HEADLINE NEWS WEEK ENDING 9/4/09
Overview
Employment Report - Nonfarm payrolls declined by 216,000 in August compared to an upwardly revised 276,000 drop in July. The unemployment rate rose to 9.7%, the highest level since June 1983 when the rate was 10.1%. more...
US MARKETS
Treasury/Economics
The US Treasury yield curve steepened in the last week of the summer, with 2-year yields dropping 10 basis points (bps) whereas Treasury yields of longer dated maturities remained relatively unchanged. more...
Large-Cap Equities
The stock markets pared back some of its recent gains this week on mixed economic data and a renewed concern of additional bank losses. more...
Corporate Bonds
Investment grade primary activity continued its subdued manner as we made our way through the last several weeks of summer. more...
Mortgage-Backed Securities
Mortgage bonds rallied to their highest level since late spring as the Federal Reserve signaled no end to accommodative monetary policy. more...
Municipal Bonds
The muni market continues its trend of tightening credit spreads and lower long-term yields as investors try to find yield in any avenue available. more...
High-Yield
The high yield market remained relatively quiet this first week of September, with many market participants on the sidelines. more...
INTERNATIONAL MARKETS
Eastern European Equities
The CECE index of equities traded in Central Europe (Czech Republic, Hungary, and Poland) lost -4.6% this week, while the Russian stock index RTS went down -2.4%. more...
Global Bonds and Currencies
Major non-US sovereign bond markets had a notably quiet week with most closing unchanged. more...
Emerging-Market Bonds
Emerging market dollar-pay debt spreads were marginally tighter this week as trading activity remained light ahead of the holiday weekend in the US. more...
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Friday, September 4, 2009
Thursday, September 3, 2009
Market Reflections 9/3/2009
Economic data on Thursday were mixed between flat and firm. Jobless claims show no improvement and point to still heavy payroll losses in tomorrow's big monthly report. The ISM's non-manufacturing report showed strength in output and an odd jump in prices but no change in new orders. The report's composite index points to continued though slowing contraction for the bulk of the economy. Chain-store sales were mostly but not uniformly positive, yet as a whole they point to long awaited, broad-based gains for the retail sales report at mid month.
Traders are reporting the appearance of fear, the result of equity losses in China. Demand for gold and silver are up in part due to concern that heavy profit taking may hit Chinese and U.S. equities this month and next and that talk may emerge for another wave of stimulus measures in the two nations. Gold flirted with $1,000 before settling over $990 for a more than $10 gain. Silver added 70 cents to $16.10. Base metals, which lack a premium as a monetary alternative, continue to fall back but only slightly with copper down a penny to $2.85. Oil ended slightly lower at $68, but natural gas was a big loser, down 50 cents to $2.50 following another weekly injection for inventories. The S&P 500 was little changed, hovering right around 1,000 and ending at 1,003. The dollar index was also little changed, ending under 78.50.
Traders are reporting the appearance of fear, the result of equity losses in China. Demand for gold and silver are up in part due to concern that heavy profit taking may hit Chinese and U.S. equities this month and next and that talk may emerge for another wave of stimulus measures in the two nations. Gold flirted with $1,000 before settling over $990 for a more than $10 gain. Silver added 70 cents to $16.10. Base metals, which lack a premium as a monetary alternative, continue to fall back but only slightly with copper down a penny to $2.85. Oil ended slightly lower at $68, but natural gas was a big loser, down 50 cents to $2.50 following another weekly injection for inventories. The S&P 500 was little changed, hovering right around 1,000 and ending at 1,003. The dollar index was also little changed, ending under 78.50.
Jobless Claims Released on 9/3/2009 8:30:00 AM For wk8/29, 2009
There has been very little change in initial jobless claims over the past seven weeks, pointing to little change in payroll losses for tomorrow's monthly employment report. Initial claims fell 4,000 to 570,000 in the Aug. 29 week (prior week revised 4,000 higher to 574,000). The four-week average is right at the current week, at 571,250. Continuing claims have been generally moving lower since early July, unfortunately reflecting the expiration of benefits and not necessarily new hiring.
But in a bad sign, continuing claims rose in data for the Aug. 22 week, up 92,000 to 6.234 million. The unemployment rate for insured workers rose 1 tenth to 4.7 percent. There was no significant reaction to the report.
But in a bad sign, continuing claims rose in data for the Aug. 22 week, up 92,000 to 6.234 million. The unemployment rate for insured workers rose 1 tenth to 4.7 percent. There was no significant reaction to the report.
Market Reflections 9/2/2009
FOMC minutes show that policy makers are as confident as the financial markets that the recession has bottomed. But policy makers do worry that the consumer is weak and so have kept their rate policy and asset-purchase policy on hold. Data included a worse-than-expected jobs forecast from ADP, one that got the stock market off to a slow start. The S&P slipped 0.3 percent on the day to end at 994.75.
Gold was the big mover of the day, up nearly $25 to $980 in a major breakout from two months of narrow trading centered at $950. Middle East accounts were behind the gain, buying ahead of seasonal jewelry demand there and in Asia. Silver rose with gold, ending at $15.40 for a 70 cent gain, but other commodities, including copper and oil, were little changed.
Gold was the big mover of the day, up nearly $25 to $980 in a major breakout from two months of narrow trading centered at $950. Middle East accounts were behind the gain, buying ahead of seasonal jewelry demand there and in Asia. Silver rose with gold, ending at $15.40 for a 70 cent gain, but other commodities, including copper and oil, were little changed.
Tuesday, September 1, 2009
Market Reflections 9/1/2009
Buy on the rumor and sell on the fact was Tuesday's theme. A very strong ISM manufacturing report, getting an appreciable boost from cash for clunkers, shot past 50 to 52.9, sounding the beginning of recovery in the sector. But a plus 50 reading was already expected and whether cash for clunkers merely pulled activity from future months is an open question. The session's housing data were also strong with another big gain for pending home sales and a big jump for single-family construction. Unit vehicle sales rounded out the good news, jumping more than 20 percent and pointing, tentatively, to gains for the August retail sales report.
But the market wasn't impressed as the S&P fell 2.2 percent to just below 1,000. But the drop isn't worrying investment strategists who say a 5 to 10 percent correction may be in store and would in fact be healthy, setting the market up for big gains further down the road. The dollar benefited from the move out of equities and toward safety with the dollar index up 0.8 percent to 78.84. Most commodities moved lower in line with equities and in line with the rise in the dollar with oil losing about $1-1/2 to end at $68 and copper losing nearly a nickel to $2.80. But strong dollar or not, gold keeps holding firm, ending at $957.
But the market wasn't impressed as the S&P fell 2.2 percent to just below 1,000. But the drop isn't worrying investment strategists who say a 5 to 10 percent correction may be in store and would in fact be healthy, setting the market up for big gains further down the road. The dollar benefited from the move out of equities and toward safety with the dollar index up 0.8 percent to 78.84. Most commodities moved lower in line with equities and in line with the rise in the dollar with oil losing about $1-1/2 to end at $68 and copper losing nearly a nickel to $2.80. But strong dollar or not, gold keeps holding firm, ending at $957.
ISM Mfg Index Released on 9/1/2009 10:00:00 AM For August, 2009
The ISM's manufacturing index burst over the dead-even 50 level for the first time since the beginning of the recession, at 52.9 in August vs. 48.9 in July. New orders led the advance, at 64.9 vs. August's 55.3 and pointing to rising business activity in the months ahead. Production was also very strong in August, at 61.9 for a 4 point gain and pointing to gains in durable goods shipments and total manufacturing sales. Backlogs also increased, at 52.5 vs. 50.0 in July. But manufacturers are not stocking up, instead they continue to draw down inventories where the index is a very weak 34.4 vs. 33.5 in July. Note that future gains in the inventories index, a seeming necessity given rising production needs, will help give the overall index a big boost. Respondents in fact think inventories at their customers' firms are too low, with the customer inventories down 3.5 points to 39.0. Deliveries slowed substantially, up more than 5 points to indicate that current production needs are stressing what has become a pared down supply chain. Production activity and the gain in orders has yet to boost employment where the index only inched forward to a still sub-50 level of 46.4.
All the strength here is flowing through to prices where the prices paid index jumped 10 points to 65.0, an indication that buyers are bidding up prices for raw materials. No doubt boosted by cash-for-clunkers and gains in transportation, the manufacturing recovery is on the way and together with the gain in the pending home sales index indicate that two key sectors are on the acceleration. Stocks jumped in immediate reaction to today's 10 o'clock data.
Construction Spending
Released on 9/1/2009 10:00:00 AM For July, 2009
Prior Consensus Consensus Range Actual
Construction Spending - M/M change 0.3 % 0.0 % -0.5 % to 0.3 % -0.2 %
Construction outlays fell in July but showed significant divergence among components as residential outlays rebounded while public and nonresidential construction declined. Overall construction spending edged down 0.2 percent in July after making a partial comeback of 0.1 percent in June. The dip in July came in below the consensus projection for no change. The decline in spending in July was led by a 1.2 percent decrease in private nonresidential outlays while public spending also fell-by 0.7 percent. The good news in the report was that private residential outlays added to the view that the housing sector is recovering with a 2.3 percent boost in July after declining 0.4 percent in June.
The July construction spending report was not as good as expected but equities liked the better-than-expected ISM manufacturing index and pending home sales index which were released at the same time as construction outlays. Overall, housing appears to have turned the corner and likely is in slow recovery. Meanwhile, the public and nonresidential sectors continue their downtrends.
Pending Home Sales Index
Released on 9/1/2009 10:00:00 AM For July, 2009
Prior Actual
Pending Home Sales Index - Level 94.6 12.0 %
Pending Home Sales Index - M/M 3.6 % 3.2 %
Pending home sales continue to improve pointing to extending gains for existing home sales. The pending home sales index rose 3.2 percent extending a long streak of gains and compared with a 3.6 percent rise in June. The year-on-year is very strong at 12.0 percent. Nearly all indications on the residential side, including today's construction spending report, point to accelerating gains in what is very good news for the economic recovery.
All the strength here is flowing through to prices where the prices paid index jumped 10 points to 65.0, an indication that buyers are bidding up prices for raw materials. No doubt boosted by cash-for-clunkers and gains in transportation, the manufacturing recovery is on the way and together with the gain in the pending home sales index indicate that two key sectors are on the acceleration. Stocks jumped in immediate reaction to today's 10 o'clock data.
Construction Spending
Released on 9/1/2009 10:00:00 AM For July, 2009
Prior Consensus Consensus Range Actual
Construction Spending - M/M change 0.3 % 0.0 % -0.5 % to 0.3 % -0.2 %
Construction outlays fell in July but showed significant divergence among components as residential outlays rebounded while public and nonresidential construction declined. Overall construction spending edged down 0.2 percent in July after making a partial comeback of 0.1 percent in June. The dip in July came in below the consensus projection for no change. The decline in spending in July was led by a 1.2 percent decrease in private nonresidential outlays while public spending also fell-by 0.7 percent. The good news in the report was that private residential outlays added to the view that the housing sector is recovering with a 2.3 percent boost in July after declining 0.4 percent in June.
The July construction spending report was not as good as expected but equities liked the better-than-expected ISM manufacturing index and pending home sales index which were released at the same time as construction outlays. Overall, housing appears to have turned the corner and likely is in slow recovery. Meanwhile, the public and nonresidential sectors continue their downtrends.
Pending Home Sales Index
Released on 9/1/2009 10:00:00 AM For July, 2009
Prior Actual
Pending Home Sales Index - Level 94.6 12.0 %
Pending Home Sales Index - M/M 3.6 % 3.2 %
Pending home sales continue to improve pointing to extending gains for existing home sales. The pending home sales index rose 3.2 percent extending a long streak of gains and compared with a 3.6 percent rise in June. The year-on-year is very strong at 12.0 percent. Nearly all indications on the residential side, including today's construction spending report, point to accelerating gains in what is very good news for the economic recovery.
Market Reflections 8/31/2009
A 7 percent plunge in the Shanghai stock market, tripped by new concerns that the government will withdraw liquidity from the business sector, reverberated through global markets and the U.S. market where the S&P 500 fell 0.8 percent to just over 1,020. U.S. economic news was upbeat as Chicago purchasers reported no change in business conditions during August, indicating a bottoming in the region's recession and pointing to similar results in this week's ISM reports. Commodities moved with equities with oil closing below $70 at $69.50 and copper falling more than 10 cents to end at $2.84. But gold held firm at $950, firmly underpinned by solid long-term investment demand. The dollar index edged 0.2 percent lower to $78.13.
