Treasury prices dropped on Wednesday as market participants reacted to the ADP Employment number (-203,000 vs. -198,000) and ISM Non-Manufacturing (at 50.6 vs. 51.5). More importantly, the afternoon brought the FOMC announcement that they will continue to keep rates at the current range of 0.00 – 0.25%. Because this decision was highly anticipated, the wording used becomes perhaps more important. The Fed’s announcement covered three points that are key to the markets: 1) The FOMC expects to keep rates at this level for an extended period 2) Long term inflation expectations are stable and subdued 3) They reiterated that economic conditions seem to be improving. The Fed also plans to reduce its purchases of agencies by $25 billion to $175 billion based on the limited availability of this type of debt. By the end of the day the 2 year note had dropped 1/32s to yield 0.90% while the 5-year ended 3/32 lower yielding 2.38%. The benchmark 10-year declined by 15/32 to yield 3.52% and the long bond lost 1 point 6/32 yielding 4.40%.
“The Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” FOMC Release November 4, 2009
Source: Bloomberg L.P. Chart by The Fixed Income Strategies Group RBC WM
The Treasury market is lower this morning due to a number of events such as the new supply that was announced this week as well as this morning’s economic reports. The 10-year Treasury is down 5/32s yielding 3.54% while the 30-year Treasury is down 13/32s to yield 4.43%. Nonfarm productivity, which measures the changes in productivity for the third quarter of 2009 beat analysts’ expectations at 9.50% versus the estimate increase of 6.50%; the previous quarter was upwardly revised by 30 basis points to 6.90%. This higher than expected increase in productivity was partially attributed to a drop in employee hours (-5.00% on a quarterly annualized basis) as wells as a sharp increase in unit non-labor costs (10.00%) and output (4.00% vs. 1.10% for the previous period). This reports shows that companies are able to decrease the number of hours employees work and still reach positive output levels (more amount of work in less time). As a result unemployment is unlikely to decline in the near term. Unit labor costs, which measures labor costs per unit of output, was also released this morning with a worse than expected decrease of -5.20% for 3Q’09 versus the expected -4.20%. This report supports the belief that inflationary pressures will remain subdue for some time.
Additionally, the Department of Labor released its weekly Initial Jobless Claims report showing that claims dropped 20,000 versus the previous week to 512,000; analysts were expecting claims to be 522,000 for the period. Continuing Claims too were slightly lower than expected at 5.749 million versus the forecast 5.750 million. Consequently the less volatile 4-week moving average number of initial claims dropped 3,000 to 523,750.
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