Weekly Market Update : Payden & Rygel

July 17, 2009
MARKET LEVELS

Friday* Last week Dec. 31, 2008 One year ago
Dow Jones Industrial Avg 8,738 8,147 8,776 11,447
S&P 500 940 879 903 1,260
NASDAQ 1,885 1,756 1,577 2,312
Russell 2000 520 481 499 697
DJ STOXX Europe 600 (€) 211 197 198 276
Nikkei Index (¥) 9,395 9,287 8,860 12,888
Fed Funds Target 0%-0.25% 0%-0.25% 0%-0.25% 2.00%
2-Year Treasury Yield 1.00% 0.90% 0.77% 2.49%
10-Year Treasury Yield 3.64% 3.30% 2.21% 3.99%
U.S. $ / Euro 1.41 1.39 1.40 1.59
U.S. $ / British Pound 1.63 1.62 1.46 2.00
Yen / U.S. $ 94.21 92.54 90.64 106.28
Gold ($/oz) $938.68 $913.05 $882.05 $957.43
Oil $63.89 $59.89 $44.60 $129.29
*Levels reported as of 11:00 am Pacific Standard Time

MARKET RETURNS

Year-to-date (1/1/09-7/17/09)* Year-to-date (1/1/09-7/16/09)
Dow Jones Indus Avg. -0.43% 90 Day T-Bill 0.13%
S&P 500 4.11% 2-Year Treasury 0.61%
NASDAQ 19.55% 10-Year Treasury -8.86%
Russell 2000 4.10% ML High Yield Index 29.66%
MSCI World Index 6.56% JPM EMBI Global Diversified 16.66%
DJ STOXX Europe 600 6.21% JP Morgan Global Hedged -0.89%
*Returns reported as of 11:00 am Pacific Standard Time

RECAP OF THE WEEK'S ECONOMIC RELEASES

July 14 Retail Sales – The Commerce Department announced a 0.6% rise in retail sales in June, up from the unrevised 0.5% increase in May. The rise was largely due to a jump in automobile sales and higher energy prices.
Producer Price Index - The Producer Price Index was up 1.8% in June, following an increase of 0.2% in May. The rise far exceeded the 1% forecast and marked the index’s biggest uptick since November 2007.
Euro Zone Industrial Production – The euro zone recorded the first increase in industrial
production in nine months (+0.5%). The numbers missed expectations of around +1.5%.
Industrial production was at -17.0% this time last year.
German ZEW Index – Expectations for economic activity declined from 44.8 to 39.5 over the last month in Germany. After eight consecutive increases, the current level lies still high above the average of 26.3.
July 15 Consumer Price Index – Headline inflation rose 0.7% in June versus 0.1% in May. Core inflation, which excludes food and energy, rose by 0.2% in June after increasing 0.1% in May. The acceleration in headline inflation was largely caused by a sharp increase in energy prices.
UK Housing Market – The RICS survey found that housing prices started to increase for the first time in 20 months in the UK. There are still small declines in prices but a shift is foreseeable.
July 16 Initial Claims - First time unemployment claims for the week ending July 11 fell by 47,000 to 522,000, the lowest level since January. The sharp drop is largely due to seasonal adjustments and the fact that General Motors and Chrysler shut down plants months before traditional July closings.
July 17 Housing Starts – Housing starts rose unexpectedly, climbing 3.6% to an annual rate of 582,000 in June from 562,000 in May. Though the month-over-month increase underscores the view that the housing market may be stabilizing and that the US economy is beginning to recover, housing starts were still down 46% on a year-over-year basis.

OVERVIEW ___________________________________________________

Inflation data released this week suggest that price pressures remain subdued. The headline consumer price index (CPI) was up 0.7% in June from the prior month, but the index is 1.5% lower than it was last year at this time. The volatility in the headline number has been driven by energy prices, which peaked at $145/barrel last July before tumbling to $63/barrel today. Core CPI inflation, which excludes food and energy prices and accounts for roughly 75% of the overall price level, has remained stickier at 1.7% yearover- year. However, core inflation could drift lower in the coming months due to declining shelter costs.

The rate of increase in the Owners' Equivalent Rent (OER), which measures what owners give up by occupying instead of renting their homes, has been falling. In June 2008, OER was up 2.6% from year ago levels compared to a 1.9% increase in June 2009. The OER accounts for about 24% of the headline inflation index and 30% of the core inflation index so it plays an important role in driving the overall price level. With the national rental vacancy rate at a near-record 10.1% and unemployment levels rising, rents, and the OER, will likely remain low for the rest of the year and keep inflation at bay.

US MARKETS:

TREASURIES ________________________________________________________________________________
• Treasury yields rose this week and the yield curve steepened as the longest-dated bonds sold off the most. A strong rebound in equities from last week’s drop coupled with reasonable earnings and economic data drove the move to higher yields. In addition, stronger-than-expected Consumer and Producer prices had a sociable impact on the long end. Agency spreads continue to stay near their tightest levels as investors become more comfortable with the idea that agency debt is government protected.

LARGE-CAP EQUITIES ___________________________________________________________

• The stock market rallied for the first time in five weeks spurred by better-than-expected second quarter earnings from some of the largest S&P 500 companies. Goldman Sachs, JP Morgan, Intel, Google, IBM, and General Electric all surprised on the upside. The S&P 500 index jumped about 6% for the week with large-cap stocks underperforming small-cap stocks. In terms of style, large-cap growth stocks underperformed large-cap value stocks. The best performing sector was materials and the worst performing sector for the second straight week was telecommunication services. In the headlines this week, Goldman Sachs reported second quarter earnings of $4.93 per share, which trumped analyst estimates of $3.65 per share. The company attributed the strong quarter to record quarterly revenues in trading and stock underwriting.

CORPORATE BONDS _____________________________________________________________

• Investment grade primary activity was quiescent once again as second quarter earnings dominated investors’ attention. Notable deals this week included Carefusion, a spinoff of Cardinal Health, which came to the market with a $1.5 billion three-tranche deal that priced around +300 to Treasuries and Goldman Sachs who tapped the market with a $1 billion three-year deal priced at +212.5 over the 3-year Treasury after they reported better-than-expected second quarter earnings. We expect issuance to remain light throughout earnings.
• Investment grade corporate spreads tightened most of the week on the heels of several factors. Higher overall yields, decent earnings and lack of issuance all contributed to tighter spreads. CIT’s fiasco this week did not have a material negative effect on credit spreads. CIT bonds have been without a doubt the most traded name this week; however, broker and bank securities have tightened due to strong second quarter results from Goldman and JP Morgan. The Barclays Credit Index Option-Adjusted Spread (OAS) finished the week at +267, tighter by 6 basis points. Financials tightened by 5 basis points (banks -9, insurance flat); industrials tightened by 9 basis points (telecom -16, consumer non-cyclical -6, Basic Materials -20, Capital Goods -3, Energy -5); and utilities tightened by 9 basis points.

MORTGAGE-BACKED SECURITIES ________________________________________________
• Mortgages outperformed Treasuries as yields drifted higher back to the middle of the recent trading range. Agency 30-year mortgage spreads compressed 10 basis points to their narrowest levels of the summer. Mortgages also enjoyed a favorable environment for risk taking as equity and credit markets rebounded on better-than-expected economic data. Credit sensitive mortgage products shrugged off rating agency downgrades to rally ahead of this week’s subscription on the legacy Term Asset-Backed Loan Facility (TALF) assistance program. The 30-year current coupon versus the 30-year Treasury closed at 96 basis points.