Saturday, August 29, 2009
Weekly market Update August 28, 2009
MARKET LEVELS
Friday* Last week Dec. 31, 2008 One year ago
Dow Jones Industrial Avg 9,520 9,506 8,776 11,715
S&P 500 1,025 1,026 903 1,301
NASDAQ 2,020 2,021 1,577 2,412
Russell 2000 578 582 499 748
DJ STOXX Europe 600 (€) 238 235 198 287
Nikkei Index (¥) 10,534 10,238 8,860 12,768
Fed Funds Target 0%-0.25% 0%-0.25% 0%-0.25% 2.00%
2-Year Treasury Yield 1.01% 1.09% 0.77% 2.36%
10-Year Treasury Yield 3.45% 3.57% 2.21% 3.78%
U.S. $ / Euro 1.43 1.43 1.40 1.47
U.S. $ / British Pound 1.63 1.65 1.46 1.83
Yen / U.S. $ 93.59 94.38 90.64 109.50
Gold ($/oz) $955.66 $953.85 $882.05 $834.05
Oil $71.93 $73.29 $44.60 $115.59
*Levels reported as of 10:00 am Pacific Standard Time
MARKET RETURNS
Year-to-date (1/1/09-8/28/09)* Year-to-date (1/1/09-8/27/09)
Dow Jones Indus Avg. 8.47% 90 Day T-Bill 0.16%
S&P 500 13.51% 2-Year Treasury 0.76%
NASDAQ 28.07% 10-Year Treasury -7.89%
Russell 2000 15.67% ML High Yield Index 39.16%
MSCI World Index 17.99% JPM EMBI Global Diversified 21.81%
DJ STOXX Europe 600 19.74% JP Morgan Global Hedged 0.27%
*Returns reported as of 10:00 am Pacific Standard Time
RECAP OF THE WEEK'S ECONOMIC RELEASES
August 25 Consumer Confidence – The Conference Board’s confidence index rose for the first time in three
months, climbing from 47.4 in June to 54.1 in July. The increase, which beat forecasts, was
largely a result of government programs such as “cash for clunkers” and extended jobless
benefits
S&P/Case-Shiller Home Price Index – The 20-city composite index declined 15.4% from year ago
levels, the smallest drop since April 2008. On a month-over-month basis, the measure rose by
the most in four years.
August 26 Durable Orders – Orders for durables jumped by 4.7% in July, the largest increase in two years. The
core rate, which excludes transportation, posted its third consecutive gain, rising 0.8% during the same
month.
New Home Sales – New home sales climbed to a seasonally adjusted annual pace of 433,000 homes in
July, a 9.6% increase over the prior month and the largest increase since February 2005. On a yearover-
year basis, however, sales were down 13.4%.
August 27 Commerce Department Revisions – Gross domestic product (GDP) fell at a seasonally adjusted 1.0%
annual rate in the second quarter, unrevised from the estimate month ago. Business inventories fell
more than previously reported, with the second quarter cut revised from $141.1 billion to $159.2 billion.
The decline in consumer spending over the April to June period was revised from 1.2% to 1.0%.
August 28 Personal Income and Spending – Consumer spending rose 0.2% in July due to increased durable-goods
spending, likely a product of the “cash for clunkers” program. Personal income was unchanged in July
and fell 1.1% in June, a downward revision from the originally reported 1.3% drop.
OVERVIEW ___________________________________________________
The housing market showed further signs of recovery this week. New home sales increased
for the fourth straight month and 18 of the 20 cities comprising the S&P/Case-Shiller Home
Price Index posted modest price gains. Hard-hit metropolitan areas such as Los Angeles,
Miami, and Phoenix registered slight increases in home prices, underscoring the view that the
real estate market has bottomed. The Federal Housing Finance Agency’s house price index
also rose, climbing 0.5% in June on a month-over-month basis. New home inventories fell to
271,000 in July, a 7.5-month supply at the current sales rate that is significantly lower than the
8.8-month supply in June. Continued declines in inventories may boost future housing starts
as construction firms begin building homes again. Improvement in the real estate market will
likely support overall economic recovery, as banks may be able to stabilize their balance
sheets more quickly.
US MARKETS:
TREASURIES ________________________________________________________________________________
• US Treasuries rallied this week, backed by better-than-expected auctions in 2-year, 5-year,
and 7-year bonds. Five-year on-the-run Treasury yields finished the week 13 basis points
(bps) lower and 30-year yields rallied 17 bps. Trading volumes and liquidity in the Treasury
market was very low this week as most market participants are still on vacation. The market
continues to trade directionless and remains event driven, i.e. dealers position themselves
for Treasury auctions and Treasury buybacks and offer limited liquidity in between.
• US agencies recovered from their temporary sell-off over the last couple of weeks, when
spreads widened 10-15 bps across all maturities. Decreasing supply and the Federal
Reserve increasing their re-purchases helped spreads to recover and tighten back 5-8 bps.
• With Libor continuing to set lower each day, US swap spreads were able to benefit, with
shorter dated spreads tightening 8 bps. Spreads of longer dated swaps tightened up to 4
bps.
LARGE-CAP EQUITIES___________________________________________________________
• The stock market was relatively quiet for the week on mixed economic data and lighter
trading volume. The S&P 500 index finished the week unchanged. The Russell 2000 index,
an index used to gauge small-cap stocks, underperformed large-cap stocks. In terms of
style, large-cap value stocks marginally outperformed large-cap growth stocks. The best
performing sector was financials and the worst performing sector was utilities. In the
headlines this week, the US government ended its highly successful “Cash for Clunkers”
stimulus program on Monday as funds allocated to the program were exhausted. Shares of
Ford Motor Company (Ticker F) fell over 4% on the news. On earnings news, Dollar Tree
reported quarterly earnings of 63 cents per share, which beat analysts’ estimates of 53
cents per share. The company attributed the strong quarter on better operating margins and
an increase in sales. Shares of DLTR rallied over 1% on the news after speculators drove
the stock higher over 4% prior to the announcement.
CORPORATE BONDS _____________________________________________________________
• Investment grade primary activity was muted, with a few benchmark deals providing those
not taking a late summer vacation a chance to invest some idle cash. The deals priced this
week were well received by investors, as the entire slate of new issuance finished the week
tighter. Consumer products giant Proctor & Gamble brought a two-tranche deal that sold out
as quickly as ice cream cones on a sultry summer afternoon. With next week being the
unofficial final week of summer, expectations are for a light, if not non-existent, new issue
calendar.
• Investment grade corporate spreads were flat to slightly tighter in fairly active trading given
the season. Trading desks were thinly staffed, as many participants were away trying to
wring the last bit of value out of their summer share. The underlying tone was positive, with
a bit of a "stealth-rally" feel to the week. The Barclays Credit Index Option-Adjusted Spread
(OAS) finished the week at +212, tighter by 9 basis points.
MORTGAGE-BACKED SECURITIES _______________________________________________
• It was calm in the mortgage market this week as market participants enjoy the last days of
summer. With Treasuries rallying on air, mortgages underperformed in light trading.
Agency pass-through spreads leaked wider by 3 to 5 basis points as steady supply trumped
demand from Asian central banks, money managers, and the Federal Reserve. Most of the
action, if any, was in the commercial mortgage market as spreads narrowed on a healthy
demand for term-asset backed loan facility (TALF) eligible CMBS bonds. The Treasury’s
release of acceptable collateral of CMBS collateral was warmly received by investors. For
the week, the 30-year current pass-through versus the 10-year Treasury closed at 103 basis
points.
MUNICIPAL BONDS _____________________________________________________________
• Lack of new tax-exempt issuance, led by seasonal calendar effects and Build America
Bonds taxable issuance (which account for about 15% of municipal issuance year-to-date
through July) continues to put downward pressure on longer-maturity municipal bond yields
as investors fight for bonds. Two-year AAA-rated GO bond yields are pinned down at 0.71%
and 30-year AAA-rated GO bonds fell to 4.47%-lower by 7 basis points on the week. Thirtyyear
yields have dropped 25 basis points during August.
• This trend is also having spillover effects on lower-rated credits, where investors have
shifted demand due to pick-up in yield over expensive high grade credits. This difference in
yield though continues to “narrow,” represented by strong demand for tobacco securitization
bonds and gas pre-payment bonds this week. Based on secondary market trades on Friday
morning, this trend is set to continue as we head into September. Next week is already set
up to be very quiet in the primary market. New issuance volume is expected to be in the $1
billion range – 20% of a normal week’s new supply hitting the market. This may mean a
pick-up in secondary market activity (as money managers look to reinvest September 1
maturities) and more downward pressure on yields in the municipal space.
• The biggest deal of the week was the seasonal issuance of the Texas Tax and Revenue
Anticipation Notes (TRANs) as part of the state’s annual cash-flow management. Totaling
$5.5 billion, the notes held the highest short-term rating from all three ratings agencies, and
were traded at yields as low as 0.43% following the competitive deal. Other highlights
included the $77 million Oconee County, South Carolina, Pollution Control Facilities - Duke
Energy Carolinas Project bonds. The A1/A revenue bonds offered 3.60% in the bullet 2017
maturity.
HIGH-YIELD BONDS ____________________________________________________________
• It was another relatively quiet week on the high yield front. Similar to last week, there was no
new issuance in the high yield market and it is likely that we will not see any deals until after
the US Labor Day holiday September 7th. Most market participants are expecting relatively
heavy issuance in September as cash continues to build and there is strong demand for
new well-structured and well-priced deals. After a small outflow last week, high yield mutual
funds this week received inflows of $351 million and this will add to the buying pressure in
September. The Merrill Lynch BB/B high yield index is up just under 1.5% for August, with
much of the price appreciation in the financial sector, in particular the insurance sub-sector.
The insurance high yield sub-sector has rallied as the market outlook on AIG debt and
equity has improved over the past few weeks. In line with the past five months, the riskiest
segment of the high yield market, CCC- and below rated bonds, continued to rally the
strongest, with the CCCs up almost 4% in August and up 70% year-to-date 2009.
INTERNATIONAL MARKETS:
EASTERN EUROPEAN EQUITIES __________________________________________________
• The CECE index of equities traded in Central Europe (Czech Republic, Hungary, and
Poland) gained +2.8% this week, while the Russian stock index RTS went up +3.7%.
• Poland, the European Union’s only eastern member to escape a recession since the
credit crisis began, expanded an annual 1.1% in the second quarter of 2009 on the
heels of +0.8% growth in the first quarter of the year. Net exports were the major
driver, as exports declined by only 1% year-over-year, while imports were down -
11.6% versus last year. Investment also surprised on the upside. Since the global
recession started the country’s relatively large internal market, stimulated by cuts in
personal taxes, has helped compensate for a decline in external demand, while a
depreciating zloty early in the year cushioned the fall in exports.
GLOBAL BONDS AND CURRENCIES _______________________________________________
• Major government bond markets ended the week stable to firmer, supported by the good
reception to the week’s heavy US issuance. In the UK, Gilts benefitted from persistent
speculation that the Bank of England will impose negative interest rates on banks’ reserve
holdings to encourage them to lend. However, two-year Bunds outperformed, with yields
closing the week down about 10 basis points as the European Central Bank reiterated its
intention to keep rates low for the foreseeable future. On the data front, news from the UK
was mixed. House prices rose robustly in August and revisions showed that the contraction
in Q2 GDP was less dramatic than initially estimated. However, UK business investment
slumped a staggering 10.4% in Q2. In Europe, the rise in industrial orders exceeded
expectations and the latest round of business and consumer sentiment surveys all
registered further improvement, but Japan’s data was unremittingly disappointing.
Household spending contracted further, unemployment jumped unexpectedly and deflation
worsened. However, Japanese government bonds only managed to finish unchanged ahead
of this weekend’s general election, which is widely predicted to see the ruling Liberal
Democratic Party lose its 60-year grip on power to the opposition Democratic Party of
Japan.
• In currency markets, the focus was on sterling, which extended its recent losses against the
US dollar in response to talk of negative UK rates. The suggestion by the head of the UK
financial markets regulator that the government should impose a tax on financial
transactions to deter short term speculation also undermined confidence in the pound. The
Canadian dollar closed off its highs after an official suggested that the central bank may
intervene to sell the currency, whose recent appreciation is perceived as a drag on growth
and an obstacle to the central bank’s efforts to meet its inflation target. The Australian dollar
edged higher against the greenback on mounting expectations that rates will rise as soon as
October, but the US dollar ended only marginally weaker against the yen and unchanged
against the euro.
EMERGING-MARKET BONDS______________________________________________________
• Emerging market dollar-pay debt spreads were marginally wider this week as liquidity and
trading volumes declined. Economic data continued to surprise on the upside with Q2 GDP
and industrial production better-than-expected in all emerging market regions.
• Israel surprised the markets by being the first country to hike interest rates globally. Bank of
Israel raised rates by 0.25% to 0.75% on the back of increasing inflation expectations and
an improvement in macroeconomic data. Short-date local yields sold off by 25 basis points
as the curve was pricing in no change in interest rates.
