An “unusually uncertain” economic outlook

Good Morning,

The Treasury market rose on Wednesday as investors decided to ignore a day filled with better than expected earnings reports and focus instead on mixed comments on the economy from Federal Reserve Chairman Ben Bernanke during his semi-annual testimony before the Senate. By the end of the day, the Dow Jones Industrial Average dropped 109 points to close at 10,120. Conversely, Treasuries rallied, especially in the intermediate and long end of the curve. By the end of the day, the 2-year note rose 1/32 to yield 0.55% while the 5-year gained 7/32 yielding 1.64%. The benchmark 10-year Treasury rose 19/32 yielding 2.88% while the 30-year gained 1 21/32 of a point to yield 3.89%.

Testifying before the Senate’s Committee on Banking, Housing and Urban Affairs, Chairman Bernanke said that the outlook on the U.S. economy was “unusually uncertain”, reiterating investors’ recent concerns of a slower than expected economic recovery or even a potential double-dip recession. However, the Fed’s Chairman also added that the Fed is prepared to review additional options they can implement beyond keeping the overnight lending rate in the 0-0.25% range: “We will continue to carefully assess ongoing financial and economic developments, and we remain prepared to take further policy actions as needed to foster a return to full utilization of our nation's productive potential in a context of price stability." These options could include giving more information on the Fed’s commitment to low interest rates, decreasing the interest rate the Fed pays on reserves that banks hold at the central bank or increasing the size of its balance sheet.

Source: Bloomberg L.P. compiled by the Fixed Income Strategies Group RBC Wealth Management

Treasury prices are trading at lower levels this morning as market participants react to the Jobless Claims report and a strong opening in equities. The 2-year note declined 1/32 to yield 0.58% and the 5-year note has lost 5/32 to yield 1.68%. Meanwhile, the 10-year note is trading 8/32 lower to yield 2.91%. The 30-year Treasury bond has so far declined 9/32 yielding 3.91%. For the record, the Department of Labor released its weekly Initial Jobless Claims report in which claims rose 37,000 from the previous week to 464,000; analysts had expected a reading of 445,000. Continuing Claims dropped 223,000 to 4.487 million, analysts expected a reading of 4.590 million for this week. The less volatile 4-week moving average number of initial claims reported an increase of 1,250 from the previous week to 456,000.

In other economic news, the Existing Home Sales report will be released at 9:00 am CDT. This report is considered a good indicator of housing activity and sets the mood for what investors can expect tomorrow as it precedes the New Home Sales report. This report is expected to show that sales of existing homes dropped 9.90% in June to reach 5.10 million. Additionally, the Leading Economic Indicators, a composite index of ten economic indicators designed to predict economic activity 6 to 9 months in the future, will also be released at 9:00 am CDT. Analysts are forecasting the index to report a -0.30% change for the month of June. Finally, Federal Reserve Chairman Ben Bernanke is scheduled to continue speaking at 8:30 am CDT before Congress, this time he will deliver his semi-annual Monetary Policy Report to the House Financial Services Committee.