MUNICIPAL BONDS _____________________________________________________________
• The tax-exempt yield curve steepened this week, with shorter-maturity bond yields falling 5-10 basis points and yields on longer maturity bonds rising slightly. Municipal bond yields, especially in the front end of the yield curve, have moved well below comparable Treasury yields. For example, two-year AAArated GO bonds now yield 75 basis points or 0.75%-just 79% of the two-year Treasury yield at 0.95%. A few key factors continue to favor municipal bonds though, including a relatively light summer issuance calendar, the overall slump in municipal issuance compared to a year ago and fresh investor money pouring into municipal bond funds. Also, for the second consecutive week taxable municipal bonds, such as the California Build America Bonds (BABs), saw a surge in demand from investors.
• Moody’s Investors Service lowered the state of California’s credit rating by two notches from A2 to Baa1 on Tuesday afternoon. On Wednesday and Thursday, the state’s Build America Bonds (BABs) traded tighter in spread to Treasuries by about 20-30 basis points. Tax-exempt California State General Obligations’ spreads to AAA-rated GOs tightened by 5 basis points on the week. It is interesting to note that 70%+ of tax-exempt buyers are households, while 97% of CA BABs buyers at new issuance in April were institutional investors. This may explain the difference in trading activity between the two markets. While a budget plan would not solve California’s near-term cash flow problems, it could alleviate the cash crunch by allowing the State to enter the market and issue revenue anticipation notes (RANs) or revenue anticipation warrants (RAWs) instead of issuing IOUs to vendors.

• The notable new issuance this week was dominated by Build America Bonds deals. Highlights included the Illinois Municipal Electric Agency Power Supply System Revenue Bonds (A1/A+/A+) that offered yields of 240 basis points over comparable Treasuries in the 2039 maturity. The North Carolina Turnpike Authority (Aa2/AA/AA-) also issued a slate of $353 million BABs, coming to market at +240 basis points to comparable Treasuries in the 2039 maturity.

HIGH-YIELD BONDS _____________________________________________________________
• The generally positive second quarter earnings from the larger US financial institutions (Citibank, Goldman Sachs and JP Morgan) have benefited the equity markets, with major equity indices up 4-5% this week, but have not had a materially positive impact on the high yield market. The financial uncertainty surrounding CIT (a major component of high yield indices since being downgraded to high yield status in May 2009) has negatively impacted high yield bond holders who own the CIT bonds. In addition to the issues surrounding CIT, the high yield market is cautiously viewing the developing second quarter earnings season. While the broad high yield market still appears to be flush with cash, inflows into high yield mutual funds have been exhibiting slowing trends over the past few weeks and were less than $100 million this week. The new issue market has also exhibited a moderating trend, with less than $1 billion in new issue high yield bonds pricing this week and the forward calendar of new deals relatively thin.

INTERNATIONAL MARKETS:

WESTERN EUROPEAN EQUITIES __________________________________________________
• European stocks went up this week. The sectors with the best performance were autos & parts (+18.4%) and basic resources (+14.1%). BMW (+13.7%) has decided to accelerate production after cutting the work week at its German plants. Porsche (+22.8%) seems to have solved the biggest hurdles in terms of their outstanding debts and a solution in the takeover action with VW (19.6%) is in sight. Xstrata, the world’s fourth-largest copper producer, climbed +18.6% due to merger activities. Stabilizing metal prices contributed to a good performance in the entire sector.
• The worst performing sectors were technology (+3.6%) and travel & leisure (+3.6%). Nokia’s
performance (-6.7%) was in line with expectations, but the company disappointed with a negative outlook due to price competition in the sector. Opap (-4.1%), a gambling company, missed its profit target after Greece imposed new taxes on gaming. Accor (-1.8%), Europe’s largest hotel operator, suffered from reduced business travel during this recession.

EASTERN EUROPEAN EQUITIES __________________________________________________
• The CECE index of equities traded in Central Europe (Czech Republic, Hungary, and Poland)
gained +9.2% this week, while the Russian stock index RTS went up +10.7%.
• Hungary sold its first debt to foreign investors since last year’s International Monetary Fund (IMF) bailout, taking advantage of the world’s strongest bond market rally to borrow €1 billion. Investors expressed interest to buy €2.9 billion of securities, nearly six times the €500 million the government initially planned to raise. The government lured buyers by offering a yield of 6.79% on a five-year debt, more than 5.9% over existing euro-bonds due in May 2014. Hungary became the first European Union nation to receive IMF aid last year as its bond market froze and a slide in the forint pushed up refinancing costs on foreign-currency loans.

GLOBAL BONDS AND CURRENCIES _______________________________________________
• Major non-US sovereign bond markets closed the week 5-10 basis points weaker following gains in global stock markets. The US Federal Reserve’s relatively upbeat assessment of the US economic outlook and news of a pick-up in the pace of economic growth in China in Q2 dampened global bond market sentiment, although the week’s European and UK inflation data provided some relative support for these markets and allowed them to outperform US Treasuries. The flash estimate of Euro-zone June inflation showed inflation turned negative last month, declining 0.1% on an annual basis, while the UK’s annual inflation rate dipped to 1.8%, below the Bank of England’s (BoE) 2% target, for the first time this cycle. Gilts were also assisted by speculation that the BoE may extend its quantitative easing program at its next policy meeting and by a further rise in UK unemployment to an all time record. In Japan, Prime Minister Aso announced a general election at the end of August, which is expected to end
the ruling Liberal Democratic Party’s domination of post-war Japanese politics. But this had little impact on Japanese government bonds (JGBs). Neither did the Bank of Japan’s decision to maintain its zero interest rate policy and extend its quantitative easing measures by three months to end December. Japanese government bonds finished the week a couple of basis points weaker across the curve.
• In currency markets the US dollar was marginally weaker against the Euro and Sterling, undermined by the improvement in risk appetite and news that China’s foreign exchange reserves reached a new high in the second quarter. The easing in risk aversion hurt the yen more and it closed the week about 0.5% lower against the greenback.

EMERGING-MARKET BONDS ____________________________________________________
• Emerging market dollar-pay debt spreads tightened this week on the back of strong economic data in China and better-than-expected US corporate earnings that led to a rally in equities. Increased investor risk appetite supported new bond supply from several state-owned companies in Colombia, Qatar, Korea and Kazakhstan.
• Monetary easing continues in emerging markets but central banks are signaling the end of the cycle is close. The Central Bank of Turkey reduced the key overnight borrowing rate by 50 basis points to 8.25% but the statement was less dovish than at the previous meeting. Mexico also cut the repo rate by 25 basis points to 4.50% and indicated it would pause going forward to monitor economic data.
• Moody’s raised South Africa’s foreign currency debt rating to A3 from Baa1, citing sound
macroeconomic policies and a build-up in foreign exchange reserves which stood at US$ 35.76 billion atthe end of June.