• As expected, the Monetary Policy Council (MPC) in Poland left its benchmark interest rate
unchanged at 3.5% citing signs of economic recovery in Poland as well as the global
economy. The MPC’s inflation forecast is lower than its medium-term target of 2.5% (+/-
1%), meaning it maintained an easing bias.
NEXT WEEK'S ECONOMIC RELEASES
Sep 1 ISM Manufacturing Index, Construction Spending, Pending Home Sales
Sep 3 ISM Non-Manufacturing Index, Turkey August Inflation
Sep 4 Unemployment Rate
Friday* Last week Dec. 31, 2008 One year ago
Dow Jones Industrial Avg 9,520 9,506 8,776 11,715
S&P 500 1,025 1,026 903 1,301
NASDAQ 2,020 2,021 1,577 2,412
Russell 2000 578 582 499 748
DJ STOXX Europe 600 (€) 238 235 198 287
Nikkei Index (¥) 10,534 10,238 8,860 12,768
Fed Funds Target 0%-0.25% 0%-0.25% 0%-0.25% 2.00%
2-Year Treasury Yield 1.01% 1.09% 0.77% 2.36%
10-Year Treasury Yield 3.45% 3.57% 2.21% 3.78%
U.S. $ / Euro 1.43 1.43 1.40 1.47
U.S. $ / British Pound 1.63 1.65 1.46 1.83
Yen / U.S. $ 93.59 94.38 90.64 109.50
Gold ($/oz) $955.66 $953.85 $882.05 $834.05
Oil $71.93 $73.29 $44.60 $115.59
*Levels reported as of 10:00 am Pacific Standard Time
MARKET RETURNS
Year-to-date (1/1/09-8/28/09)* Year-to-date (1/1/09-8/27/09)
Dow Jones Indus Avg. 8.47% 90 Day T-Bill 0.16%
S&P 500 13.51% 2-Year Treasury 0.76%
NASDAQ 28.07% 10-Year Treasury -7.89%
Russell 2000 15.67% ML High Yield Index 39.16%
MSCI World Index 17.99% JPM EMBI Global Diversified 21.81%
DJ STOXX Europe 600 19.74% JP Morgan Global Hedged 0.27%
*Returns reported as of 10:00 am Pacific Standard Time
RECAP OF THE WEEK'S ECONOMIC RELEASES
August 25 Consumer Confidence – The Conference Board’s confidence index rose for the first time in three
months, climbing from 47.4 in June to 54.1 in July. The increase, which beat forecasts, was
largely a result of government programs such as “cash for clunkers” and extended jobless
benefits
S&P/Case-Shiller Home Price Index – The 20-city composite index declined 15.4% from year ago
levels, the smallest drop since April 2008. On a month-over-month basis, the measure rose by
the most in four years.
August 26 Durable Orders – Orders for durables jumped by 4.7% in July, the largest increase in two years. The
core rate, which excludes transportation, posted its third consecutive gain, rising 0.8% during the same
month.
New Home Sales – New home sales climbed to a seasonally adjusted annual pace of 433,000 homes in
July, a 9.6% increase over the prior month and the largest increase since February 2005. On a yearover-
year basis, however, sales were down 13.4%.
August 27 Commerce Department Revisions – Gross domestic product (GDP) fell at a seasonally adjusted 1.0%
annual rate in the second quarter, unrevised from the estimate month ago. Business inventories fell
more than previously reported, with the second quarter cut revised from $141.1 billion to $159.2 billion.
The decline in consumer spending over the April to June period was revised from 1.2% to 1.0%.
August 28 Personal Income and Spending – Consumer spending rose 0.2% in July due to increased durable-goods
spending, likely a product of the “cash for clunkers” program. Personal income was unchanged in July
and fell 1.1% in June, a downward revision from the originally reported 1.3% drop.
OVERVIEW ___________________________________________________
The housing market showed further signs of recovery this week. New home sales increased
for the fourth straight month and 18 of the 20 cities comprising the S&P/Case-Shiller Home
Price Index posted modest price gains. Hard-hit metropolitan areas such as Los Angeles,
Miami, and Phoenix registered slight increases in home prices, underscoring the view that the
real estate market has bottomed. The Federal Housing Finance Agency’s house price index
also rose, climbing 0.5% in June on a month-over-month basis. New home inventories fell to
271,000 in July, a 7.5-month supply at the current sales rate that is significantly lower than the
8.8-month supply in June. Continued declines in inventories may boost future housing starts
as construction firms begin building homes again. Improvement in the real estate market will
likely support overall economic recovery, as banks may be able to stabilize their balance
sheets more quickly.
US MARKETS:
TREASURIES ________________________________________________________________________________
• US Treasuries rallied this week, backed by better-than-expected auctions in 2-year, 5-year,
and 7-year bonds. Five-year on-the-run Treasury yields finished the week 13 basis points
(bps) lower and 30-year yields rallied 17 bps. Trading volumes and liquidity in the Treasury
market was very low this week as most market participants are still on vacation. The market
continues to trade directionless and remains event driven, i.e. dealers position themselves
for Treasury auctions and Treasury buybacks and offer limited liquidity in between.
• US agencies recovered from their temporary sell-off over the last couple of weeks, when
spreads widened 10-15 bps across all maturities. Decreasing supply and the Federal
Reserve increasing their re-purchases helped spreads to recover and tighten back 5-8 bps.
• With Libor continuing to set lower each day, US swap spreads were able to benefit, with
shorter dated spreads tightening 8 bps. Spreads of longer dated swaps tightened up to 4
bps.
LARGE-CAP EQUITIES___________________________________________________________
• The stock market was relatively quiet for the week on mixed economic data and lighter
trading volume. The S&P 500 index finished the week unchanged. The Russell 2000 index,
an index used to gauge small-cap stocks, underperformed large-cap stocks. In terms of
style, large-cap value stocks marginally outperformed large-cap growth stocks. The best
performing sector was financials and the worst performing sector was utilities. In the
headlines this week, the US government ended its highly successful “Cash for Clunkers”
stimulus program on Monday as funds allocated to the program were exhausted. Shares of
Ford Motor Company (Ticker F) fell over 4% on the news. On earnings news, Dollar Tree
reported quarterly earnings of 63 cents per share, which beat analysts’ estimates of 53
cents per share. The company attributed the strong quarter on better operating margins and
an increase in sales. Shares of DLTR rallied over 1% on the news after speculators drove
the stock higher over 4% prior to the announcement.
CORPORATE BONDS _____________________________________________________________
• Investment grade primary activity was muted, with a few benchmark deals providing those
not taking a late summer vacation a chance to invest some idle cash. The deals priced this
week were well received by investors, as the entire slate of new issuance finished the week
tighter. Consumer products giant Proctor & Gamble brought a two-tranche deal that sold out
as quickly as ice cream cones on a sultry summer afternoon. With next week being the
unofficial final week of summer, expectations are for a light, if not non-existent, new issue
calendar.
• Investment grade corporate spreads were flat to slightly tighter in fairly active trading given
the season. Trading desks were thinly staffed, as many participants were away trying to
wring the last bit of value out of their summer share. The underlying tone was positive, with
a bit of a "stealth-rally" feel to the week. The Barclays Credit Index Option-Adjusted Spread
(OAS) finished the week at +212, tighter by 9 basis points.
MORTGAGE-BACKED SECURITIES _______________________________________________
• It was calm in the mortgage market this week as market participants enjoy the last days of
summer. With Treasuries rallying on air, mortgages underperformed in light trading.
Agency pass-through spreads leaked wider by 3 to 5 basis points as steady supply trumped
demand from Asian central banks, money managers, and the Federal Reserve. Most of the
action, if any, was in the commercial mortgage market as spreads narrowed on a healthy
demand for term-asset backed loan facility (TALF) eligible CMBS bonds. The Treasury’s
release of acceptable collateral of CMBS collateral was warmly received by investors. For
the week, the 30-year current pass-through versus the 10-year Treasury closed at 103 basis
points.
MUNICIPAL BONDS _____________________________________________________________
• Lack of new tax-exempt issuance, led by seasonal calendar effects and Build America
Bonds taxable issuance (which account for about 15% of municipal issuance year-to-date
through July) continues to put downward pressure on longer-maturity municipal bond yields
as investors fight for bonds. Two-year AAA-rated GO bond yields are pinned down at 0.71%
and 30-year AAA-rated GO bonds fell to 4.47%-lower by 7 basis points on the week. Thirtyyear
yields have dropped 25 basis points during August.
• This trend is also having spillover effects on lower-rated credits, where investors have
shifted demand due to pick-up in yield over expensive high grade credits. This difference in
yield though continues to “narrow,” represented by strong demand for tobacco securitization
bonds and gas pre-payment bonds this week. Based on secondary market trades on Friday
morning, this trend is set to continue as we head into September. Next week is already set
up to be very quiet in the primary market. New issuance volume is expected to be in the $1
billion range – 20% of a normal week’s new supply hitting the market. This may mean a
pick-up in secondary market activity (as money managers look to reinvest September 1
maturities) and more downward pressure on yields in the municipal space.
• The biggest deal of the week was the seasonal issuance of the Texas Tax and Revenue
Anticipation Notes (TRANs) as part of the state’s annual cash-flow management. Totaling
$5.5 billion, the notes held the highest short-term rating from all three ratings agencies, and
were traded at yields as low as 0.43% following the competitive deal. Other highlights
included the $77 million Oconee County, South Carolina, Pollution Control Facilities - Duke
Energy Carolinas Project bonds. The A1/A revenue bonds offered 3.60% in the bullet 2017
maturity.
HIGH-YIELD BONDS ____________________________________________________________
• It was another relatively quiet week on the high yield front. Similar to last week, there was no
new issuance in the high yield market and it is likely that we will not see any deals until after
the US Labor Day holiday September 7th. Most market participants are expecting relatively
heavy issuance in September as cash continues to build and there is strong demand for
new well-structured and well-priced deals. After a small outflow last week, high yield mutual
funds this week received inflows of $351 million and this will add to the buying pressure in
September. The Merrill Lynch BB/B high yield index is up just under 1.5% for August, with
much of the price appreciation in the financial sector, in particular the insurance sub-sector.
The insurance high yield sub-sector has rallied as the market outlook on AIG debt and
equity has improved over the past few weeks. In line with the past five months, the riskiest
segment of the high yield market, CCC- and below rated bonds, continued to rally the
strongest, with the CCCs up almost 4% in August and up 70% year-to-date 2009.
INTERNATIONAL MARKETS:
EASTERN EUROPEAN EQUITIES __________________________________________________
• The CECE index of equities traded in Central Europe (Czech Republic, Hungary, and
Poland) gained +2.8% this week, while the Russian stock index RTS went up +3.7%.
• Poland, the European Union’s only eastern member to escape a recession since the
credit crisis began, expanded an annual 1.1% in the second quarter of 2009 on the
heels of +0.8% growth in the first quarter of the year. Net exports were the major
driver, as exports declined by only 1% year-over-year, while imports were down -
11.6% versus last year. Investment also surprised on the upside. Since the global
recession started the country’s relatively large internal market, stimulated by cuts in
personal taxes, has helped compensate for a decline in external demand, while a
depreciating zloty early in the year cushioned the fall in exports.
GLOBAL BONDS AND CURRENCIES _______________________________________________
• Major government bond markets ended the week stable to firmer, supported by the good
reception to the week’s heavy US issuance. In the UK, Gilts benefitted from persistent
speculation that the Bank of England will impose negative interest rates on banks’ reserve
holdings to encourage them to lend. However, two-year Bunds outperformed, with yields
closing the week down about 10 basis points as the European Central Bank reiterated its
intention to keep rates low for the foreseeable future. On the data front, news from the UK
was mixed. House prices rose robustly in August and revisions showed that the contraction
in Q2 GDP was less dramatic than initially estimated. However, UK business investment
slumped a staggering 10.4% in Q2. In Europe, the rise in industrial orders exceeded
expectations and the latest round of business and consumer sentiment surveys all
registered further improvement, but Japan’s data was unremittingly disappointing.
Household spending contracted further, unemployment jumped unexpectedly and deflation
worsened. However, Japanese government bonds only managed to finish unchanged ahead
of this weekend’s general election, which is widely predicted to see the ruling Liberal
Democratic Party lose its 60-year grip on power to the opposition Democratic Party of
Japan.
• In currency markets, the focus was on sterling, which extended its recent losses against the
US dollar in response to talk of negative UK rates. The suggestion by the head of the UK
financial markets regulator that the government should impose a tax on financial
transactions to deter short term speculation also undermined confidence in the pound. The
Canadian dollar closed off its highs after an official suggested that the central bank may
intervene to sell the currency, whose recent appreciation is perceived as a drag on growth
and an obstacle to the central bank’s efforts to meet its inflation target. The Australian dollar
edged higher against the greenback on mounting expectations that rates will rise as soon as
October, but the US dollar ended only marginally weaker against the yen and unchanged
against the euro.
