by Rod Gonzalez
Treasury prices rose Tuesday as a set of weak economic reports pushed investors away from the equity markets into Treasuries. The ADP employment report showed the biggest drop since 2002. Additionally, the ISM Non-Manufacturing Index, a key survey of the services, construction and financial industries, fell to an all-time low of 44.0 last month. Breaking down the ISM report we see a 10 point decline in business activity (44.2), new orders dropped to 44.0 from a growth of 50.8 in September, and the employment portion fell to 41.5. If we combine Monday’s manufacturing and yesterday’s non-manufacturing indices we have a 43.8 level for the month, down from 49.4 for the previous period. The Dow Jones Industrial Average fell 486 points to close at 9,139. Demand for Treasuries pushed yields down; the 5-year note rose 4/32s to yield 2.51% while the benchmark 10-year gained 6/32s to yield 3.70%. The long bond rose 9/32s to yield 4.18%
The Treasury market is lower this morning as investors react to a better than expected rate of Nonfarm Productivity as well as a stronger pace of Unit Labor Costs. The 10-year Treasury is down 9/32s yielding 3.74% while the 30-year Treasury is down 24/32s to yield 4.22%. The Nonfarm productivity report, which measures the changes in productivity for the third quarter of 2008, beat analysts’ expectations at 1.10% versus the estimate increase of only 0.70%; the previous quarter was downwardly revised to 3.60%. This unexpected increase in productivity was partially attributed to a drop in employee hours (-2.70%) and a sharp increase in unit non-labor costs (7.30% vs. 2.40% for the previous period). This reports shows that companies are still able to decrease the number of hours employees work even if they face higher production costs and still reach positive output levels (the same amount of work in less time). Unit labor costs, which measures labor costs per unit of output, was also released this morning with a higher than expected gain of 3.60% for 3Q’08 versus the expected 3.00% increase. A higher than expected Unit Labor Cost could push long treasury prices down as it could signal an increase in inflationary pressures (as labor costs represent roughly 2/3s of the total cost to private companies). Although productivity was stronger than expected for the period, the trend continues to point to slower growth, especially as employee hours can only be reduced so much without output turning negative.
Additionally, the Department of Labor released its weekly Initial Jobless Claims report in which claims actually dropped 4,000 to 481,000 versus the 485,000 revised number reported for the previous period. However, Continuing Claims increased 122,000 to 3.843 million. The less volatile 4-week average number of initial claims was unchanged from the previous week at 477,000.
In other news, both the Bank of England and the European Central Bank announced today that they have cut their benchmark rates. The Bank of England announced unexpectedly a 150 basis points rate cut to 3.00% in an effort to boost lending and stabilize the UK financial market: “While the measures taken on bank capital, funding and liquidity in several countries, including our own, have begun to ease the situation, the availability of credit to households and businesses is likely to remain restricted for some time.” The ECB reacted similarly, although not as aggressive, with a 50 basis points rate cut to 3.25%. The ECB’s president Jean-Claude Trichet said the bank is reacting to the risk of economic slowdown and has more room to act as inflationary pressures decrease as food and energy prices continue to drop.
The Treasury market is lower this morning as investors react to a better than expected rate of Nonfarm Productivity as well as a stronger pace of Unit Labor Costs. The 10-year Treasury is down 9/32s yielding 3.74% while the 30-year Treasury is down 24/32s to yield 4.22%. The Nonfarm productivity report, which measures the changes in productivity for the third quarter of 2008, beat analysts’ expectations at 1.10% versus the estimate increase of only 0.70%; the previous quarter was downwardly revised to 3.60%. This unexpected increase in productivity was partially attributed to a drop in employee hours (-2.70%) and a sharp increase in unit non-labor costs (7.30% vs. 2.40% for the previous period). This reports shows that companies are still able to decrease the number of hours employees work even if they face higher production costs and still reach positive output levels (the same amount of work in less time). Unit labor costs, which measures labor costs per unit of output, was also released this morning with a higher than expected gain of 3.60% for 3Q’08 versus the expected 3.00% increase. A higher than expected Unit Labor Cost could push long treasury prices down as it could signal an increase in inflationary pressures (as labor costs represent roughly 2/3s of the total cost to private companies). Although productivity was stronger than expected for the period, the trend continues to point to slower growth, especially as employee hours can only be reduced so much without output turning negative.
Additionally, the Department of Labor released its weekly Initial Jobless Claims report in which claims actually dropped 4,000 to 481,000 versus the 485,000 revised number reported for the previous period. However, Continuing Claims increased 122,000 to 3.843 million. The less volatile 4-week average number of initial claims was unchanged from the previous week at 477,000.
In other news, both the Bank of England and the European Central Bank announced today that they have cut their benchmark rates. The Bank of England announced unexpectedly a 150 basis points rate cut to 3.00% in an effort to boost lending and stabilize the UK financial market: “While the measures taken on bank capital, funding and liquidity in several countries, including our own, have begun to ease the situation, the availability of credit to households and businesses is likely to remain restricted for some time.” The ECB reacted similarly, although not as aggressive, with a 50 basis points rate cut to 3.25%. The ECB’s president Jean-Claude Trichet said the bank is reacting to the risk of economic slowdown and has more room to act as inflationary pressures decrease as food and energy prices continue to drop.
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