NEXT WEEK'S ECONOMIC RELEASES
July 19 German Producer Price Index
July 22 Mortgage Applications
July 23 Existing Home Sales, Poland June Net Inflation Figures
July 24 University of Michigan Consumer Confidence, German IFO Business Climate Index

Market Reflections 7/16/2009

Continuing talk over strong results at Intel and the prospect of improving PC demand continued to push the stock market higher where the S&P 500 rose nearly 1 percent to just over 940. IBM and Google added to the upbeat run of earnings, both easily beating estimates in news after the close.

Economic data was mixed: big improvements in jobless claims were dismissed as seasonal quirks tied to GM and Chrysler; Treasury International Capital data showed a net outflow of foreign investment but Chinese investment in Treasuries continues to rise; the Philadelphia manufacturing sector is improving for the most part but very slowly. Perhaps the clearest news was a solid gain in the housing market index which more and more is pointing to recovery for the sector.

Reports that CIT Group, refused a bailout and poisoned by toxic assets, will file for bankruptcy tomorrow had little effect on the market. Talk was optimistic, noting that the government must be confident that the financial sector and economy can comfortably absorb the failure. A member of the S&P 500, CIT is a major business lender, or at least apparently was

Market Reflections 7/15/2009

Strong earnings from Intel and Goldman Sachs together with an upbeat economic assessment in the latest FOMC minutes sent stocks back to levels last seen in late June, before that month's disappointing jobs report. In a big rally, the S&P 500 rose 3% to just over 930. Economic data was less upbeat headed by another decline in industrial production but also including an Empire State report where declines are becoming marginal. Money moved into commodities with oil ending under $62 and gold ending over $940. Demand for the safety of the dollar fell back, another reason for the gain in commodities. The dollar index ended at 79.30, down 0.7 percent. Money also moved out of Treasuries where the 10-year yield rose 12 basis points to 3.59 percent

Market Reflections 7/14/2009

Strength in retail sales and exceptionally strong earnings at Goldman Sachs reawakened spirits which have been dulled by two months of disappointing economic news and consolidation in the stock market. The S&P rose 0.5 percent to just over 905. Gains would probably have been stronger if not for some soft spots in retail sales including a fourth consecutive month of declines outside of autos and gas stations, two categories that were very strong in June. Demand for safety eased making for a 10 basis point rise in the 10-year Treasury yield to 3.45 percent. Most commodities were steady with oil at $59.50 and gold at $925. Base metals, however, jumped on news of a rise in EMU industrial production. Copper rose 5 percent to $2.29/lb.

Market Reflections 7/13/2009

Talk that Goldman Sachs will post strong earnings tomorrow gave a big lift to stocks on Monday where the S&P rose 2.5 percent to just over 900. Until today safety had been the watchword, and the gains in stocks dried up demand for Treasuries where yields were up as much as 6 basis points on the 10-year to 3.36 percent. Commodity prices didn't show much reaction with oil steady under $60 and gold firm at $920. The dollar index dipped 0.2 percent to 80.01.

Weekly Market Update : Payden & Rygel

Week ending July 10, 2
Market Levels
Friday* Last Week Dec. 31
2008 1 Yr Ago
Dow Jones Ind. Avg. 8,115 8,281 8,776 11,229
S&P 500 876 896 903 1,253
Nasdaq 100 1,748 1,797 1,577 2,258
The Russell 2000 477 497 499 670
DJ STOXX Europe 197 204 198 278
Nikkei Index 9,287 9,816 8,860 13,067
Fed Funds Target 0-0.25% 0-0.25% 0-0.25% 2.00%
2-Year U.S. Treasury Yield 0.89% 0.99% 0.77% 2.41%
10-Year U.S. Treasury Yield 3.29% 3.50% 2.21% 3.80%
U.S.$ / Euro 1.39 1.40 1.40 1.58
U.S.$ / British Pound 1.62 1.63 1.46 1.98
Yen / U.S.$ 952.36 96.04 90.64 107.07
Gold ($/oz) $911.84 $932.25 $882.05 $947.66
Oil $59.22 $66.73 $44.60 $141.65
*Levels as of 12:40 a.m. PST

Market Returns
Year to Date (1/1/09 - 7/10/09)
Dow Jones Industrial Avg -7.53%
S&P 500 -2.98%
NASDAQ 10.84%
Russell 2000 -4.47%
MSCI World Index 0.69%
DJ STOXX Europe 600 (euro) 2.90%
Year to Date (1/1/00 - 7/1/09)
90 Day T-Bill 0.13%
2-Year Treasury 0.66%
10-Year Treasury -7.80%
ML High Yield Index 29.06%
JP Morgan EMBI Global Diversified 15.91%
JP Morgan Global Hedged -0.65%


ECONOMIC RELEASES


July 6
SM Non-Farm Manufacturing –The Institute for Supply Management’s index of non-farming businesses rose to 47 in June, up from 44 in May and beating forecasts of 46. Though readings less than 50 still signal a contraction, the index shrank at its slowest pace in nine months.
July 8
IMF World Economic Outlook – The International Monetary Fund raised its forecast for the 2010 global growth rate to 2.5%, compared with its April projection of a 1.9% rate. Despite this upward revision, IMF officials warned that the recovery would be weak and protracted.
German Industrial Production – German industrial output surged the most in almost 16 years in May, adding to signs that the recession in Europe’s largest economy is reaching its end. Production rose 3.7% from April, when it dropped 2.6%; this was the biggest gain since August 1993. Economists had predicted a gain of 0.5%.
July 9
Wholesale Inventories – Inventories at U.S. wholesalers fell for the ninth consecutive month, dropping 0.8% in May due to increased sales. The decrease in stockpiles was smaller than forecast and followed a revised 1.3% drop in April. July 10
University of Michigan Consumer Confidence - The University of Michigan index of consumer sentiment fell to its lowest level since March, dropping to 64.6 in July, down from 70.8 In June. The significant decrease reflects concerns about the rising unemployment level and signals a possible contraction in consumer spending even as the economy begins to recover.

Trade Balance – The U.S. trade balance unexpectedly narrowed in May, dropping 9.8% in the month to its lowest level in a decade. The deficit fell to $26 billion from $29.2 billion in April. Euro Zone OECD Leading Indicator – The Organization for Economic Co-operation and Development (OECD) said that its composite leading indicator (CLI) for the OECD-area rose to 94.0 in May from 93.2 in April. The euro zone showed the strongest increase with 1.0%.


COMMENTARY

OVERVIEW




This week, the International Monetary Fund (IMF) upgraded its global growth forecast to 2.5% in 2010, compared with its April projection of only 1.9%. Asia’s developing economies, predicted to grow at 7.0% in 2010, will likely rebound most rapidly, though a sustained recovery will depend on more advanced economies. Output in the United States and Japan is expected to stabilize in the second half of 2009 and gradually increase in 2010. A euro zone recovery will likely lag the rest of the world due to the region’s rising unemployment level and weak banking sector. The improvement in global financial conditions is largely due to aggressive government intervention: central banks have slashed interest rates to record lows and spent billions in an effort to prop up the faltering financial sector and raise demand. While many countries, especially Germany, are hoping to end their stimulus programs in the near future, the IMF warned that “policymakers must continue the strong monetary, fiscal and financial policies that they have put in place. If they do not, there is a great risk that the recovery falters." The IMF also predicted that unemployment levels will continue to rise through the end of 2010, further underscoring the view that the return to pre-recession conditions mandates sustained public intervention.