EMERGING-MARKET BONDS______________________________________________________
• Emerging market dollar-pay debt spreads were marginally wider this week as liquidity and
trading volumes declined. Economic data continued to surprise on the upside with Q2 GDP
and industrial production better-than-expected in all emerging market regions.
• Israel surprised the markets by being the first country to hike interest rates globally. Bank of
Israel raised rates by 0.25% to 0.75% on the back of increasing inflation expectations and
an improvement in macroeconomic data. Short-date local yields sold off by 25 basis points
as the curve was pricing in no change in interest rates.
• As expected, the Monetary Policy Council (MPC) in Poland left its benchmark interest rate
unchanged at 3.5% citing signs of economic recovery in Poland as well as the global
economy. The MPC’s inflation forecast is lower than its medium-term target of 2.5% (+/-
1%), meaning it maintained an easing bias.
NEXT WEEK'S ECONOMIC RELEASES
Sep 1 ISM Manufacturing Index, Construction Spending, Pending Home Sales
Sep 3 ISM Non-Manufacturing Index, Turkey August Inflation
Sep 4 Unemployment Rate
Friday, August 28, 2009
Market Reflections 8/27/2009
Second-quarter GDP was unrevised at minus 1.0 percent, a bit better than expected but still a fourth straight decline. Initial jobless claims point to no help for the August jobs report, coming in at 570,000 and showing no improvement for the last two months. Company news included a year-end date for the Boeing 787 test flight, now delayed for more than two years. Stocks initially retreated in the session but then rallied with the S&P fractionally higher at just over 1,030. Oil firmed about $1 to end at $72.50 but the gain didn't help natural gas which hit a 7-year low at $2.70 following another rise in inventories and on heavy shorting as the hurricane season has yet to threaten the U.S. Gulf.
Thursday, August 27, 2009
Market Reflections 8/26/2009
Wednesday's economic data point very directly to recovery. Durable goods orders bolted higher showing nearly across-the-board strength. New home sales confirm a host of other indicators pointing with certainty that the real estate market is accelerating. Even with the all strength, the jobs market remains weak and indications on consumer spending are not showing the same strength. Atlanta Fed President Dennis Lockhart says he's in the camp calling for a slow recovery and he said it's still early to talk about rate hikes.
The economic news couldn't fire up the market as the S&P was nearly unchanged ending just under 1,030. Oil fell back 50 cents to $71.50 after weekly inventory data showed a small build in crude. Early talk, citing weak demand and limited refinery runs, is calling for a larger build in next week's data. The dollar index firmed 0.4 percent to 78.61.
The economic news couldn't fire up the market as the S&P was nearly unchanged ending just under 1,030. Oil fell back 50 cents to $71.50 after weekly inventory data showed a small build in crude. Early talk, citing weak demand and limited refinery runs, is calling for a larger build in next week's data. The dollar index firmed 0.4 percent to 78.61.
Wednesday, August 26, 2009
Market Reflections 8/25/2009
The re-appointment of Fed Chairman Ben Bernanke ends the risk of delays that a new chairman would face in learning the post, specifically how the Fed is going to unwind quantitative easing. Consumer confidence data shows improvement, not striking improvement but an end to two prior months of disappointment. Budget forecasts from the administration and Congress say weak growth and heavy benefit spending will just about double the nation's deficit to nearly $20 trillion over the next 10 years. Stocks showed little reaction with the S&P rising 0.2 percent to 1,028. Commodities were little changed though oil edged back from recent highs ending at $72. The dollar index ended fractionally higher at 78.24.
Tuesday, August 25, 2009
Market Reflections 8/24/2009
Markets were quiet Monday, reacting to overnight gains in Chinese markets that were reacting to Friday's big report on existing home sales and upbeat comments from Ben Bernanke. But stocks gave up early gains with the S&P ending fractionally lower at 1,025. Most commodities were fractionally higher with oil ending just below $75. The dollar index rose 0.3 percent to 78.25.
Saturday, August 22, 2009
Weekly Market Update Week ending August 21, 2009
Friday* Last Week Dec. 31 2008 1 Yr Ago
Dow Jones Ind. Avg. 9,483 9,321 8,776 11,430
S&P 500 1,023 1,004 903 1,278
Nasdaq 100 2,012 1,986 1,577 2,380
The Russell 2000 579 564 499 725
DJ STOXX Europe 235 229 198 278
Nikkei Index 10,238 10,597 8,860 12,752
Fed Funds Target 0-0.25% 0-0.25% 0-0.25% 2.00%
2-Year U.S. Treasury Yield 1.09% 1.05% 0.77% 2.31%
10-Year U.S. Treasury Yield 3.55% 3.57% 2.21% 3.83%
U.S.$ / Euro 1.43 1.42 1.40 1.49
U.S.$ / British Pound 1.65 1.65 1.46 1.87
Yen / U.S.$ 94.54 94.77 90.64 108.45
Gold ($/oz) $954.15 $948.55 $882.05 $837.00
Oil $73.19 $67.51 $44.60 $120.93
*Levels as of 12:40 a.m. PST
Year to Date (1/1/09 -8/21/09)
Dow Jones Industrial Avg 8.05%
S&P 500 13.27%
NASDAQ 27.61%
Russell 2000 15.97%
MSCI World Index 15.53%
DJ STOXX Europe 600 (euro) 18.40%
Year to Date (1/1/00 - 8/20/09)
90 Day T-Bill 0.14%
2-Year Treasury 0.46%
10-Year Treasury -8.29%
ML High Yield Index 38.01%
JP Morgan EMBI Global Diversified 21.24%
JP Morgan Global Hedged 0.10%
August 18
Housing Starts – New-home construction fell for the first time in three months, declining by 1.0% to an annual rate of 581,000 in July from a revised 587,000 in June. The unexpected drop was largely due to steep declines in multifamily units, which include condominium and apartment buildings. Producer Price Index – The Labor Department reported a 0.9% decline in producer prices in July, indicating that inflation will not be a concern for the Federal Reserve in the near future. Core producer prices, which exclude food and energy, fell 0.1% during the month.
August 20
Leading Indicators – The index of US leading economic indicators rose in July for the fourth consecutive month, climbing 0.6% following a revised 0.8% increase in June. The rise signals that the US economy has stopped shrinking and may be headed for an expansion.
August 21
Existing Home Sales – Sales of existing homes rose for the fourth straight month, jumping 7.2% in July to a seasonally adjusted 5.24 million annual rate. This marks both the largest month-over-month percentage increase in more than a decade and the measure’s highest level in nearly two years.
August 14 Consumer Price Index – Headline inflation was unchanged on a monthly basis in July but down 2.1% on a year-over-year basis, the most rapid rate of decline since 1950. Core inflation, which excludes food and energy, rose 0.1%, indicating that inflation will remain subdued for some time. Euro Zone CPI – European consumer prices dropped more than the estimated 0.6%. Prices fell 0.7% from a year earlier after declining 0.1% in June. Core inflation rate, which excludes volatile energy and food costs, eased to 1.3%. Euro Zone GDP – The euro zone GDP contracted by 0.1% in the second quarter—against economists’ forecasts of a decline by 0.5%. Demand for European exports is improving as government rescue packages and lower interest rates support spending. Germany & France GDP – German and French economies grew unexpectedly in the second quarter. GDP rose a seasonally adjusted 0.3% in both countries. June 5 Employment – Nonfarm employment declined by 345,000 in May, the smallest decline in 8 months, beating forecasts of 520,000 job losses. During the same period, the unemployment rate exceeded estimates, rising from 8.9% to 9.4%, the highest unemployment rate since 1983. February 6 Employment Report – The US economy shed 598,000 jobs in January and the unemployment rate rose to 7.6%, which is its highest level since 1992. -->
Though the housing market appears to be stabilizing, there is still a substantial distance to travel before a full recovery. Total housing starts in July were dragged down by severe weakness in multifamily housing construction, which includes condominium and apartment buildings. On the upside, single-family home starts were strong, rising 1.7% in July to 490,000 after climbing 17.8% in June. The dramatic increase in existing home sales, which climbed 5.0% on a year-over-year basis, signals that the three-year housing slump may finally be bottoming. Despite these positive indicators, housing activity remains at historically weak levels, with sales 38% below their peak and distressed sales making up a large share of recent transactions. While economic improvement and affordability may continue to support housing sales in the near future, any sustained recovery will likely be sluggish as high unemployment levels threaten to continue to cause foreclosures.
US Treasuries sold-off this week, due to better-than-expected fundamental data and a strong equity market performance. Two-year on-the-run Treasury yields finished the week 15 basis points (bps) lower, 5-year yields rose 20 bps. The sell-off was more concentrated in shorter dated maturities, which caused the yield curve to flatten six bps for the week.
At the end of the week, the release of better-than-expected US existing home sales data for July accelerated the sell-off. This resulted in unwinding of recent long positions in short and longer dated maturities going into the weekend.
Large-Cap Equities
The stock market continued to trend higher reaching newer highs for the year on strong corporate earnings and better-than-expected economic data. The S&P 500 index rose 1.9% for the week, finishing higher five out of the last six weeks. Large-cap stocks underperformed small-cap stocks. In terms of style, large-cap growth stocks underperformed large-cap value stocks. The best performing sector for the second straight week was health care and the worst performing sector was information technology. In the headlines this week, American International Group Inc. rallied over 21% on news that the company expects to repay their government loans. On corporate earnings this week, Hewlett-Packard reported 91 cents per share, which beat analyst estimates of 90 cents per share. The company attributed the positive quarter to better cost management.
Corporate Bonds
Investment grade primary was somewhat active this week as several small infrequent issuers tapped the market. Watson Pharmaceuticals and Yum Brands both brought small multi-tranche deals across the five- and 10-year part of the curve. Both deals were heavily oversubscribed and performed nicely on the break. The supply calendar is likely to remain light until after Labor Day, which should be constructive on the secondary spreads.
Investment grade corporate spreads widened throughout the week as light trading volumes and a sluggish start in equities contributed to wider spreads. Both thin trading and a skeleton work crew have been conducive to exaggerated spread movement causing spreads to push out. Many investors have been apprehensive that the market has run too far too fast, causing some to sell into this rally and take chips off the table. The Barclays Credit Index Option-Adjusted Spread (OAS) finished the week at +221, wider by 8 basis points. Financials widened by 8 basis points (banks +10, insurance +10); industrials widened by 10 basis points (telecom +15, consumer non-cyclical +5, basic materials +12, capital goods +6, energy +12); and utilities widened by 1 basis point.
Mortgage-Backed Securities
Summer doldrums! Agency mortgages kept pace with Treasuries in a light trading week. Spread movement was benign with no headline story or economic data print to move the market by more than a few basis points. The mortgage market remains in a range as the US Government remedies to heal the financial system comes at a price to future economic growth. Within the mortgage market, Ginnie Maes remain well bid versus conventional mortgages as prepayment differences converge. Premium pass-throughs remain in vogue as money managers stay clear of Federal Reserve buying of production coupons. For the week, the 30-year current coupon mortgage spread versus the 10-year Treasury closed at 96 basis points.
Municipal Bonds
Apparently investors embraced last week’s theme (that shorter maturity bond yields have fallen to unreasonably low levels) and began selling – albeit slowly. From 3 to 5 years, AAA-rated GO bond yields rose 2-4 basis points. Meanwhile, six years and beyond saw bond yields move the opposite direction, finishing the week 5-6 basis points across the curve. In fact, 10-year AAA-rated municipal bond yields as monitored by Thomson Financial, hovered at 2.94% on Thursday, near their lowest level on record stretching back over 20 years. What encouraged the flattening trend? We saw slow secondary market trading activity and plenty of new deal activity this week, but nearly two-thirds of the total municipal bonds issued during the week were in the form of Build America Bonds (BABs), the taxable substitute for tax-free bonds in the longer part of the maturity spectrum. This included $1.2 billion in BABs from the Texas Transportation Commission. The bonds offered a maximum yield of 5.52% in the 30-year maturity, which is 1.2 percentage points above the comparable 30-year Treasury yields.
High-Yield Bonds
The high yield market is taking a well-deserved pause. For the first time in numerous months, there was no new issuance this past week as underwriters and issuers took a break from the torrid pace of new issuance over the past few months. The high yield market tone has subsided from July as investors digest the plethora of market information and economic data, much of it conflicting. For the month of August 2009 to-date, the high yield market total return as represented by the Merrill Lynch BB/B high yield index is up is 0.7%, a significant decline from the return series from the prior five months. It is quite natural for the market to take a “breather” from the neck-breaking speed at which the high yield market was travelling from mid-March 2009 through July 2009. Many investors are awaiting the return of normal trading patterns, when much of the market returns from their summer sojourn post the US Labor Day holiday on September 7.
