U.S. Treasuries are trading lower this morning as market participants react to today’s economic releases. Currently the 2-year note has dropped 1/32 to yield 0.47% while the 5-year note has declined 8/32 yielding 1.44%. The benchmark 10-year note has lost 13/32 in value to yield 2.61% and the price of the long bond has eroded 8/32 yielding 3.73%. On the economic front, the Producer Price Index was released in line with expectations from a “headline” standpoint but with higher than expected levels when we exclude food and energy prices. The monthly Producer Price Index (PPI), which measures the change in prices received by domestic producers in the three stages of processing (crude, intermediate materials and finished goods), rose as anticipated in July at 0.20%. However, Core PPI, which does not include the volatility in the food and energy sectors, increased of 0.30% for the month versus the anticipated 0.10%. On a year-over-year basis, PPI rose 4.20%, also in line with expectations. Nevertheless, Core PPI YoY rose 1.50% versus the expected increase 1.30%. Therefore, demand for intermediate and long Treasuries, susceptible to inflationary expectations, could be negatively affected today as a higher than expected Producer Price Index indicates the possibility of higher inflation.
Source: Bloomberg L.P. compiled by the Fixed Income Strategies Group RBC WM
Housing Starts, which measures both privately owned housing units started and authorized by building permits, was released with slightly lower than expected results. The report indicates that housing starts reached 546,000 in July, a MoM increase of 1.70%. The result was below what analysts estimated would be a 560,000 increase. The previous month's report was downwardly revised from 549,000 to 537,000. Taking a closer look at this report we see that single family homes accounted for 432,000 (a 4.20% drop) while multiple family homes contributed 114,000. Meanwhile, the building permits report was also weaker than expected at 565,000, versus a consensus of 580,000. Investors pay close attention to both Housing Starts and Building permits as they are considered good indicators of home sales and spending in general.
In other economic news, Industrial Production, which measures the change in production of the nation’s factories, mines and utilities, was released with a better than expected result showing a gain of 1.00% in July; analysts were expecting industrial production to only grow 0.50% for the period. Additionally, Capacity Utilization, which measures the greatest level of output a factory can maintain under normal conditions, was slightly above expectations at 74.80% in June versus the anticipated 74.60% reading. Although historical data shows a correlation between the level of capacity utilization and the Fed’s Monetary Policy, Bloomberg’s implied probability currently shows no chance of a Fed Funds increase to 0.50% in 2010. Finally, the Federal Reserve is expected to purchase Treasuries from the August 2014 to July 2016 maturity range in an effort to promote economic growth by keeping interest rates low.
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