Market Volatility - Initial Jobless Claims hit 500K

by Rod Gonzalez

Treasury prices rose on Wednesday as bearish sentiment in the stock markets pushed demand for Treasuries higher. A 10-year Treasury auction ($20 billion) did little to mitigate demand and in fact the 10-year Treasury rose the most out of all maturities. The government intervention to aid financial institutions around the globe (from the TARP to China’s recent actions), although viewed as necessary, have so far been ineffective in stabilizing the markets. Renewed concerns that a global recession is inevitable and may be long lasting pushed investors away from the equity markets all over the world (i.e. The DAX dropped 3.00% and the Bovespa lost almost 8%). These concerns where exacerbated by the proposed changes to the TARP which shook investors’ confidence in the effectiveness of this program and its ability to aid the financial system and the overall economy. The US was not the exception to this trend where the Dow Jones Industrial Average lost 411 points (4.73%) to close at 8,282 and the Nasdaq dropped 81 points (5.17%) to close at 1,499. Consequently the 5-year note gained 20/32s to yield 2.35% while the 10-year rose 25/32s to yield 3.65%. The long bond rose 13/32s yielding 4.17%

Treasury prices are lower this morning as the Commerce Department announced that the Trade Balance decreased for the month of September. The 10-year Treasury is down 3/32s to yield 3.75% while the 30-year is down 22/32s, yielding 4.21%. For the record, the trade gap between imports and exports shrunk for that period with total exports reaching $155.4 billion, $56.5 billions short of total imports but $0.5 million less than analysts expected. Growth in total exports decreased from August’s report by 6.0% and imports also were down by 5.60% signaling an overall decrease in trading. A lower than expected trade imbalance typically supports the likelihood of a future rate hike as net exports is a component of GDP, however, this report will likely have little impact in the markets’ expectation of a rate cut due to the fact that other economic indicators point to an economic slowdown. Nevertheless, today’s expectations of a 50 basis points rate cut did drop 14% (versus yesterday) to an 80% probability of the overnight lending rate decreasing to 0.50%.

In other economic news, the Department of Labor released its weekly Initial Jobless Claims report this morning showing that first time claims increased by 32,000 versus the previous week to 516,000, the highest level in over 7 years. Analysts were expecting a reading of 480,000. Accordingly, continuing claims were also higher than expected at 3.897 million versus the expected 3.825 million. The less volatile 4-week average number of initial claims was 491,000, a 13,250 increase from the previous week. This higher than expected jobless claims report will only reinforce the belief that we could be heading into a deepening economic slowdown that will extend well into 2009.