The rate markets started a little weaker early this morning; at 830am two data points brought the treasury andmortgage markets back to unchanged. Weekly Jobless Claims were expected up 3K to 375K, as reported claims jumped 24K to 399K; Continuing Claims up 19K, the 4-week average is at 381,750 from 374K last week. December Retail Sales were expected up 0.3%, as reported were up +0.1%, excluding autos and trucks was expected up 0.4%, as reported down 0.2%. Retail Sales were the weakest since last May. Two reports that should dampen the outlook for increased growth of the economy didn’t have the impact we would have thought. Prior to the 830am reports the DJIA futures were trading up +70, at 915am was up +22; the 10-Year Note prior to 830am was down -7/32 but at 915am was up +1/32. mortgage prices were unchanged at 915am.
At 930am the DJIA opened up +15, the 10-Year Note slipped down to -1/32 at 1.91% (unchanged) and MBS prices were unchanged. The U.S. markets are ignoring the weak Retail Sales and increase in Unemployment Claims in favor of the constant and inconsistent news out of Europe. Yesterday there were reports that Germany’s economic outlook was worsening with manufacturing slowing and talk that Europe would fall back into recession. This morning European Central Bank President Mario Draghi said there are some signs the euro-area economy is stabilizing even as the sovereign debt crisis poses risks to the outlook. “According to some recent survey indicators, there are tentative signs of stabilization of economic activity at low levels,” Draghi said at a press conference in Frankfurt today after the ECB kept its benchmark interest rate at 1% following two straight reductions. “The economic outlook remains subject to high uncertainty and substantial downside risks,” he added.
Spain and Italy successfully sold notes this morning. Spain auctioned 9.98 billion euros ($12.7 billion) of bonds maturing in 2015 and 2016, including a new 3-year Note benchmark security, twice the maximum target of 5 billion euros set for the sale. The yield on the 3-year Note was 3.384%, compared with 5.187% when the nation sold similar notes in December. Italy sold 12 billion euros of Treasury bills, meeting its target, and its borrowing costs plunged. The Rome-based Treasury sold 8.5 billion euros 1-year Notes at a rate of 2.735%, down from 5.952% at the last auction. The auctions were stronger than expected providing a razor thin idea that Europe’s debt issues may be waning; an idea completely wrong, Europe is headed for default and in our view another recession, the second in the last three years. That said, there isn’t any strong conviction regardless of ones outlook for Europe.
At 1000am, November Business Inventories, expected up 0.4%, were up 0.3%; sales were up 0.3%; the inventory to sales ratio was unchanged from October at 1.27 months. There was no reaction to the report.
Next up today; at 100pm the Treasury will auction $13B of 30-Year Bonds, re-opening the 30-Year Bond issued in November. The 10-Year Note auction yesterday and the 3-Year Note auction Tuesday saw good demand, likely the 30-Year Bond will also.
At 200pm the Treasury will report the December Deficit, expected to be down -$79.0B.
Will interest rates continue to fall? It’s difficult to handicap the outlook given the mess in Europe. So far the technical data are holding but losing a lot of momentum with investors and to some extent with traders. On recent rallies the 10-Year Note has not declined to its previous lows, on selling it hasn’t increased more than previous selling bouts. A coiling spring with the trading range narrowing each day suggests a breakout is coming but the direction yet to be determined. The outlook for the U.S. economy is has ratcheted up since there hasn’t been any new shocks out of Europe’s banking and credit crisis, keeping the bond and mortgage markets in narrow ranges. Safety trades into treasuries is waning however traders and investors are reluctant to sell U.S. treasuries.
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