by Rod Gonzalez
Treasuries continue to rise in price this week as a worsening economic outlook pushes investors to the safety of government debt. The change was more pronounced on the long maturities when inflationary fears practically vanished (at least for now) as the monthly Consumer Price Index recorded its biggest drop ever at a -1.00% (the largest drop recorded before was -0.5% in October 2006). The change in economic outlook and inflation expectation impact the yield curve in different ways: on the short end an economic slowdown pushes prices up as expectations for further rate cuts increase; on the long end lower inflation expectations diminishes risk of erosion to the value of the long maturities. The Dow Jones continued to slide and lost 427 points by the end of the day closing at 7,997 points. The 5-year Treasury gained 26/32s to yield 2.02% while the 10-year note rose 1 and 25/32s points to a 3.32% yield. The 30-year closed a noteworthy 3 and 25/32s points higher to yield 3.91% (21 basis points tighter).
The minutes for the October 28-29 FOMC meeting, released at 1:00pm CDT Wednesday afternoon did nothing but invigorate concerns about an economic slowdown. According to the Minutes, expectations for economic growth for subsequent years have been downwardly revised. The Committee is expecting subpar growth in 2009 and near potential growth but not until 2010. GDP is expected to be between 0 - 0.30% for this year. This worst than expected economic outlook will continue to push demand for short securities and will support analysts’ expectations of more rate cuts in the near future:
“In the forecast prepared for the meeting, the staff lowered its projection for economic activity in the second half of 2008 as well as in 2009 and 2010. Real GDP appeared to have declined in the third quarter, and the few available indicators that reflected conditions following the intensification of the financial market turmoil in mid-September pointed to another decline in the fourth quarter. The declines in stock-market wealth, low levels of consumer sentiment, weakened household balance sheets, and restrictive credit conditions were likely to hinder household spending over the near term.” FOMC Minutes Release Nov 19, 2008
The minutes for the October 28-29 FOMC meeting, released at 1:00pm CDT Wednesday afternoon did nothing but invigorate concerns about an economic slowdown. According to the Minutes, expectations for economic growth for subsequent years have been downwardly revised. The Committee is expecting subpar growth in 2009 and near potential growth but not until 2010. GDP is expected to be between 0 - 0.30% for this year. This worst than expected economic outlook will continue to push demand for short securities and will support analysts’ expectations of more rate cuts in the near future:
“In the forecast prepared for the meeting, the staff lowered its projection for economic activity in the second half of 2008 as well as in 2009 and 2010. Real GDP appeared to have declined in the third quarter, and the few available indicators that reflected conditions following the intensification of the financial market turmoil in mid-September pointed to another decline in the fourth quarter. The declines in stock-market wealth, low levels of consumer sentiment, weakened household balance sheets, and restrictive credit conditions were likely to hinder household spending over the near term.” FOMC Minutes Release Nov 19, 2008
Treasury prices are reacting to this morning economic releases, with the 10-year Treasury continuing yesterday’s price gain and currently trading 1 and 09/32s points higher to yield 3.17%, the 30-year Treasury has risen over 3 points to yield 3.75%. The Department of Labor released its weekly initial jobless claims report this morning showing that first time claims increased by 27,000 versus the previous week to 542,000 (the highest reading in 16 years). Analysts were expecting an increase of 505,000 for the week. Consequently, continuing claims were also higher than expected at 4.012 million versus the expected 3.900 million. The more stable 4-week average number of initial claims was reported to be 506,500 for the period (490,750 was reported the previous week). In other economic releases for the day, the Leading Economic Indicators, a composite index of ten economic indicators designed to predict economic activity six to nine months in the future, will be released at 9 am CST. Analysts are forecasting the index to report a -0.60% change in October (attention would also be placed on last month’s revision as it showed the stronger reading of 2008 at 0.30%). The Philadelphia Fed will also be releasing its index at 9:00 am CST. Analysts are expecting a reading of -35.00.
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