by Rod Gonzalez
Fixed Income Strategist
RBC Wealth Management
Treasury prices ended at lower levels on Wednesday as market participants exited both the equity and Treasury markets on continuing concerns regarding the financial health of European countries. The 2-year note declined 3/32 to yield 0.77% while the 5-year note dropped 9/32 to yield 2.12%. Meanwhile, the benchmark 10-year note lost 6/32 to yield 3.37% and the long bond declined 7/32 to a 4.24% yield. For the record, the April 27-28 FOMC meeting Minutes were released in the afternoon with upward revisions to economic forecasts. According to the Minutes, the FOMC is estimating GDP will grow more than previously expected: from 2.80% - 3.50% to 3.20% - 3.70%. Additionally, the FOMC has downwardly revised their expectation for the unemployment rate to a range between 9.10% and 9.50%. Officials also anticipate inflationary risk to remain contained in the subsequent years with food/energy prices leading headline PCE to levels slightly above core PCE.
“The information reviewed at the April 27-28 meeting suggested that, on balance, the economic recovery was proceeding at a moderate pace and that the deterioration in the labor market was likely coming to an end. Consumer spending continued to post solid gains in the first three months of the year, and business investment in equipment and software appeared to have increased significantly further in the first quarter…Residential construction, while having edged up, was still depressed, construction of nonresidential buildings remained on a steep downward trajectory, and state and local governments continued to retrench. Consumer price inflation remained low.” FOMC Minutes Release April 27-28, 2010
“The information reviewed at the April 27-28 meeting suggested that, on balance, the economic recovery was proceeding at a moderate pace and that the deterioration in the labor market was likely coming to an end. Consumer spending continued to post solid gains in the first three months of the year, and business investment in equipment and software appeared to have increased significantly further in the first quarter…Residential construction, while having edged up, was still depressed, construction of nonresidential buildings remained on a steep downward trajectory, and state and local governments continued to retrench. Consumer price inflation remained low.” FOMC Minutes Release April 27-28, 2010
Treasuries are rallying this morning as investors are expected to continue to move out of equities, futures are pointing to a sharp opening drop, into government debt. This is especially true in longer dated securities as the FOMC forecast calls for consumer price inflation to remain under 2.00% until at least 2012 (see graph above). The 2-year note has currently gained 3/32 to yield 0.72% while the 5-year note has risen 12/32 yielding 2.04%. The 10-year note has moved 28/32 higher to yield 3.26% and the 30-year bond is up over 2 points to yield 4.13%.
On the economic front, the Department of Labor released its weekly Initial Jobless Claims report showing that first time claims rose from the previous week to 471,000, worse than analysts’ expectations of an addition of 440,000 for the week. Consequently, continuing claims were also higher than estimated, although lower than the previous week at 4.625 million versus the expected 4.605 million. The more stable 4-week average number of initial claims also rose to 453,500 versus the 450,500 number registered in the previous period.
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 CDT. Analysts are forecasting the index to report a 0.20% change in April. Finally, the Philadelphia Fed business survey will also be releasing its index at 9:00 am CDT. Analysts are expecting a reading of 21.30.
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