US MARKETS
Treasury Bonds

The recent rally in US Treasuries intensified this week on the back of the return of risk aversion and very strong auction results. Very weak unemployment data at the end of last week triggered a new wave of pessimism about the global economic outlook and led to further decline in equity markets across the globe, keeping the Treasury market well bid across all maturities. On Wednesday, the Treasury rally further strengthened after the 10 year Treasury auction stopped 5.5 basis points (bps) through market levels. As a result, short positions unwound, trade curves steepened, and the fear of convexity hedging increased the demand for Treasuries into Friday’s close.

Large-Cap Equities

The stock market fell for the fourth consecutive week as commodity prices continued to trend lower and fears arose that economic recovery will be slower than expected. The S&P 500 index fell about 2% for the week with large-cap stocks outperforming small-cap stocks and large-cap growth stocks outperformed large-cap value stocks. The best performing sector was health care and the worst performing sector was telecommunication services. In the headlines this week, Amgen Inc. (AMGN) announced their drug Denosumab tested better than their rivals in treating breast cancer patients with bone disease. Shares of AMGN jumped almost 14% on the positive news. In other news, Google Inc. (GOOG) revealed plans to launch a new operating system next year to directly compete against Microsoft Corporation’s flagship product Windows. Shares of GOOG rallied almost 2% on the news.

Corporate Bonds

Investment grade primary activity was dormant with only a handful of issuers tapping the market this week. This was expected ahead of earnings reports which will begin in earnest next week. With treasury yields falling sharply and a subdued equity market, it is a testament to the demand for credit exposure that spreads continue to tighten. There has been a limited amount of companies pre-announcing second quarter earnings, but most expect an aggregate improvement.

Investment grade corporate spreads tightened vaguely during a week where new issuance was almost non-existent and secondary trading kept investors jostling for yield. These two factors will most likely keep spreads grinding tighter throughout the month in spite of lower summertime activity. The Barclays Credit Index Option-Adjusted Spread (OAS) finished the week at +273, tighter by 1 bp. Financials tightened by 1 bp (banks flat, insurance +1), industrials remained unchanged (telecom +1, consumer non-cyclical flat, basic materials flat, capital goods -3, energy flat), and utilities remained unchanged.

Mortgage-Backed Securities

Mortgages lagged the Treasury rally on higher volatility, a pickup in origination volume, and credit market apathy. The ‘green shoots’ of the spring rally are looking more like weeds. As yields moved aggressively lower, agency mortgage spreads widened by 5-7 bps. This was an unfortunate turn of events, as the market was earlier enjoying the release of a favorably slow prepayment report. Within the mortgage sectors, lower coupons underperformed higher coupons on a duration-adjusted basis and Ginnie Mae mortgages recovered versus their conventional cousins. The thirty-year current coupon versus the 10-year Treasury closed at 105 bps.

Municipal Bonds

The municipal bond market started the second half of 2009 stronger, with tax-exempt bond yields moving sharply lower across the yield curve. In particular, from the 5-year maturity range out to 20-years, yields dropped 15 bps on the week. Five year AAA-rated GO bond yields reached 1.90%, 10-year yields hit 3.07% and 20-year bond yields fell to 4.12%. The tax-exempt yield curve is also modestly flatter from 2 to 20 years as investor demand has been piqued in the longer end of the market given that 2-year tax-exempt yields have dipped under 1%. In addition, longer taxable municipal bonds, such as the California Build America Bonds (BABs), saw a surge in demand from investors this week. A light calendar of new issuance, strong demand for bonds from flows into municipal bond funds and a rally in the Treasury market this week all helped give municipals a boost.

In terms of news, Fitch Ratings downgraded California GO debt from A- to BBB, citing the budget and cash flow situation. Speaking of which, the budget impasse continues in Sacramento—10 days after the start of the new fiscal year. Without a budget, the state cannot borrow in the capital markets. In fact, faced with bills to pay and not enough cash to meet all of the obligations, the State Controller this week began issuing IOUs—a form of deferred payment—to select payees. The state last issued IOUs when facing a cash crunch in 1992. Despite all this, California GO debt actually finished the week stronger.

Notable new deals this week include the $200 million California Infrastructure and Economic Development Bank - California Independent System Operator (CAISO) Corporation Project Revenue Bonds (rated A2/A) which offered a maximum yield of 5.88% in 2039. CAISO is a not-for-profit public-benefit corporation that charges fees for providing scheduling services for the market where buyers and sellers trade electricity—an essential service.

High-Yield Bonds

A level of uncertainty has crept back into the capital markets over the past three weeks, especially after the weaker-than-expected nonfarm payroll figures and the weak consumer confidence data. Major equity indices are off 7-8% from their mid-June 2009 highs and commodity prices (for example, crude oil) are significantly off their recent highs, as investors are beginning to fear that the expected economic stabilization may be further off than expected in April and May when the risk rally began. The high yield market is not immune to these market currents and has been softer over the past few weeks. Since mid-June, the Merrill Lynch High Yield Index is off 1.0%, which is small in the context of the asset class’s stellar second quarter performance. The high yield asset class continues to receive inflows, as reflected by the $329 million of inflows into high yield mutual funds this past week. In addition, the new issue market remains active, with close to $1 billion in new deals pricing this week including a $400 million deal for Regal Cinemas, one of the largest movie theater companies in the U.S.

INTERNATIONAL MARKETS


Western European Equities

European stocks went down this week. The sectors with the worst performance were insurance (-6.6%) and basic resources (-5.9%). Bad news about declining real insurance premiums put pressure on the entire sector. Big companies are being forced to reduce costs and outsource certain functions. Over seven companies lost more than 10%, led by Aviva (-18.0%). Basic resources was the second worst performer this week with Norsk Hydro ASA (-13.4%) leading the share plunge.

The best performing sectors were retail (-0.28%) and healthcare (-0.99%). The best performers in retail were Home Retail Group (+4.6%) and Next Plc (+4.2%). The healthcare sector remains a safe haven in a bearish week. Glaxosmithkline (+2.9%) gained after a takeover of Bristol Myers Squibb divisions in the Middle East and North Africa. News about the introduction of a new diabetes drug supported Astrazeneca’s shares (+1.1%).

Eastern European Equities

The CECE index of equities traded in Central Europe (Czech Republic, Hungary, and Poland) lost 3.2% this week, while the Russian stock index RTS went down 13.0%.

Russia’s currency, the ruble, weakened the most since February as oil prices dropped, Russia cut interest rates, and the budget deficit widened in the country’s worst economic slump in a decade. The ruble depreciated as much as 3.1% to 32.76 per dollar and the Micex Index sank to a three-month low.

Oil (Russia’s main export) fell 1.5% to $59.48 a barrel, bringing this week’s drop to 11% as concerns deepened that a prolonged global economic slowdown will dampen demand for fuel. Lower oil revenue means that less foreign currency will flow into Russia, which leads to a bigger budget deficit and reduces the central bank’s ability to defend the ruble.