Eastern European Equities
The CECE index of equities traded in Central Europe (Czech Republic, Hungary, and Poland) gained +4.0% this week, while the Russian stock index RTS went down -0.9%.
Emerging-market equities rose for the last two days with Polish stocks surging the most worldwide after a brokerage advised buying central European shares on prospects for an economic recovery. The WIG20 Index advanced 6.6% over the week. Bank Pekao and PKO Bank Polski contributed to the WIG20’s rally after the brokerage raised its recommendation on Polish, Czech and Hungarian stocks to “overweight.” According to strategists, growth expectations should improve in these three economies, as they benefit from the stronger-than-expected euro zone recovery.
Global Bonds and Currencies
The past week was as quiet one for major non-US sovereign bond markets, with both Bunds and Gilts closing stable to only slightly firmer despite generally stronger-than-expected data. The latest European business sentiment surveys suggested that confidence is improving more swiftly than expected, while in the UK, retail sales surprised on the upside, monthly government borrowing was much heavier than expected in July and the decline in the pace of UK inflation halted. Annual headline CPI was unchanged at 1.8% for the second successive month in July, compared with expectations of a slowing to 1.5%. One recent notable development in the UK Gilt market has been the significant downward pressure on short-term Gilt yields. Two-year Gilt yields ended the week 3 basis points lower at 0.89%, having fallen steadily from 1.3% early this month, on speculation that the Bank of England (BoE) may begin charging banks to hold reserves in a further bid to encourage them to lend. Such a step would mirror actions by Sweden’s Riksbank, which imposed negative rates on banks last month. The week also brought the surprising revelation that BoE Governor King wanted to boost the Bank’s bond purchases by even more than the £50 billion announced after the last Monetary Policy Committee meeting in early August. Along with two other committee members, King voted for £75 billion of purchases, but was overruled by the majority. Meantime, in Japan, the economy joined France and Germany in pulling out of recession in Q2, but this did not deter Japanese government bonds (JGBs) from also making minor gains across the curve on the week, thanks in part to a sharp correction in stock prices on Friday.
In currency markets the US dollar closing the week within its recent ranges against the Euro and Sterling, with both the latter currencies receiving only margin support from the generally stronger-than-expected data. However, the greenback closed down against the Yen, which received support from the positive Q2 GDP figures, weakness in Chinese equity markets and technical factors.
Emerging-Market Bonds
Emerging market dollar-pay debt spreads were unchanged as Friday’s rally reversed the widening during the week. Better-than-expected economic data in the US and Europe led to an equity rally that supported all risk assets.
In Mexico, the Central Bank left its benchmark interest rate unchanged at 4.5% as expected. The bank maintained its view that the economic recovery in Mexico would be gradual and dependent on the United States. Inflation remains contained allowing rates to stay lower in the medium term. Next week, the economic data calendar will lighten up in the United States. Thursday’s report on retail sales will likely garner the most attention as investors and economists seek to gauge the impact of the deterioration in the labor market on consumer spending. In global markets, both the United Kingdom and euro zone will be reporting on retail sales. The UK also has new data on industrial production. Aug 24
Hungary Quarterly Inflation Report
Aug 25
Consumer Confidence, S&P/Case-Shiller Home Price Index
Aug 26
Durable Orders, New Home Sales
Aug 27
Hungary Unemployment Data
Aug 28
Personal Income and Spending
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Weekly Market Update archives page to browse past editions of the publication.
Dow Jones Ind. Avg. 9,483 9,321 8,776 11,430
S&P 500 1,023 1,004 903 1,278
Nasdaq 100 2,012 1,986 1,577 2,380
The Russell 2000 579 564 499 725
DJ STOXX Europe 235 229 198 278
Nikkei Index 10,238 10,597 8,860 12,752
Fed Funds Target 0-0.25% 0-0.25% 0-0.25% 2.00%
2-Year U.S. Treasury Yield 1.09% 1.05% 0.77% 2.31%
10-Year U.S. Treasury Yield 3.55% 3.57% 2.21% 3.83%
U.S.$ / Euro 1.43 1.42 1.40 1.49
U.S.$ / British Pound 1.65 1.65 1.46 1.87
Yen / U.S.$ 94.54 94.77 90.64 108.45
Gold ($/oz) $954.15 $948.55 $882.05 $837.00
Oil $73.19 $67.51 $44.60 $120.93
*Levels as of 12:40 a.m. PST
Year to Date (1/1/09 -8/21/09)
Dow Jones Industrial Avg 8.05%
S&P 500 13.27%
NASDAQ 27.61%
Russell 2000 15.97%
MSCI World Index 15.53%
DJ STOXX Europe 600 (euro) 18.40%
Year to Date (1/1/00 - 8/20/09)
90 Day T-Bill 0.14%
2-Year Treasury 0.46%
10-Year Treasury -8.29%
ML High Yield Index 38.01%
JP Morgan EMBI Global Diversified 21.24%
JP Morgan Global Hedged 0.10%
August 18
Housing Starts – New-home construction fell for the first time in three months, declining by 1.0% to an annual rate of 581,000 in July from a revised 587,000 in June. The unexpected drop was largely due to steep declines in multifamily units, which include condominium and apartment buildings. Producer Price Index – The Labor Department reported a 0.9% decline in producer prices in July, indicating that inflation will not be a concern for the Federal Reserve in the near future. Core producer prices, which exclude food and energy, fell 0.1% during the month.
August 20
Leading Indicators – The index of US leading economic indicators rose in July for the fourth consecutive month, climbing 0.6% following a revised 0.8% increase in June. The rise signals that the US economy has stopped shrinking and may be headed for an expansion.
August 21
Existing Home Sales – Sales of existing homes rose for the fourth straight month, jumping 7.2% in July to a seasonally adjusted 5.24 million annual rate. This marks both the largest month-over-month percentage increase in more than a decade and the measure’s highest level in nearly two years.
August 14 Consumer Price Index – Headline inflation was unchanged on a monthly basis in July but down 2.1% on a year-over-year basis, the most rapid rate of decline since 1950. Core inflation, which excludes food and energy, rose 0.1%, indicating that inflation will remain subdued for some time. Euro Zone CPI – European consumer prices dropped more than the estimated 0.6%. Prices fell 0.7% from a year earlier after declining 0.1% in June. Core inflation rate, which excludes volatile energy and food costs, eased to 1.3%. Euro Zone GDP – The euro zone GDP contracted by 0.1% in the second quarter—against economists’ forecasts of a decline by 0.5%. Demand for European exports is improving as government rescue packages and lower interest rates support spending. Germany & France GDP – German and French economies grew unexpectedly in the second quarter. GDP rose a seasonally adjusted 0.3% in both countries. June 5 Employment – Nonfarm employment declined by 345,000 in May, the smallest decline in 8 months, beating forecasts of 520,000 job losses. During the same period, the unemployment rate exceeded estimates, rising from 8.9% to 9.4%, the highest unemployment rate since 1983. February 6 Employment Report – The US economy shed 598,000 jobs in January and the unemployment rate rose to 7.6%, which is its highest level since 1992. -->
Though the housing market appears to be stabilizing, there is still a substantial distance to travel before a full recovery. Total housing starts in July were dragged down by severe weakness in multifamily housing construction, which includes condominium and apartment buildings. On the upside, single-family home starts were strong, rising 1.7% in July to 490,000 after climbing 17.8% in June. The dramatic increase in existing home sales, which climbed 5.0% on a year-over-year basis, signals that the three-year housing slump may finally be bottoming. Despite these positive indicators, housing activity remains at historically weak levels, with sales 38% below their peak and distressed sales making up a large share of recent transactions. While economic improvement and affordability may continue to support housing sales in the near future, any sustained recovery will likely be sluggish as high unemployment levels threaten to continue to cause foreclosures.
US Treasuries sold-off this week, due to better-than-expected fundamental data and a strong equity market performance. Two-year on-the-run Treasury yields finished the week 15 basis points (bps) lower, 5-year yields rose 20 bps. The sell-off was more concentrated in shorter dated maturities, which caused the yield curve to flatten six bps for the week.
At the end of the week, the release of better-than-expected US existing home sales data for July accelerated the sell-off. This resulted in unwinding of recent long positions in short and longer dated maturities going into the weekend.
Large-Cap Equities
The stock market continued to trend higher reaching newer highs for the year on strong corporate earnings and better-than-expected economic data. The S&P 500 index rose 1.9% for the week, finishing higher five out of the last six weeks. Large-cap stocks underperformed small-cap stocks. In terms of style, large-cap growth stocks underperformed large-cap value stocks. The best performing sector for the second straight week was health care and the worst performing sector was information technology. In the headlines this week, American International Group Inc. rallied over 21% on news that the company expects to repay their government loans. On corporate earnings this week, Hewlett-Packard reported 91 cents per share, which beat analyst estimates of 90 cents per share. The company attributed the positive quarter to better cost management.
Corporate Bonds
Investment grade primary was somewhat active this week as several small infrequent issuers tapped the market. Watson Pharmaceuticals and Yum Brands both brought small multi-tranche deals across the five- and 10-year part of the curve. Both deals were heavily oversubscribed and performed nicely on the break. The supply calendar is likely to remain light until after Labor Day, which should be constructive on the secondary spreads.
Investment grade corporate spreads widened throughout the week as light trading volumes and a sluggish start in equities contributed to wider spreads. Both thin trading and a skeleton work crew have been conducive to exaggerated spread movement causing spreads to push out. Many investors have been apprehensive that the market has run too far too fast, causing some to sell into this rally and take chips off the table. The Barclays Credit Index Option-Adjusted Spread (OAS) finished the week at +221, wider by 8 basis points. Financials widened by 8 basis points (banks +10, insurance +10); industrials widened by 10 basis points (telecom +15, consumer non-cyclical +5, basic materials +12, capital goods +6, energy +12); and utilities widened by 1 basis point.
Mortgage-Backed Securities
Summer doldrums! Agency mortgages kept pace with Treasuries in a light trading week. Spread movement was benign with no headline story or economic data print to move the market by more than a few basis points. The mortgage market remains in a range as the US Government remedies to heal the financial system comes at a price to future economic growth. Within the mortgage market, Ginnie Maes remain well bid versus conventional mortgages as prepayment differences converge. Premium pass-throughs remain in vogue as money managers stay clear of Federal Reserve buying of production coupons. For the week, the 30-year current coupon mortgage spread versus the 10-year Treasury closed at 96 basis points.
Municipal Bonds
Apparently investors embraced last week’s theme (that shorter maturity bond yields have fallen to unreasonably low levels) and began selling – albeit slowly. From 3 to 5 years, AAA-rated GO bond yields rose 2-4 basis points. Meanwhile, six years and beyond saw bond yields move the opposite direction, finishing the week 5-6 basis points across the curve. In fact, 10-year AAA-rated municipal bond yields as monitored by Thomson Financial, hovered at 2.94% on Thursday, near their lowest level on record stretching back over 20 years. What encouraged the flattening trend? We saw slow secondary market trading activity and plenty of new deal activity this week, but nearly two-thirds of the total municipal bonds issued during the week were in the form of Build America Bonds (BABs), the taxable substitute for tax-free bonds in the longer part of the maturity spectrum. This included $1.2 billion in BABs from the Texas Transportation Commission. The bonds offered a maximum yield of 5.52% in the 30-year maturity, which is 1.2 percentage points above the comparable 30-year Treasury yields.
High-Yield Bonds
The high yield market is taking a well-deserved pause. For the first time in numerous months, there was no new issuance this past week as underwriters and issuers took a break from the torrid pace of new issuance over the past few months. The high yield market tone has subsided from July as investors digest the plethora of market information and economic data, much of it conflicting. For the month of August 2009 to-date, the high yield market total return as represented by the Merrill Lynch BB/B high yield index is up is 0.7%, a significant decline from the return series from the prior five months. It is quite natural for the market to take a “breather” from the neck-breaking speed at which the high yield market was travelling from mid-March 2009 through July 2009. Many investors are awaiting the return of normal trading patterns, when much of the market returns from their summer sojourn post the US Labor Day holiday on September 7.
Eastern European Equities
The CECE index of equities traded in Central Europe (Czech Republic, Hungary, and Poland) gained +4.0% this week, while the Russian stock index RTS went down -0.9%.
Emerging-market equities rose for the last two days with Polish stocks surging the most worldwide after a brokerage advised buying central European shares on prospects for an economic recovery. The WIG20 Index advanced 6.6% over the week. Bank Pekao and PKO Bank Polski contributed to the WIG20’s rally after the brokerage raised its recommendation on Polish, Czech and Hungarian stocks to “overweight.” According to strategists, growth expectations should improve in these three economies, as they benefit from the stronger-than-expected euro zone recovery.
