MM Recap for Sept. 20 

Signs of an improving economy took their toll on the benchmark 10-year note last week.  Many economic reports came in stronger than expected, allowing some to think that recovery is truly under way. 

If this turns out to be true, buying in Treasuries would likely turn toward less-risky short-term bonds.  China and Japan are also expected to invest in short-term government debt. 

Although this perception is not accepted by all, it was strong enough to quiet buying in the safe haven of Treasuries. 

The other school of thought is that Treasury yields will stay low for an extended time.  In addition, the Fed is once again buying Treasuries to keep interest rates low and hopefully induce consumers to buy homes and take out loans. 

Monday was report-free, but Treasuries rebounded from the beating they took the previous Friday.  The correction, supported by bargain-hunters, drove the 10-year yield, which moves inversely to price, down to 2.74% from 2.81%. 

Tuesday’s retail sales numbers for August were good, but not great, allowing investors to remain cautious regarding recovery.  Sales rose 0.4% versus a downward revision of 0.3% in July.  When autos were excluded, however, sales rose 0.6%, the best since March.  Strong buying pushed the 10-year yield down to 2.67%.  Separately, wholesale inventories rose 1% in July. 

Good news from the manufacturing sector on Wednesday sent the yield right back up.  Industrial production beat analysts’ predictions, rising 0.2% in August — the 14^thstraight increase.  And capacity utilization posted its best percentage since Sept. 2008 — 74.7%.  Less fortunate was the NY Empire State index on September manufacturing conditions.  It fell to 4.10 from 7.1 but couldn’t undo the damage created by the earlier report. 

Stocks and bonds didn’t see much action Thursday.  First-time jobless claims for the week ended Sept. 11 dropped to 450,000, but it was only a 1,000-claim decline.  It was, however, the second straight drop. 

The producer price index, which tracks wholesale inflation, rose 0.4% in August from the previous 0.2%.  The core rate, which eliminates food and energy prices, was flat.  And the Philly Fed index on September manufacturing conditions rose to -0.7 from -7.7. 

Friday’s report on the consumer price index (CPI) for September showed little reason to worry about inflation.  The CPI itself rose 0.3%, while the core rate was unchanged.  Over the last year consumer prices rose only 1.1%, while the core rose 0.9%. 

And the University of Michigan’s preliminary consumer sentiment survey for September fell to 66.6 from 68.9.  Surprisingly, these reports sent the 10-year down only two basis points.   

The Mortgage Bankers Association reported that for the week ended Sept. 10 purchase applications fell 21.9%.  Refis were down 10.8%, in spite of falling mortgage rate. 

This week features data on housing and the Fed decision on rates, which will be out Tuesday.  Although there’s no chance rates will be raised, there will be interest in any disclosures the Committee provides regarding plans to push the economy forward. 

Housing starts/building permits for September will be released Tuesday.  Starts should rise to an annual rate of 550,000 units — up from 546,000 in August.  Building permits, however, are expected to decline to an annual rate of 555,000 from 559,000.  If on target, there’s not enough movement to stir the markets. 

On the other hand, Thursday’s release of existing home sales could put some pressure on Treasuries.  August sales are predicted to rise to an annual rate of 4.11 million units from 3.83 million, which would be substantial.  On Friday, new home sales for August should follow course.  They’re expected to rise to an annual rate of 298,000 units from 276,000. 

This leaves first-time claims on Thursday, followed by the Index of leading indicators for August.  The 10 indicators, which aim to predict future economic conditions, should rise 0.1%, just like they did in July. 

First-time jobless claims for the week ended Sept. 18 could fall below 450,000 — the awaited breakthrough.  If claims drop, Treasuries could be hit.  But an increase would likely cause a sigh of relief — and some buying. 

The final report, August durable goods orders should show a 2.2% decline, versus a 0.3% gain in July.  Excluding transportation they could rise 0.7%.