Global Bonds and Currencies

Over the past week major sovereign bond markets extended the previous week’s gains as financial markets’ confidence in the global economic outlook waivered and equity markets and commodity prices dipped accordingly. The weaker than expected US payroll data released late in the previous week was one trigger for these jitters. Another was the cautious note struck by the IMF in its latest round of forecasts, published in the past week. Investors are looking anxiously towards the forthcoming US second quarter earnings season and market sentiment is likely to remain fragile until this hurdle is cleared. The past week’s data provided scant reassurance meantime. Industrial production rose in Germany, but dipped in the UK, while the third successive monthly decline in Japanese machinery orders raised doubts about the demand for exports from the entire Asian region. All these factors combined to drive government bond yields several basis points lower across the curve in Europe and Japan, in sympathy with moves in the US Treasury market. Short-dated UK Gilt yields also declined. But longer-dated Gilts bucked the trend, rising about 10 bps on the week, after a surprise move by the Bank of England at its monthly policy meeting. Instead of extending its quantitative easing program by a further £25 billion, up to its limit of £150 billion, as was widely tipped in the media, it instead suspended it from next month, without providing any insight into its future plans. The Bank said only that it will review the program at its August meeting, in light of its latest inflation projections, which will be available then.

In currency markets, yen strength was the week’s main theme. It rose to a 5-month high against the US dollar as risk aversion returned. Japan’s current account surplus recorded its fifth successive improvement and technical factors turned supportive. Risk aversion also assisted the US dollar, especially against commodity currencies, as oil and other commodity prices declined. However the dollar closed the week only marginally firmer against the euro and sterling.

Emerging-Market Bonds

Emerging market dollar-pay debt spreads were wider this week, as investors turned more cautious on the back of some weaker-than-expected economic data. In turn, US Treasury yields rallied, which also contributed to the widening in credit spreads.

Oil exporting countries, including Russia, felt the negative impact of sharply declining oil prices this week as crude oil prices fell 11%. As a consequence, Russian assets sold off late in the week, including its currency the ruble, which depreciated the most in five months.

The Central Bank of Chile cut interest rates by 25 bps from 0.75% to 0.50%, in line with markets expectations. The Central Bank explicitly stated that interest rates will stay at a low level for a prolonged period of time. On the back of this announcement and also the decline in commodity prices this week, local rates were unchanged and the Chilean peso depreciated.

NEXT WEEKS ECONOMIC RELEASES


July 14 Retail Sales, Producer Price Index, Euro Zone Industrial Production, German ZEW Indicator of Economic Sentiment

July 15 Consumer Price Index, Euro Zone Inflation

July 16 Turkey Consumer Confidence

July 17 Housing Starts

©2009 Payden & Rygel. All rights reserved.

Market Reflections 7/10/2009

A drop in imports and a drop in consumer sentiment are the latest bad news on the economy, offsetting a rise in exports. The S&P 500 fell 0.4 percent to just under 880. Many are warning that investors will not be turning to the dollar this time around should the economy end up bouncing lower. Still, the dollar rose as stocks fell, with the dollar index up 0.4 percent to 80.27. Treasuries were also in demand with the 10-year yield down 11 basis points to 3.30 percent. Commodities moved mostly lower including oil, which fell 25 cents and under $60 at $59.75. Gold held firm just over $910.

Market Reflections7/9/2009

Markets were steady Thursday as a sizable drop in initial jobless claims was offset by very weak chain-store reports for June. The drop in initial claims, which extends a trend, points to meaningful relief in monthly payroll losses. But chain-store results point to a meaningful decline in June retail sales, one that would mark weak results in three of the last four months.

The S&P ended 0.4 percent higher at just over 880, while the dollar index fell 1 percent to 79.86. The dip in the dollar, tied to short-covering gains in the euro, helped stem further losses in commodities where crude was little changed at $60 as was gold at $912. Demand for an $11 billion 30-year bond auction was moderate. The 30-year yield ended at 4.27 percent, 3 basis points under the auction's high rate.

Market Reflections 7/8/2009

The loss was mild, only 0.2 percent on the S&P 500, but stocks were once again on the defensive Wednesday awaiting Thursday's jobless claims and chain-store data as well as the roll out of second-quarter earnings. Aluminum giant Alcoa, as always, kicks off the season, posting better-than-expected results after the close but results that still show deep declines.

Economic news in the session was scarce though MBA's weekly mortgage applications data showed definite improvement, good news but one week is only one week. It was bad news that hit the oil sector as weekly fuel inventories shot up. Oil fell more than $2 to end just above $60. The tide of pessimism is hurting gold where jewelry makes up three quarters of the demand. Gold tested $900 to end at just under $910. Money moved out of other commodities as well.

Pessimism and the demand for safety is good business for Treasuries and today's 10-year note auction was the best ever. The 10-year yield fell 16 basis points on the day to end at 3.29 percent.

Market Reflections 7/7/2009

Pessimism over the economic outlook extended into Tuesday's session, pulling down the S&P 500 by 2 percent to end just over 880. The pessimism isn't tied to this week's economic data, what little there has been, but to last week's that included the disappointing employment report and also disappointing consumer confidence data.

Oil fell another $2 to $62.50 amid rising talk that $55 to $50 may be where things settle, at least in the short term. Firmness in the dollar is also hurting oil and other commodities, which rallied through the second quarter on concern over dollar weakness and related inflation. The dollar index rose 0.4 percent to 80.69. Demand for long Treasuries firmed slightly as money moved out of the stock market. The 10-year yield fell 7 basis points to 3.44 percent

Market Reflections 7/6/2009

Last week's disappointing economic data, especially employment and including consumer confidence, finally sank in Monday. That and the holiday thin trading conditions made for a mostly bad day for the bulls especially in the commodity markets. Oil fell $2 to end at $64.50 with grains and silver among other big losers. But gold held mostly firm, ending at $925 and benefiting from wide talk of persistent systemic risk in the financial sector. News that seven more U.S. banks had failed over the weekend didn't help, bringing the year's total to 501 vs. only 25 last year.

But stocks did end slightly higher and just under 900 on the S&P, boosted as were other markets by a solid ISM non-manufacturing report that points solidly at recovery in the third quarter. The dollar index ended 0.1 percent lower at 80.40. Treasury yields were little changed.

Week ending July 2, 2009 Market Update

COMMENTARY
Overview



The US economy lost 467,000 in June, disappointing investors who had expected a smaller decline. The ongoing deterioration in the labor market raises the risk that the stimulus-driven rebound in household purchases may not be sustainable. This marks the first time in four months that the number of jobs lost rose from the prior month. The number of jobs shed in 2009 now totals nearly 3.4 million, more than the 3.1 million lost in all of 2008. The unemployment rate continues to inch towards double digits, climbing to 9.5% in June. Manufacturing and construction have posted the most job losses, cutting 1.9 million and 1.3 million jobs, respectively, since the recession began in December 2007. Though the government fiscal stimulus package has bolstered household incomes, Americans remain cautious, choosing to use most of the money to rebuild savings. Indeed, personal savings as a share of disposable income rose to 6.9% in May—its highest level since 1993.




Treasury Bonds

Treasury yields rallied this week, led by shorter maturities as investors took solace in the idea that the Federal Reserve would be accommodative with monetary policy for as long as it took to steady the economy. Previous uncertainty about the extent of government support for Treasury yields have abated with the rally. A weaker non-farm payroll report coupled with lower equities reinforced the rally in interest rates. Agency spreads, on the other hand, widened modestly as investors seek more compensation for accepting agency credit risk.