Global Bonds and Currencies
The past week was as quiet one for major non-US sovereign bond markets, with both Bunds and Gilts closing stable to only slightly firmer despite generally stronger-than-expected data. The latest European business sentiment surveys suggested that confidence is improving more swiftly than expected, while in the UK, retail sales surprised on the upside, monthly government borrowing was much heavier than expected in July and the decline in the pace of UK inflation halted. Annual headline CPI was unchanged at 1.8% for the second successive month in July, compared with expectations of a slowing to 1.5%. One recent notable development in the UK Gilt market has been the significant downward pressure on short-term Gilt yields. Two-year Gilt yields ended the week 3 basis points lower at 0.89%, having fallen steadily from 1.3% early this month, on speculation that the Bank of England (BoE) may begin charging banks to hold reserves in a further bid to encourage them to lend. Such a step would mirror actions by Sweden’s Riksbank, which imposed negative rates on banks last month. The week also brought the surprising revelation that BoE Governor King wanted to boost the Bank’s bond purchases by even more than the £50 billion announced after the last Monetary Policy Committee meeting in early August. Along with two other committee members, King voted for £75 billion of purchases, but was overruled by the majority. Meantime, in Japan, the economy joined France and Germany in pulling out of recession in Q2, but this did not deter Japanese government bonds (JGBs) from also making minor gains across the curve on the week, thanks in part to a sharp correction in stock prices on Friday.
In currency markets the US dollar closing the week within its recent ranges against the Euro and Sterling, with both the latter currencies receiving only margin support from the generally stronger-than-expected data. However, the greenback closed down against the Yen, which received support from the positive Q2 GDP figures, weakness in Chinese equity markets and technical factors.
Emerging-Market Bonds
Emerging market dollar-pay debt spreads were unchanged as Friday’s rally reversed the widening during the week. Better-than-expected economic data in the US and Europe led to an equity rally that supported all risk assets.
In Mexico, the Central Bank left its benchmark interest rate unchanged at 4.5% as expected. The bank maintained its view that the economic recovery in Mexico would be gradual and dependent on the United States. Inflation remains contained allowing rates to stay lower in the medium term. Next week, the economic data calendar will lighten up in the United States. Thursday’s report on retail sales will likely garner the most attention as investors and economists seek to gauge the impact of the deterioration in the labor market on consumer spending. In global markets, both the United Kingdom and euro zone will be reporting on retail sales. The UK also has new data on industrial production. Aug 24
Hungary Quarterly Inflation Report
Aug 25
Consumer Confidence, S&P/Case-Shiller Home Price Index
Aug 26
Durable Orders, New Home Sales
Aug 27
Hungary Unemployment Data
Aug 28
Personal Income and Spending
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Friday, August 21, 2009
Market Reflections 8/20/2009
An overnight rally in Chinese stocks gave a boost to U.S. stocks where the S&P gained 1.1 percent to end at 1,007. The market didn't react to the day's batch of mixed economic news: disappointing increases in jobless claims but gains for the index of leading economic indicators and the Philly Fed manufacturing report. The dollar index was little changed at 78.38 as were long rates where the 10-year Treasury yield ended at 3.43 percent. Commodities didn't get much kick out of the gain in stocks with oil ending only slightly higher at $72.50.
Thursday, August 20, 2009
Market Reflections 8/19/2009
Equities withstood a 4 percent sell-off in the Chinese market to end slightly higher at 996 on the S&P 500. However frothy the U.S. market may or may not be, with the S&P up 10 percent on the year, the Shanghai composite is up 60 percent on the year. Oil jumped $3 to $72.25 in reaction to stand-out draws in still swollen petroleum stocks. Other commodities showed little movement despite weakness in the dollar which reacted more to the gain in U.S. stocks, a gain that raised demand for risk, than the loss in China. The dollar index fell 0.7 percent to 78.50.
Tuesday, August 18, 2009
Market Reflections 8/18/2009
Highlights
Cost cutting helped two big retailers, Home Depot and Target, to beat estimates which together with strong economic data out of Germany eased risk premiums, feeding gains in equities and tripping losses for the dollar. The S&P 500 gained 1.0 percent to just under 990 while the dollar index fell 0.4 percent to end at 79.12. The combination of strong equities and the weak dollar gave a boost to commodities which benefit on signs of economic strength and on signs of inflation. Oil jumped about $3 to $69.
Cost cutting helped two big retailers, Home Depot and Target, to beat estimates which together with strong economic data out of Germany eased risk premiums, feeding gains in equities and tripping losses for the dollar. The S&P 500 gained 1.0 percent to just under 990 while the dollar index fell 0.4 percent to end at 79.12. The combination of strong equities and the weak dollar gave a boost to commodities which benefit on signs of economic strength and on signs of inflation. Oil jumped about $3 to $69.
Monday, August 17, 2009
Market Reflections 8/17/2009
Traders were at loss to pin point why markets fell so steeply on Monday. Explanations included a delayed reaction to last week's disappointments for retail sales and consumer confidence along with reaction to weekend TV reports that the back-to-school season will be a flop. But Monday's hard economic data were very positive including gains for the Empire State and homebuilder reports and a big jump in the Treasury International Capital headline showing strong foreign demand for U.S. financial assets. Yet markets dropped anyway though in very thin volumes, a factor that often exaggerates swings. The S&P 500 fell 2.4 percent to 979.73 sparking talk of 950 as the next big level. The dollar gained as overnight losses in Asian stock markets tripped a run of risk aversion. The dollar index rose 0.6 percent to 79.29. Dollar strength and talk of economic weakness eased inflation premiums, reflected in commodities where prices fell back. Copper fell 7 cents to $2.74/lb while oil fell 75 cents to $66.75.
Saturday, August 15, 2009
August 14, 2009 Weekly Markrt Update
MARKET LEVELS
Friday* Last week Dec. 31, 2008 One year ago
Dow Jones Industrial Avg 9,251 9,370 8,776 11,616
S&P 500 996 1,010 903 1,293
NASDAQ 1,972 2,000 1,577 2,454
Russell 2000 561 572 499 754
DJ STOXX Europe 600 (€) 229 231 198 286
Nikkei Index (¥) 10,597 10,412 8,860 12,957
Fed Funds Target 0%-0.25% 0%-0.25% 0%-0.25% 2.00%
2-Year Treasury Yield 1.04% 1.30% 0.77% 2.43%
10-Year Treasury Yield 3.52% 3.85% 2.21% 3.89%
U.S. $ / Euro 1.42 1.42 1.40 1.48
U.S. $ / British Pound 1.65 1.67 1.46 1.87
Yen / U.S. $ 94.65 97.57 90.64 109.74
Gold ($/oz) $946.95 $954.95 $882.05 $806.63
Oil $70.59 $70.93 $44.60 $115.01
*Levels reported as of 9:00 am Pacific Standard Time
MARKET RETURNS
Year-to-date (1/1/09-8/14/09)* Year-to-date (1/1/09-8/13/09)
Dow Jones Indus Avg. 5.41% 90 Day T-Bill 0.15%
S&P 500 10.32% 2-Year Treasury 0.54%
NASDAQ 25.03% 10-Year Treasury -8.88%
Russell 2000 12.27% ML High Yield Index 38.97%
MSCI World Index 16.39% JPM EMBI Global Diversified 20.77%
DJ STOXX Europe 600 15.28% JP Morgan Global Hedged -0.61%
*Returns reported as of 9:00 am Pacific Standard Time
RECAP OF THE WEEK'S ECONOMIC RELEASES
August 11 Wholesale Inventories – Wholesale inventories fell by 1.7% in June as distributors were able to move out
excess stockpiles. The July drop was almost twice as large as the predicted 0.9% decline and marks
the tenth consecutive month of decreases.
August 12 Trade Balance – The US trade deficit widened by 4.0% to $27.0 billion in June after unexpectedly
narrowing to $26.0 billion in May. Exports and imports increased by 2.0% and 2.3%, respectively,
signaling that the global economic slump may be coming to an end.
FOMC Rate Decision – The Federal Open Market Committee announced that it will maintain the
target range for the federal funds rate at 0.0 to 0.25% and that economic conditions are likely to
warrant exceptionally low levels of the federal funds rate for an extended period. In addition, the
Committee will gradually slow the pace of its purchases of Treasury securities and anticipates
that the full amount will be purchased by the end of October.
August 13 Retail Sales – Despite a boost from the government's cash-for-clunkers subsidy, US seasonally adjusted
retail sales fell 0.1% in July, the first decline in three months. The drop indicates that consumer demand
will likely remain weak even in the face of government stimulus measures.
Business Inventories – Business inventories fell by 1.1% in June, slightly less than the 1.2% drop in
May. This marks the eighth consecutive month of inventory declines larger than 1.0% and indicates that
higher demand may be clearing away unwanted supply.
Import and Export Prices – Import prices fell by 0.7% in July, largely due to price decreases for both
petroleum and nonpetroleum products. Export prices decreased by 0.3% in the same month as a result
of lowered agricultural export prices.
August 14 Consumer Price Index – Headline inflation was unchanged on a monthly basis in July but down 2.1%
on a year-over-year basis, the most rapid rate of decline since 1950. Core inflation, which excludes food
and energy, rose 0.1%, indicating that inflation will remain subdued for some time.
Euro Zone CPI – European consumer prices dropped more than the estimated 0.6%. Prices fell
0.7% from a year earlier after declining 0.1% in June. Core inflation rate, which excludes volatile
energy and food costs, eased to 1.3%.
Euro Zone GDP – The euro zone GDP contracted by 0.1% in the second quarteragainst
economists’ forecasts of a decline by 0.5%. Demand for European exports is improving as
government rescue packages and lower interest rates support spending.
Germany & France GDP – German and French economies grew unexpectedly in the second
quarter. GDP rose a seasonally adjusted 0.3% in both countries.
OVERVIEW ___________________________________________________
The Federal Reserve left its benchmark interest rate unchanged in a range between 0.0% and
0.25% at the conclusion of its August meeting on Wednesday. In its policy statement, the Fed
reiterated that economic conditions were likely to warrant a low federal funds rate for an
“extended period,” despite signs that the US economy is “leveling out.” The central bank also
discussed exiting parts of its credit easing program, suggesting that it may end its Treasury
purchase program in October when it has exhausted the $300 billion allocated for this purpose.
Going forward, the evolution of the economic data will play a key role in driving the Fed’s next
move. The 0.1% July drop in retail sales indicated that consumers are choosing to build savings
and pay down debt rather than increase spending, underscoring our expectation that real GDP
growth will remain at 1-2% for most of 2010. In this environment, we anticipate that the Fed will
leave short-term interest rates on hold until mid-2010 until it begins the process of gradually
raising its overnight rate to 1% by the end of next year.
US MARKETS:
TREASURIES ________________________________________________________________________________
• US Treasuries had a strong performance this week, backed by better-than-expected
auctions in 3-year, 10-year, and 30-year bonds. Two-year on-the-run Treasury yields
finished the week 25 basis points (bps) lower, 10-year yields rallied 35 bps.
• At the end of the week the combination of unchanged consumer prices and lower-thanexpected
consumer confidence, expressed via the University of Michigan survey index,
accelerated this rally. This resulted in unwinding of short positions in longer dated maturities
and the re-emergence of curve flattening trades, with the yield spread between 2-yr notes
and 10-yr bonds tightening by 10 bps over the last five trading days.
LARGE-CAP EQUITIES___________________________________________________________
• The stock market fell for the first time in five weeks due to weaker-than-expected economic
data releases. The S&P 500 index fell about 1.3% for the week. Large-cap stocks
outperformed small-cap stocks. In terms of style, large-cap growth stocks outperformed
large-cap value stocks. The best performing sector was health care and the worst
performing sector was consumer discretionary. Earnings season continues to wind down
with retail companies dominating this week’s announcements. Wal-Mart Stores Inc reported
quarterly earnings of 88 cents per share, which beat analysts’ estimates of 86 cents per
share. The company attributed the positive quarter to cost reductions and better inventory
management. Shares of WMT rose almost 3% on the news.
CORPORATE BONDS _____________________________________________________________
• Investment grade primary activity continued its torrid pace during the first half of the week.
Money continues to pour into the high grade credit space despite Treasury yields falling
most of the week. For the first time in some time now, several new issues that priced this
week are actually trading wider to where they initially priced. Many investors think that the
widening is temporary as lower Treasury yields dampened interest from absolute yield
buyers. Thin summer trading also contributed to the move wider adding to the notion of
some that the widening was merely a function of the market running too far too fast.
