spite of the news.
A drop in mortgage rates during the week ended Nov. 6 brought refinancers out in droves. According to the Mortgage Bankers Association, refis rose 11.3%, but purchase applications declined 13.7%.
As suspected, this week is loaded with reports, and there's at least one market mover each day through Thursday. No reports are scheduled for Friday.
Retail sales for October are up first, and they're expected to rise 0.9% versus a 1.5% decline in September. Ex-autos, sales should grow by 0.4% versus the previous 0.5% increase. The prospect of spending consumers would likely ignite selling in Treasuries.
On the other hand, the NY Empire State index of November manufacturing conditions could stall selling. The index is expected to fall to 29 from October's 34.51 reading. And business inventories for September, which wields little influence, should fall -0.6%.
The producer price index, which looks at wholesale inflation, should increase 0.5% in October -- some of it due to oil prices. In September it fell 0.6%. But the core rate, which eliminates volatile food and energy prices, could rise by an acceptable 0.1% versus the previous 0.1% decline.
We'll also get a report on industrial production, which after several months in negative territory is showing signs of life. A 0.3% increase, however, is expected for October, which would be substantially lower than the 0.7% rise in September. Capacity utilization could creep up to 70.8% from 70.5%.
The consumer price index, or CPI, which is closely watched for signs of inflation, is due Wednesday. Predictions show inflation to be well under control, which would cheer traders. The CPI should rise 0.2%, the same as September, while the core rate is expected to edge up 0.1% -- less than the previous 0.2% increase.
Housing starts and building permits for October are expected to increase, which could put pressure on Treasuries if they beat projections by a lot. Starts should rise to an annual rate of 599,000 units from 590,000, while building permits could increase to an annual rate of 580,000 from 573,000.
Thursday begins with initial claims for the week ended Nov. 14. If there's a big increase, bonds will rally. If there's a big decline, bonds will sell. At least, that's how it's been lately. And leading economic indicators for October, which look at the economy six to months ahead, should show a 0.4% increase, which bodes well for the economy. However, the Philly Fed survey on November manufacturing conditions is expected to fall to 10.8 from 11.5, which could send money into bonds.
That's it for the recap and look ahead. I hope you have a tremendous rest of your day ahead. If there is ever anything that I can do for you, please let me know.
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