I hope that your Monday is off to a terrific start. It was another tough week for Treasuries. Mostly positive economic reports spurred selling in bonds, as traders continued to worry about an early rate. Selling sent the yield on the benchmark 10-yield, which moves in the opposite direction of price, to 3.59% -- its highest level since mid-August.
Tuesday's producer price index for November didn't sit well with traders. It rose by a stronger-than-expected 1.8%. Energy prices accounted for three-quarters of the increase, opening the door for future inflation. And the core, which eliminates food and energy prices, rose 0.5% due to the higher cost of trucks and cigarettes.
Industrial production beat expectations, rising 0.8% -- the biggest increase since August. It remains down 5.1% over the past year. But the Empire State index of December manufacturing conditions plunged to 2.55 from 23.51 when 22 was expected.
On Wednesday the consumer price index, which measures retail inflation, calmed inflation anxiety. It rose 0.4% in November and the core was unchanged from October. But once again there were signs that the housing market is recovering. Building permits in November rose to an annual rate of 584,000 from 551,000, while housing starts jumped by 47,000 to an annual rate of 574,000 units.
That afternoon the Federal Reserve once again said that interest rates will be "exceptionally low" for an "extended period of time." It did note, however, that although economic conditions will remain weak, they are stabilizing, with housing and consumer spending on the rise. It noted that the labor market and businesses continue to struggle. In the end, there was little reaction from the financial markets.
Not so on Thursday. First-time unemployment claims for the week ended Dec.12 rose by 7,000 to 480,000, while the more-accurate four-week average fell for the 15th straight week. Continued claims, those collecting benefits for more than one week, also rose to 5.186 million.
Two strong reports followed: leading economic indicators, or LEI, and the Philly Fed index of December manufacturing conditions. LEI rose 0.9%, and for the first time since December 2007 employment did not negatively impact the index. The Philly Fed jumped to 20.4, its highest level since April 2005. These reports spurred selling in bonds.
But the rise in initial claims, another credit downgrade for Greece and the Fed's cautious outlook for economic recovering prompted a big sell-off on Wall Street and the flight to quality was on. The 10-year yield fell below 3.50% for the first time in a week.
The Mortgage Bankers Association reported that applications to refinance rose 0.9% for the week ended Dec. 12, and accounted for 75.2% of all mortgages -- the highest percentage since April 24. Purchase apps edged down 0.1%.
This week features another three-day release calendar, but big moves are not on the radar. And trading should be light.
Tuesday's first report is the final 3rd quarter revision of GDP. Analysts expect growth to come in at 2.7% -- down a hair from the previous 2.8% revision. GDP prices are expected to show a 0.5% increase, which would be unchanged.
Existing home sales for November are expected to support the theory of a housing market rebound. Sales should rise to an annual rate of 6.30 million units, up from 6.10 million.
Wednesday's report on new home sales for November should follow suit. Sales are expected to rise by 10,000 units to an annual rate of 440,000.
Personal income for November is predicted to rise 0.5% from the previous 0.2% increase. However, personal spending should rise 0.7%, the same as in October.
Separately, the University of Michigan's final consumer sentiment survey for December is expected to climb to 73.9 from 73.4. Two weeks ago the index shocked traders when it rose 6 points, sending Treasury prices tumbling.
Thursday's initial claims report for the week ended Dec. 19 could sway Treasuries if it shows another big increase in initial claims. Or not.
The final report, durable goods orders for November, is predicted to improve from October. Orders are forecast to rise 0.4% versus a 0.6% decline, while orders, excluding transportation, should increase 1.0% -- far better than the previous1.3% decline.
I hope you have a terrific week. If there is ever anything that I can do for you, please let me know.
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