• Investment grade corporate spreads tightened slightly on the week even though it felt like
most of the market was trading sideways on very thin volumes. Range-bound spread levels
should stay at least until post Labor Day weekend. It does feel like we have reached a point
where the buy-everything-you-can-get-your-hands-on mentality has given way to a more
rational approach. The Barclays Credit Index Option-Adjusted Spread (OAS) finished the
week at +213, tighter by 3 basis points. Financials tightened by 9 basis points (banks -7,
insurance -11); industrials widened by 1 basis point (telecom +3, consumer non-cyclical -1,
basic materials +9, capital goods -2, energy +6); and utilities widened by 1 basis point.
MORTGAGE-BACKED SECURITIES _______________________________________________
• Agency mortgages kept pace with Treasuries in the rally back to the middle of the range.
The mortgage market weathered a slew of economic reports and headline events that
offered mixed views on the direction of interest rates. This lack of direction is an ideal
environment for mortgages as rates have oscillated in a narrow 25 basis point range. Thirtyyear
current coupon pass-through spreads closed unchanged versus Treasuries at 94 basis
points. Although the production coupons experienced quiet spread movement, activity
picked up for the higher coupon agency mortgage market. The relatively benign
prepayment report has enticed investors to pay up for premium mortgages opting for an
attractive alternative to short government and corporate products.
MUNICIPAL BONDS _____________________________________________________________
• After closing in on its steepest levels on record, the municipal bond market yield curve
flattened this week. Yields on short maturity bonds edged higher and longer maturity yields
dipped lower. We are hearing – and seeing – investor interest sour for the front end of the
municipal market. An example will help explain why: a 2-year municipal bond yielding just
0.68% did not seem all that appealing as “risk-free” Treasury yields ratcheted up to 1.30% at
the end of last week. As a result, municipal investors held on to cash, shifted their focus
across markets (into taxables) or moved further out along the municipal curve. In addition,
the flood of Build America Bonds (BABs) serves as a substitute for long-term tax-exempt
issuance. Investors continue to anticipate this relative scarcity of longer term municipal
bonds in the markets, bidding up prices and sending yields lower. This helped push the yield
curve flatter. By Thursday, two-year AAA-rated bond yields rested at 0.71% and 30-year
bond yields fell to 4.62%.
• The pace of new supply kicked up a notch on the week as a flurry of deals hit the market.
One highlight was the $775 million Bay Area Toll Authority, San Francisco Bay Area Toll
Bridge Revenue Bonds. The Aa3/AA/AA- credit offered a maximum yield of 5.12% in the
2044 maturity and was met with heavy demand from investors.
HIGH-YIELD BONDS ____________________________________________________________
• The high yield bond market remained firm with bonds generally well-bid in August. The
relatively positive economic data (for example, declining unemployment rate) and the
continuing equity rally has resulted in continuing market momentum for high yield. The
broad Merrill Lynch high yield index is up 1.65% for August to-date and the Merrill Lynch
BB/B index is 1.3% for the month to-date. Similar to the past five months, it is the typically
CCC-rated segment of the market that is up the most as some investors continue to reach
for yield. High yield mutual funds continue to receive significant inflows, as investors
maintain their positive view of the asset class. The inflows this week totaled $713 million.
Surprisingly, given the time of the year, the high yield new issuance remains strong, with
over $5 billion of deals pricing this week. New deals included a $1 billion financing for
Case New Holland, the agricultural and construction equipment company, and a $1.3 billion
bond deal for Sprint Nextel, one of the largest wireless telecommunication companies.
INTERNATIONAL MARKETS:
WESTERN EUROPEAN EQUITIES __________________________________________________
• European stocks went down this week. The sectors with the worst performance were
auto & parts (-3.9%) and food & beverage (-1.1%). Volkswagen (-21.0%) pulled
down the performance of the entire sector as the takeover of Porsche is now
finalized. On the other hand, Porsche gained 11.2% as a result. Chrysler creditors
were granted permission to sue Daimler (-2.2%) over $9 billion in transfers. The food
& beverage sector suffered from high unemployment rates and cost conscious
consumers. The entire sector is suffering under hard price competition, especially
breweries. Heineken (-3.8%), Coca Cola (-3.3%) and Nestle (-3.1%) performed the
worst.
• The best performing sectors were real estate (+5.3%) and utility (+2.8%). A group of
Indian and Gulf investors is considering a take-over of Derwent London leading to an
increase of its stock by +10.2%. British real estate continues to show good growth,
specifically Land Securities (+6.6%) and Brit Land Co (+6.4%). In the utility sector,
Endesa (7.7%) profited from rising energy prices. In Germany, E.ON (+5.6%) and
RWE (+2.6%) benefited from a recovery of the sector overall.
EASTERN EUROPEAN EQUITIES __________________________________________________
• The CECE index of equities traded in Central Europe (Czech Republic, Hungary,
and Poland) gained +0.6% this week, while the Russian stock index RTS went down
-1.9%.
• The euro zone’s two largest economies, Germany and France, unexpectedly returned to
growth in the second quarter, hauling Europe out of its worst recession since World War II.
This reduced the drop in the 16-nation bloc’s GDP to just 0.1%, helping it outperform the
US and the UK. Global stimulus measures to battle the deepest slump since the Great
Depression have boosted demand for European exports and government packages are
supporting spending at home. Government and household spending were among the main
drivers of second quarter growth in Germany and France. This is also good news for the
economies of Emerging Europe, as trade with Western Europe is an important component
of their growth story.
GLOBAL BONDS AND CURRENCIES _____________________________________________
• The past week was a particularly good one for shorter-dated sovereign bonds in most
markets, supported by equity market jitters early in the week, weaker than expected US
retail sales and jobless data and by indications from the US Fed that rates will remain low
for an ‘extended period’. Two-year Bunds finished the week more than 20 basis points
lower, in line with developments in the US Treasury market, despite unexpected news that
both the French and German economies expanded modestly in Q2 after four successive
quarters of contraction. Short-dated UK Gilts received an extra fillip from the release of the
Bank of England’s (BoE) quarterly Inflation Report. Two-year Gilt yields fell more than 30
basis points on the week after the BoE said that the UK’s recovery will be ‘slow and
protracted’, suggesting that its accommodative policy stance will remain in place for some
time. The buoyant mood filtered up the European and UK yield curves but gains were most
modest in the 10-year zone. The Japanese government bond (JGB) market had a quieter
time than the other sovereign markets, with the short end of the JGB curve closing virtually
unchanged and longer-dated JGBs only a few basis points firmer on scepticism about the
sustainability of the Japanese recovery.
• In currency markets the US dollar was generally weaker against its major crosses
following the Fed’s hint that rates would remain at current low levels. At the same time, the
Euro received a boost from the better-than-expected French and German Q2 GDP data.
The Australian and New Zealand dollars also rose against the greenback due to firmer
commodity prices and mounting speculation that these countries will lead the rise in rates.
Sterling lagged, closing the week lower against the dollar, on disappointment at the BoE’s
cautious comments on the UK’s economic outlook.
EMERGING-MARKET BONDS ____________________________________________________
• Emerging market dollar-pay debt spreads widened this week as risk appetite receded. The
Federal Reserve meeting, however, delivered a statement that was in line with
expectations and reinforced investors' expectations that the global economic recovery is
under way.
• In South Africa, the Central Bank cut its benchmark interest rate by 50 basis points from
7.50% to 7%, a surprise to the market as no change had been expected. The cut was
based on the continued weakness in the South African economy and signs that inflationary
pressures are easing. Local bonds rallied on the news.
NEXT WEEK'S ECONOMIC RELEASES
August 17 Turkey May Jobless Figures
August 18 Producer Price Index, Housing Starts, German ZEW Economic Sentiment
August 19 Crude Inventories
August 20 Leading Indicators, Poland July Inflation
August 21 Existing Home Sales
Friday* Last week Dec. 31, 2008 One year ago
Dow Jones Industrial Avg 9,251 9,370 8,776 11,616
S&P 500 996 1,010 903 1,293
NASDAQ 1,972 2,000 1,577 2,454
Russell 2000 561 572 499 754
DJ STOXX Europe 600 (€) 229 231 198 286
Nikkei Index (¥) 10,597 10,412 8,860 12,957
Fed Funds Target 0%-0.25% 0%-0.25% 0%-0.25% 2.00%
2-Year Treasury Yield 1.04% 1.30% 0.77% 2.43%
10-Year Treasury Yield 3.52% 3.85% 2.21% 3.89%
U.S. $ / Euro 1.42 1.42 1.40 1.48
U.S. $ / British Pound 1.65 1.67 1.46 1.87
Yen / U.S. $ 94.65 97.57 90.64 109.74
Gold ($/oz) $946.95 $954.95 $882.05 $806.63
Oil $70.59 $70.93 $44.60 $115.01
*Levels reported as of 9:00 am Pacific Standard Time
MARKET RETURNS
Year-to-date (1/1/09-8/14/09)* Year-to-date (1/1/09-8/13/09)
Dow Jones Indus Avg. 5.41% 90 Day T-Bill 0.15%
S&P 500 10.32% 2-Year Treasury 0.54%
NASDAQ 25.03% 10-Year Treasury -8.88%
Russell 2000 12.27% ML High Yield Index 38.97%
MSCI World Index 16.39% JPM EMBI Global Diversified 20.77%
DJ STOXX Europe 600 15.28% JP Morgan Global Hedged -0.61%
*Returns reported as of 9:00 am Pacific Standard Time
RECAP OF THE WEEK'S ECONOMIC RELEASES
August 11 Wholesale Inventories – Wholesale inventories fell by 1.7% in June as distributors were able to move out
excess stockpiles. The July drop was almost twice as large as the predicted 0.9% decline and marks
the tenth consecutive month of decreases.
August 12 Trade Balance – The US trade deficit widened by 4.0% to $27.0 billion in June after unexpectedly
narrowing to $26.0 billion in May. Exports and imports increased by 2.0% and 2.3%, respectively,
signaling that the global economic slump may be coming to an end.
FOMC Rate Decision – The Federal Open Market Committee announced that it will maintain the
target range for the federal funds rate at 0.0 to 0.25% and that economic conditions are likely to
warrant exceptionally low levels of the federal funds rate for an extended period. In addition, the
Committee will gradually slow the pace of its purchases of Treasury securities and anticipates
that the full amount will be purchased by the end of October.
August 13 Retail Sales – Despite a boost from the government's cash-for-clunkers subsidy, US seasonally adjusted
retail sales fell 0.1% in July, the first decline in three months. The drop indicates that consumer demand
will likely remain weak even in the face of government stimulus measures.
Business Inventories – Business inventories fell by 1.1% in June, slightly less than the 1.2% drop in
May. This marks the eighth consecutive month of inventory declines larger than 1.0% and indicates that
higher demand may be clearing away unwanted supply.
Import and Export Prices – Import prices fell by 0.7% in July, largely due to price decreases for both
petroleum and nonpetroleum products. Export prices decreased by 0.3% in the same month as a result
of lowered agricultural export prices.
August 14 Consumer Price Index – Headline inflation was unchanged on a monthly basis in July but down 2.1%
on a year-over-year basis, the most rapid rate of decline since 1950. Core inflation, which excludes food
and energy, rose 0.1%, indicating that inflation will remain subdued for some time.
Euro Zone CPI – European consumer prices dropped more than the estimated 0.6%. Prices fell
0.7% from a year earlier after declining 0.1% in June. Core inflation rate, which excludes volatile
energy and food costs, eased to 1.3%.
Euro Zone GDP – The euro zone GDP contracted by 0.1% in the second quarteragainst
economists’ forecasts of a decline by 0.5%. Demand for European exports is improving as
government rescue packages and lower interest rates support spending.
Germany & France GDP – German and French economies grew unexpectedly in the second
quarter. GDP rose a seasonally adjusted 0.3% in both countries.
OVERVIEW ___________________________________________________
The Federal Reserve left its benchmark interest rate unchanged in a range between 0.0% and
0.25% at the conclusion of its August meeting on Wednesday. In its policy statement, the Fed
reiterated that economic conditions were likely to warrant a low federal funds rate for an
“extended period,” despite signs that the US economy is “leveling out.” The central bank also
discussed exiting parts of its credit easing program, suggesting that it may end its Treasury
purchase program in October when it has exhausted the $300 billion allocated for this purpose.
Going forward, the evolution of the economic data will play a key role in driving the Fed’s next
move. The 0.1% July drop in retail sales indicated that consumers are choosing to build savings
and pay down debt rather than increase spending, underscoring our expectation that real GDP
growth will remain at 1-2% for most of 2010. In this environment, we anticipate that the Fed will
leave short-term interest rates on hold until mid-2010 until it begins the process of gradually
raising its overnight rate to 1% by the end of next year.
US MARKETS:
TREASURIES ________________________________________________________________________________
• US Treasuries had a strong performance this week, backed by better-than-expected
auctions in 3-year, 10-year, and 30-year bonds. Two-year on-the-run Treasury yields
finished the week 25 basis points (bps) lower, 10-year yields rallied 35 bps.