Large-Cap Equities

The stock market ended the week lower during this holiday shortened week. The equity market fell for the third consecutive week on light volume due to disappointing economic data and lower commodity prices. The S&P 500 index fell about 2% for the week with large-cap stocks outperforming small-cap stocks and large-cap growth stocks outperforming large-cap value stocks. The best performing sector was consumer staples and the worst performing sector for the second consecutive week was energy. In the headlines this week, General Mills, Inc (GIS) raised their quarterly dividend and reported fourth quarter earnings of 86 cents per share, beating analyst estimates of 81 cents per share. The company attributed the strong quarter to improved gross margins. Shares of GIS rallied almost 4% on the positive news.

Corporate Bonds

Investment grade primary activity was surprisingly active once again given month/quarter-end falling on a compressed end of the week. This week’s key issue came from Oracle Corp who issued a $4.5 billion deal across the curve. Similar to most recent deals, it was oversubscribed and performed well after issuance. The payroll number today did not cause spreads to sell-off as most market participants headed out the door early for the long weekend.

Investment grade corporate spreads tightened most of the week despite a worse-than-expected payroll number. Secondary trading was beyond doubt in the back seat this week as the new issue market seemed full of zip for a shortened week. The Barclays Credit Index Option-Adjusted Spread (OAS) finished the week at +274, tighter by 4 basis point (bps). Financials tightened by 10 bps (banks -8, insurance -21), industrials tightened by 2 bps (telecom flat, consumer non-cyclical -3, basic materials -5, capital goods -8, energy -1), and utilities tightened by 5 bps.

Mortgage-Backed Securities

Mortgages outperformed Treasuries in a low volume, holiday shortened week. The rally in Treasuries coupled with active buying by the US Government and a drop in volatility helped agency pass-through spreads tighten by 5-7 basis points. Mortgage originations were readily absorbed by market participants and foreign central banks offered incremental support. The headline story of the week was the Obama Administration call to offer refinance relief to borrowers that are underwater on their mortgages by easing conforming loan-to-value guideline restrictions from 105% to 125%. This will boost, but only on the margin, prepayment speeds for outstanding Fannie Mae and Freddie Mac mortgages. Market reaction was surprisingly benign and more focused on the macro environment of economic data and interest rate direction.

Municipal Bonds

A quiet week in the municipal bond market saw bond yields move lower to conclude the second quarter of 2009 and the fiscal year-end for state and local government issuers. Cash flowing into municipal bond funds and the reinvestment of proceeds from maturities helped bolster the market. Two-year AAA-rated GO bond yields ticked down 4 bps to 0.94%. Ten-year AAA-rated GO bond yields also moved 4 bps lower, to 3.21%. California again dominated headlines, this time with news that the state is set to issue IOUs (“registered warrants” in official jargon) to select payees in order to meet obligations under California’s strained cash situation. The last time the state was forced to issue IOUs was 1992. Lawmakers have yet to reach a solution to the looming budget problem, forcing the Governor to invoke a fiscal emergency. Despite all this, on the week, the difference in yield on CA GOs and AAA GOs actually tightened by 3 basis points.

Due to the holiday-shortened week, there were no major new deals to note. In fact, only 3 deals breached the $100 million threshold in terms of deal size, including the $220 million Orange County John Wayne airport revenue deal. The deal offered a maximum yield of 5.55% in 2039 for the AA-/Aa3 credit. The new issuance calendar for next week is thin as the summer doldrums appear to have descended over the market.

High-Yield Bonds

The high yield market completed the second quarter of 2009 as its best quarter in the past 25 years of the modern high yield market. For the second quarter, the Merrill Lynch High Yield Index was up a stunning 22.5%, with performance mostly driven by the more risky CCC-rated segment of the market. CCC-rated bonds, which comprise approximately 25% of the broad high yield market, were up 45% during the second quarter and benefitted from the risk rally which began in mid-March 2009. The CCCs are scattered across industries but are concentrated in the cyclical industry sectors, such as automotives, chemicals, paper/packaging, retail and restaurants. The industry sector that led the market was the broad financial sector (banks, finance and insurance companies), which was up over 46% on a blended basis during the second quarter. The high yield financial sector, a largely BB/B rated sector, has grown dramatically during the course of 2009, as the rating agencies have aggressively downgraded the hybrid debt of companies such as Bank of America, Citigroup and Royal Bank of Scotland (RBS) amongst numerous others. The financial industry sector has grown from less than 4% of the broad high yield market in early 2009 to now over 12% posts the ratings downgrades. The high yield financial sector has benefitted from the strong equity market rally in financial stocks in April and May and the positively viewed release of the stress test results in early May by US regulators.

High yield issuers have been taking advantage of the market recovery in the second quarter to issue new debt at more attractive price levels. New issuance in June totaled $16 billion, and while this figure is down from May’s levels it represents the second best monthly volume over the past 2 years. Year-to-date 2009, high yield issuers have raised $60 billion, 39% ahead of the first 6 months of 2008.




Western European Equities

European stocks went down this week. The sectors with the worst performance were autos & parts (-0.6%) and utilities (-0.6%). A bad outlook for the entire autos & parts sector and especially the negative sales numbers in the US market were reasons for the sector’s poor performance. Peugeot declined the most with -5.5%. In the utility sector, E.on stock drove down the sector with a decline of 3.6%.

The best performing sectors were banks (+2.0%) and oil & gas (+2.0%). The rally in the banking sector was caused by a new Bad Bank model in Germany, a positive stress test for Greek banks, and a new loan program of the Swedish Riksbank. The week’s best performer was Commerzbank (+12.4%). In the oil & gas sector, Acergy (+13.4%) and Petrofac awarded big contracts pulling the entire sector upwards. Statoil gained after the announcement that they start commercial operations of their gas cavern in the UK.

Eastern European Equities

The CECE index of equities traded in Central Europe (Czech Republic, Hungary, and Poland) gained +0.4% this week, while the Russian stock index RTS went up +0.5%.

Russia’s international reserves, the world’s third-largest stockpile behind Japan and China, grew $3.4 billion last week after a rise of $500 million in the previous week, as capital outflows stopped and the central bank refrained from currency-market intervention. The central bank has curtailed its purchases of foreign currency as is moving toward a free float of the ruble. Between August and January, the central bank drained over a third of the country’s reserves to stem a 35% devaluation of the ruble to the dollar.

Meanwhile, emerging Europe’s central banks have room to lower interest rates as inflation slows, according to analysts. Inflation has slowed in eastern Europe as the global recession started, sapping demand for the region’s exports and squeezing access to credit and foreign investment. While recession and disinflation will continue to drive central bank policy, it is expected that central banks in emerging Europe maintain an easing bias.

Global Bonds and Currencies

The major non-US government bond markets closed the week on a rallying note. The first half of 2009 was a rollercoaster as expectations of a global economic recovery have gone through several iterations – from Armageddon to “green shoots” to now a potential “W” shaped economic cycle. As the implementation of the global stimulus throughout 2009 has steadied the deterioration of economic data, central banks are coming to grips with the fact that accommodative monetary policies (overnight interest rates at approximately 0%) will most likely have to stay in place well into 2010. The European Central Bank, despite earlier protestations that inflation was their primary concern, announced at its July policy meeting that “the current rates are appropriate” with the additional innuendo that the current 1% level would not necessarily be the low and further rate cuts are a possibility. The front end of global yield curves outperformed their 10-year yield counterparts by roughly 5 bps.

Currency directionality remained becalmed as the Japanese yen, euro, and British pound were all unchanged versus the US dollar for the week. As overnight interest rate parity has been achieved, the next major driver of the USD trend either stronger or weaker will be the market’s assessment of relative stability of individual country balance sheets (fiscal stimulus, bond supply, growth prospects to name a few). As the capital markets seek the answers of when the global recovery will become real, currencies have adopted the same range-bound mentality recently observed in bond yields and equity markets.

Emerging-Market Bonds

Emerging market dollar-pay debt spreads were tighter this week, although disappointing employment data in the US caused risk markets to retrace some of the gains from earlier in the week.

In Argentina’s midterm elections, the Kirchner coalition lost key races and several seats in congress. As a result, former President Nestor Kirchner resigned as the head of the Peronist party. Argentine assets including sovereign bonds were broadly stronger as a result of the market friendly outcome of the elections.

In Brazil, industrial production data release this week showed an increase of 1.3% in May, its fifth monthly gain and latest signal that the country may be recovering from the recession. Local rates and currency were roughly unchanged over the week.





ECONOMIC RELEASES



June 30S&P/Case Shiller Home Price Index – The 20-city composite index fell 18.1% year-over-year, less than the predicted 18.6% decline. The easing of the home-price slide underscores signs that the economic contraction may be easing.
Consumer Confidence – Confidence among US consumers dropped unexpectedly, with the index decreasing to 49.3 in June from 54.8 in May. Still, these figures remain significantly higher than February’s record low of 25.3.
July 1ISM Manufacturing – The Institute for Supply Management’s factory index rose to its highest level since August 2008, increasing 4.7% to 44.8 in June from 42.8 in May. Though readings below 50 signal a contraction, a third-quarter recovery in manufacturing is still expected.
Construction Spending – US Construction Spending fell by 0.9% in May, surprising economists who forecast a 0.6% decline. This decrease follows April’s revised 0.6% gain and can be largely attributed to a weak residential real-estate market.

Pending Home Sales – The index of signed purchase agreements rose by 0.1% in May, the fourth consecutive increase and a sign that the housing market may be recovering. The index was up 4.6% on a year-over-year basis.

Euro Zone Manufacturing PMI – The euro zone PMI rose to 42.6 in June—a 9-month high. It was above the flash estimate of 42.4, however, the index is still below the 50-mark, suggesting a contraction in the sector.
July 2Unemployment Rate – The US economy shed 467,000 jobs in June, pushing the unemployment rate to 9.5%, its highest level since August 1983. The figure follows a revised 322,000 drop in May and far exceeded expectations of a 365,000 decrease in payrolls for the month.
Euro Zone Unemployment – The euro zone seasonally-adjusted unemployment rate was 9.5% in May 2009, compared to 9.3% in April and 7.4% in May 2008. This is the highest rate in the euro zone since May 1999.

Euro Zone Interest Rate – The European Central Bank (ECB) kept key interest rates steady at a record 1.0%. ECB President Jean-Claude Trichet signaled that the ECB has no immediate plans to cut interest rates again and said the euro region’s economy will start to recover in the middle of 2010.

©2009 Payden & Rygel. All rights reserved


Week ending July 2, 2009


MARKET LEVELS


Friday* Last Week Dec. 312008 1 Yr Ago
Dow Jones Ind. Avg. 8,325 8,472 8,776 11,216
S&P 500 902 920 903 1,262
Nasdaq 100 1,802 1,830 1,577 2,251
The Russell 2000 500 509 499 672
DJ STOXX Europe 204 205 198 281
Nikkei Index 9,876 9,796 8,860 13,286
Fed Funds Target 0-0.25% 0-0.25% 0-0.25% 2.00%
2-Year U.S. Treasury Yield 0.98% 1.13% 0.77% 2.58%
10-Year U.S. Treasury Yield 3.47% 3.54% 2.21% 3.96%
U.S.$ / Euro 1.40 1.39 1.40 1.59
U.S.$ / British Pound 1.64 1.64 1.46 1.99
Yen / U.S.$ 95.95 96.13 90.64 106.00
Gold ($/oz) $931.33 $939.25 $882.05 $945.15
Oil $67.02 $69.63 $44.60 $143.57
*Levels as of 12:40 a.m. PST

MARKET RETURNS
Year to Date (1/1/09 - 7/2/09)
Dow Jones Industrial Avg -5.14%
S&P 500 -0.17%
NASDAQ 14.24%
Russell 2000 0.15%
MSCI World Index 5.72%
DJ STOXX Europe 600 (euro) 2.90%

Year to Date (1/1/00 - 7/1/09)
90 Day T-Bill 0.12%
2-Year Treasury 0.42%
10-Year Treasury -8.90%
ML High Yield Index 29.35%
JP Morgan EMBI Global Diversified 15.94%
JP Morgan Global Hedged -1.12%

Looking Ahead: Week of July 6 through 10

The road to recovery was bumpy this past week and occasional weeks like this should be expected given that the projected recovery is forecast to be sluggish. While the worsening in the rate of job loss is disappointing, net it still looks like the recession is bottoming soon. But one should keep in mind that the vast majority of economists expect employment to recover significantly after the overall economy.

There is just one market moving indicator this week – international trade on Friday. But after last week’s reversals in the jobs report and consumer confidence index, markets will likely pay more attention than usual to the unemployment claims and consumer sentiment reports.

Employment Situation

Released on 7/2/2009 8:30:00 AM For June, 2009
Prior Consensus Consensus Range Actual
Nonfarm Payrolls - M/M change -345,000 -350,000 -435,000 to -225,000 -467,000
Unemployment Rate - Level 9.4 % 9.6 % 9.5 % to 9.7 % 9.5 %
Average Hourly Earnings - M/M change 0.1 % 0.2 % 0.1 % to 0.3 % 0.0 %
Average Workweek - Level 33.1 hrs 33.2 hrs 33.1 hrs to 33.2 hrs 33.0 hrs


Highlights
The labor sector continued to contract in June with payroll jobs falling more than expected while the unemployment rate rose just marginally. Nonfarm payroll employment in June declined 467,000, following a fall of 322,000 in May and a decrease of 519,000 in April. The June contraction in jobs was worse than the market forecast for a 350,000 decrease. May and April revisions were up a net 8,000. Payroll losses were widespread.

By major categories, goods-producing jobs dropped 223,000 in June, led by a 136,000 drop in manufacturing employment with motor vehicles & parts down 27,000. Construction decreased 79,000 while natural resources & mining slipped 8,000. Service-providing payrolls dropped 244,000 in June after falling 107,000 in May. Weakness was especially pronounced in professional business services which plunged 118,000. Notable declines were also seen in trade & transportation, down 51,000, and in government, down 52,000.

On a year-ago basis, payroll jobs were down 4.1 percent in June, compared to down 3.9 percent the month before.

Wage inflation was nonexistent in June as average hourly earnings unchanged after rising 0.2 percent in May. The latest gain was lower than the consensus forecast for a 0.2 percent rise. The average workweek slipped to an extremely week 33.0 hours from 33.1 hours in May.

From the household survey, the civilian unemployment rate rose to 9.5 percent from 9.4 percent in May and was lower than the consensus forecast for 9.6 percent. But the number of unemployed hit 14.7 million, a record high. The June unemployment rate is the highest since 9.5 percent for August 1983.