• At the end of the week the combination of unchanged consumer prices and lower-thanexpected
consumer confidence, expressed via the University of Michigan survey index,
accelerated this rally. This resulted in unwinding of short positions in longer dated maturities
and the re-emergence of curve flattening trades, with the yield spread between 2-yr notes
and 10-yr bonds tightening by 10 bps over the last five trading days.
LARGE-CAP EQUITIES___________________________________________________________
• The stock market fell for the first time in five weeks due to weaker-than-expected economic
data releases. The S&P 500 index fell about 1.3% for the week. Large-cap stocks
outperformed small-cap stocks. In terms of style, large-cap growth stocks outperformed
large-cap value stocks. The best performing sector was health care and the worst
performing sector was consumer discretionary. Earnings season continues to wind down
with retail companies dominating this week’s announcements. Wal-Mart Stores Inc reported
quarterly earnings of 88 cents per share, which beat analysts’ estimates of 86 cents per
share. The company attributed the positive quarter to cost reductions and better inventory
management. Shares of WMT rose almost 3% on the news.
CORPORATE BONDS _____________________________________________________________
• Investment grade primary activity continued its torrid pace during the first half of the week.
Money continues to pour into the high grade credit space despite Treasury yields falling
most of the week. For the first time in some time now, several new issues that priced this
week are actually trading wider to where they initially priced. Many investors think that the
widening is temporary as lower Treasury yields dampened interest from absolute yield
buyers. Thin summer trading also contributed to the move wider adding to the notion of
some that the widening was merely a function of the market running too far too fast.
• Investment grade corporate spreads tightened slightly on the week even though it felt like
most of the market was trading sideways on very thin volumes. Range-bound spread levels
should stay at least until post Labor Day weekend. It does feel like we have reached a point
where the buy-everything-you-can-get-your-hands-on mentality has given way to a more
rational approach. The Barclays Credit Index Option-Adjusted Spread (OAS) finished the
week at +213, tighter by 3 basis points. Financials tightened by 9 basis points (banks -7,
insurance -11); industrials widened by 1 basis point (telecom +3, consumer non-cyclical -1,
basic materials +9, capital goods -2, energy +6); and utilities widened by 1 basis point.
MORTGAGE-BACKED SECURITIES _______________________________________________
• Agency mortgages kept pace with Treasuries in the rally back to the middle of the range.
The mortgage market weathered a slew of economic reports and headline events that
offered mixed views on the direction of interest rates. This lack of direction is an ideal
environment for mortgages as rates have oscillated in a narrow 25 basis point range. Thirtyyear
current coupon pass-through spreads closed unchanged versus Treasuries at 94 basis
points. Although the production coupons experienced quiet spread movement, activity
picked up for the higher coupon agency mortgage market. The relatively benign
prepayment report has enticed investors to pay up for premium mortgages opting for an
attractive alternative to short government and corporate products.
MUNICIPAL BONDS _____________________________________________________________
• After closing in on its steepest levels on record, the municipal bond market yield curve
flattened this week. Yields on short maturity bonds edged higher and longer maturity yields
dipped lower. We are hearing – and seeing – investor interest sour for the front end of the
municipal market. An example will help explain why: a 2-year municipal bond yielding just
0.68% did not seem all that appealing as “risk-free” Treasury yields ratcheted up to 1.30% at
the end of last week. As a result, municipal investors held on to cash, shifted their focus
across markets (into taxables) or moved further out along the municipal curve. In addition,
the flood of Build America Bonds (BABs) serves as a substitute for long-term tax-exempt
issuance. Investors continue to anticipate this relative scarcity of longer term municipal
bonds in the markets, bidding up prices and sending yields lower. This helped push the yield
curve flatter. By Thursday, two-year AAA-rated bond yields rested at 0.71% and 30-year
bond yields fell to 4.62%.
• The pace of new supply kicked up a notch on the week as a flurry of deals hit the market.
One highlight was the $775 million Bay Area Toll Authority, San Francisco Bay Area Toll
Bridge Revenue Bonds. The Aa3/AA/AA- credit offered a maximum yield of 5.12% in the
2044 maturity and was met with heavy demand from investors.
HIGH-YIELD BONDS ____________________________________________________________
• The high yield bond market remained firm with bonds generally well-bid in August. The
relatively positive economic data (for example, declining unemployment rate) and the
continuing equity rally has resulted in continuing market momentum for high yield. The
broad Merrill Lynch high yield index is up 1.65% for August to-date and the Merrill Lynch
BB/B index is 1.3% for the month to-date. Similar to the past five months, it is the typically
CCC-rated segment of the market that is up the most as some investors continue to reach
for yield. High yield mutual funds continue to receive significant inflows, as investors
maintain their positive view of the asset class. The inflows this week totaled $713 million.
Surprisingly, given the time of the year, the high yield new issuance remains strong, with
over $5 billion of deals pricing this week. New deals included a $1 billion financing for
Case New Holland, the agricultural and construction equipment company, and a $1.3 billion
bond deal for Sprint Nextel, one of the largest wireless telecommunication companies.
INTERNATIONAL MARKETS:
WESTERN EUROPEAN EQUITIES __________________________________________________
• European stocks went down this week. The sectors with the worst performance were
auto & parts (-3.9%) and food & beverage (-1.1%). Volkswagen (-21.0%) pulled
down the performance of the entire sector as the takeover of Porsche is now
finalized. On the other hand, Porsche gained 11.2% as a result. Chrysler creditors
were granted permission to sue Daimler (-2.2%) over $9 billion in transfers. The food
& beverage sector suffered from high unemployment rates and cost conscious
consumers. The entire sector is suffering under hard price competition, especially
breweries. Heineken (-3.8%), Coca Cola (-3.3%) and Nestle (-3.1%) performed the
worst.
• The best performing sectors were real estate (+5.3%) and utility (+2.8%). A group of
Indian and Gulf investors is considering a take-over of Derwent London leading to an
increase of its stock by +10.2%. British real estate continues to show good growth,
specifically Land Securities (+6.6%) and Brit Land Co (+6.4%). In the utility sector,
Endesa (7.7%) profited from rising energy prices. In Germany, E.ON (+5.6%) and
RWE (+2.6%) benefited from a recovery of the sector overall.
EASTERN EUROPEAN EQUITIES __________________________________________________
• The CECE index of equities traded in Central Europe (Czech Republic, Hungary,
and Poland) gained +0.6% this week, while the Russian stock index RTS went down
-1.9%.
• The euro zone’s two largest economies, Germany and France, unexpectedly returned to
growth in the second quarter, hauling Europe out of its worst recession since World War II.
This reduced the drop in the 16-nation bloc’s GDP to just 0.1%, helping it outperform the
US and the UK. Global stimulus measures to battle the deepest slump since the Great
Depression have boosted demand for European exports and government packages are
supporting spending at home. Government and household spending were among the main
drivers of second quarter growth in Germany and France. This is also good news for the
economies of Emerging Europe, as trade with Western Europe is an important component
of their growth story.
GLOBAL BONDS AND CURRENCIES _____________________________________________
• The past week was a particularly good one for shorter-dated sovereign bonds in most
markets, supported by equity market jitters early in the week, weaker than expected US
retail sales and jobless data and by indications from the US Fed that rates will remain low
for an ‘extended period’. Two-year Bunds finished the week more than 20 basis points
lower, in line with developments in the US Treasury market, despite unexpected news that
both the French and German economies expanded modestly in Q2 after four successive
quarters of contraction. Short-dated UK Gilts received an extra fillip from the release of the
Bank of England’s (BoE) quarterly Inflation Report. Two-year Gilt yields fell more than 30
basis points on the week after the BoE said that the UK’s recovery will be ‘slow and
protracted’, suggesting that its accommodative policy stance will remain in place for some
time. The buoyant mood filtered up the European and UK yield curves but gains were most
modest in the 10-year zone. The Japanese government bond (JGB) market had a quieter
time than the other sovereign markets, with the short end of the JGB curve closing virtually
unchanged and longer-dated JGBs only a few basis points firmer on scepticism about the
sustainability of the Japanese recovery.
• In currency markets the US dollar was generally weaker against its major crosses
following the Fed’s hint that rates would remain at current low levels. At the same time, the
Euro received a boost from the better-than-expected French and German Q2 GDP data.
The Australian and New Zealand dollars also rose against the greenback due to firmer
commodity prices and mounting speculation that these countries will lead the rise in rates.
Sterling lagged, closing the week lower against the dollar, on disappointment at the BoE’s
cautious comments on the UK’s economic outlook.
EMERGING-MARKET BONDS ____________________________________________________
• Emerging market dollar-pay debt spreads widened this week as risk appetite receded. The
Federal Reserve meeting, however, delivered a statement that was in line with
expectations and reinforced investors' expectations that the global economic recovery is
under way.
• In South Africa, the Central Bank cut its benchmark interest rate by 50 basis points from
7.50% to 7%, a surprise to the market as no change had been expected. The cut was
based on the continued weakness in the South African economy and signs that inflationary
pressures are easing. Local bonds rallied on the news.
NEXT WEEK'S ECONOMIC RELEASES
August 17 Turkey May Jobless Figures
August 18 Producer Price Index, Housing Starts, German ZEW Economic Sentiment
August 19 Crude Inventories
August 20 Leading Indicators, Poland July Inflation
August 21 Existing Home Sales
Friday, August 14, 2009
Market Reflections 8/13/2009
The cash-for-clunkers program packed less of a belt than was expected, making for a grim retail sales report that showed declines across components. But the disappointment was offset by stable jobless claims data and positive GDP readings, not negative readings, out of Germany and France. Strong earnings from Wal-Mart didn't hurt. The S&P 500 rose on day, gaining 0.7 percent to 1,012. The strength in Europe made for losses in the dollar with the dollar down 0.5 percent to 78.43. Copper, driven by Chinese stockpiling, is taking the lead in the commodities group, ending at a 2009 high of $2.88 for a 10 cent gain. Other commodities also held firm. The Treasury, despite its massive debt, wound up another successful quarterly refunding with strong demand for 30-year bonds where the yield fell 12 basis points on the day to 4.42 percent.
Thursday, August 13, 2009
Jobless claims A ray of sun or false hope?
Jobless Claims
Released on 8/13/2009 8:30:00 AM For wk8/8, 2009
The rate of layoffs is heavy but steady as first-time jobless claims were little changed in the Aug. 8 week, at 558,000 vs. 554,000 in the prior week. The numbers, in a plus, are a little bit below the four-week average, which is at 565,000. Continuing claims fell steeply, down 141,000 for data in the Aug. 1 week to 6.202 million. But the decline is hard to read, reflecting either new hirings and/or the expiration of benefits. The economy may be in recovery or at least is steady but the outlook for the jobs market, and how far it lags, is a serious concern for the economic outlook and for policy makers.
Market Consensus Before AnnouncementInitial jobless claims fell 38,000 to a much better-than-expected level of 550,000. Businesses appear to have made their major cuts in labor costs in earlier weeks and are now trimming fewer jobs. Continuing claims, however, rose 69,000 for the July 25 week to 6.310 million, indicating that it is still hard to get rehired.
DefinitionNew unemployment claims are compiled weekly to show the number of individuals who filed for unemployment insurance for the first time. An increasing (decreasing) trend suggests a deteriorating (improving) labor market. The four-week moving average of new claims smoothes out weekly volatility. Why Investors Care
Weekly series fluctuate more dramatically than monthly series even when the series are adjusted for seasonal variation. The 4-week moving average gives a better perspective on the underlying trend.
Released on 8/13/2009 8:30:00 AM For wk8/8, 2009
The rate of layoffs is heavy but steady as first-time jobless claims were little changed in the Aug. 8 week, at 558,000 vs. 554,000 in the prior week. The numbers, in a plus, are a little bit below the four-week average, which is at 565,000. Continuing claims fell steeply, down 141,000 for data in the Aug. 1 week to 6.202 million. But the decline is hard to read, reflecting either new hirings and/or the expiration of benefits. The economy may be in recovery or at least is steady but the outlook for the jobs market, and how far it lags, is a serious concern for the economic outlook and for policy makers.
Market Consensus Before AnnouncementInitial jobless claims fell 38,000 to a much better-than-expected level of 550,000. Businesses appear to have made their major cuts in labor costs in earlier weeks and are now trimming fewer jobs. Continuing claims, however, rose 69,000 for the July 25 week to 6.310 million, indicating that it is still hard to get rehired.
DefinitionNew unemployment claims are compiled weekly to show the number of individuals who filed for unemployment insurance for the first time. An increasing (decreasing) trend suggests a deteriorating (improving) labor market. The four-week moving average of new claims smoothes out weekly volatility. Why Investors Care
Weekly series fluctuate more dramatically than monthly series even when the series are adjusted for seasonal variation. The 4-week moving average gives a better perspective on the underlying trend.
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