The June employment report was only a little worse than expected net, taking into account the smaller-than-expected rise in the unemployment rate. Also, jobless claims released at the same time were not as bad as expected. Overall, the markets have to mull over a steep drop in payroll jobs in June versus an easing in claims at month end. Markets may go back and forth today, trying to decide the net impact of this morning's numbers. But at the release of the numbers, the focus was on the worse-than-expected payroll loss, with equity futures headed down.



Market Consensus Before Announcement
Nonfarm payroll employment in May was unexpectedly and significantly less negative than in recent months, falling only 345,000. The number of job losses has actually shrunk four months in a row since January's 741,000 plunge. But the bad news was that the civilian unemployment rate jumped another five-tenths to 9.4 in May. There is speculation that the spike in unemployment was largely due to college and high school graduates not being able to obtain employment and due to the difficulty in seasonally adjusting jobless numbers this time of year. The May rate was the highest since 9.5 percent last seen in August 1983. Wage inflation remained very soft in May as average hourly earnings posted only a 0.1 percent gain. Looking ahead, job losses are likely to continue in June but the key question is whether the rate of job loss will slow. Although many analysts expect the unemployment rate to continue to rise, we could get a modest technical reversal in June as there is not as much of a surge in college graduates entering the job market.

Definition
The employment situation is a set of labor market indicators. The unemployment rate measures the number of unemployed as a percentage of the labor force. Nonfarm payroll employment counts the number of paid employees working part-time or full-time in the nation's business and government establishments. The average workweek reflects the number of hours worked in the nonfarm sector. Average hourly earnings reveal the basic hourly rate for major industries as indicated in nonfarm payrolls. (Bureau of Labor Statistics, U.S. Department of Labor) Why Investors Care


Data Source: Haver Analytics

Market Reflections 7/1/2009

The ISM manufacturing report did show more positives than negatives but one of the negatives, or at least not one of the positives, was a fizzling out in new orders where momentum in prior months was strong. ADP's jobs call is also weak, pointing to little or no improvement in the June employment report which will be released tomorrow. Housing data struck out with mortgage applications, construction spending and pending home sales all flopping. Vehicle sales at day end were no better.

But stocks still got a lift from the ISM report which also showed deep inventory destocking, a surprise that optimists say points to even greater restocking ahead. The S&P rose 0.4 percent to 923. Oil ended at $69 with gold at $940, both in the middle of tight ranges.

Market Reflections 6/30/2009

The economic recovery's going to be a slow haul, a comment from the Conference Board that describes June's disappointing drop in consumer confidence. High unemployment and lack of credit are hurting consumers even if job losses are slowing and even if manufacturing and maybe even housing are bottoming. Today's Case-Shiller report shows some improvement in home prices, adding to the small run of good news in the sector, while tomorrow's ISM data will offer important information on the manufacturing sector with today's purchaser report from Chicago, whose sample also includes non-manufacturers, pointing to disappointment. Most disappointing of all may be June's retail sales, based on the dip in consumer confidence as well as steep plunges in the weekly chain-store reports.

The S&P 500 sank 0.9 percent to 919 while the dollar index firmed slightly to 80.12. Treasury yields edged higher with the 2-year at 1.11 percent. Commodities dipped back together with oil ending at $70 and gold at $925.

Market Reflections 6/29/2009

Stocks are drifting higher as quarter-end approaches and account managers beef up stock exposure. The S&P 500 rose 0.9 percent to end at 927. The dollar index was little changed at 79.86. Treasury yields edged lower with the 2-year ending at 1.09 percent. Gold ended near $935 while oil firmed to $71.50 on news that China is building reserves.

Closer to bottom

This past week, economic news was positive for manufacturing and for the consumer but mixed for housing. Overall, the worst of the recession is clearly behind us and the end of the recession appears to be getting closer.

HEADLINE NEWS WEEK ENDING 6/26/09

Overview
The Federal Reserve left its key policy rate unchanged in a range between 0.0% to 0.25% at the conclusion of its June policy meeting. more...http://payden.com/library/weeklyMarketUpdateE.aspx

U.S. MARKETS
Treasury/Economics
In a week dominated by new Treasury supply in 2, 5 and 7 year maturities, Treasuries were able to rally on the back of high demand from investors for those bonds and 10 year yields trading briefly at 3.50% by the end of the week. more...
http://payden.com/library/weeklyMarketUpdateE.aspx
Large-Cap Equities
The stock market recovered from an early week pull-back to end the week only modestly lower. Higher metal prices and better than expected corporate earnings reports tempered mixed economic data. more...http://payden.com/library/weeklyMarketUpdateE.aspx

Corporate Bonds
Investment grade primary activity was fairly active prior to FOMC’s announcement on Wednesday. The marquee issuer this week was global pharmaceutical company Merck, who brought a $4.25 billion deal across the entire curve to fund their Schering-Plough merger. more...http://payden.com/library/weeklyMarketUpdateE.aspx

Mortgage-Backed Securities
Mortgages kept pace with the Treasury rally in a low volume, summer week. Mortgage originations were readily digested by steady Federal Reserve and domestic bank buying. more...
http://payden.com/library/weeklyMarketUpdateE.aspx
Municipal Bonds
While this week’s municipal bond market action was highlighted by the Fitch downgrade of California’s $60 billion in general obligation (GO) bond debt, the broad municipal bond market was strong on the week. more...http://payden.com/library/weeklyMarketUpdateE.aspx

High-Yield
High yield was a bit softer again this week as we saw spreads to treasuries move approximately 35 bps wider going into Friday. more...

INTERNATIONAL MARKETS
Western European Equities
European stocks went down this week. The sectors with the worst performance were oil & gas (-4.1%) and health care (-3.4%). more...http://payden.com/library/weeklyMarketUpdateE.aspx

Eastern European Equities
The CECE index of equities traded in Central Europe (Czech Republic, Hungary, and Poland) lost -2.6% this week, while the Russian stock index RTS went down -5.5%. more...http://payden.com/library/weeklyMarketUpdateE.aspx

Global Bonds and Currencies
The major non-US government bond markets rallied for the third consecutive week as investors reassessed the likelihood and timing of potential hikes in official interest rates, and as riskier asset classes continued to stall. more...http://payden.com/library/weeklyMarketUpdateE.aspx

Emerging-Market Bonds
The major non-US government bond markets rallied for the third consecutive week as investors reassessed the likelihood and timing of potential hikes in official interest rates, and as riskier asset classes continued to stall. more...http://payden.com/library/weeklyMarketUpdateE.aspx

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Market Reflections 6/25/2009

Ben Bernanke was in the hot seat Thursday, defending the handling of Bank of America's acquisition of Merrill Lynch and denying that he threatened to oust the bank's board if they didn't go through with the deal. The Fed itself made news, extending special lending facilities and reminding the financial markets that conditions "remain impaired." Economic data included disappointing increases in the number of unemployed filing claims, results that suggest the June jobs report won't show the same degree of improvement as the May report.

The day's big event was an enormously strong 7-year Treasury auction that followed enormously strong 2- and 5-year auctions earlier in the week and left some wondering whether central bank buying is involved. The 7-year yield ended at 3.19 percent -- 14 basis points below the auction's high yield! Stocks may be getting a boost from quarter-end window dressing (money managers who don't want to look like they missed the big rally). The S&P gained 2.1 percent to end just above 920.