Housing Starts beat expectations

Treasury prices continued to drop on Wednesday as the faster than expected level of industrial production reinvigorated the notion that the economic recovery is under way. Additionally, the likelihood that both the Senate and the house will vote for President Obama’s legislative compromise with the GOP to keep tax cuts in place helped pushed Treasury prices lower as it will encourage consumption, a fundamental part of GDP. By the end of the day, the 2-year note dropped 1/32 to yield 0.67% while the 5 year note declined 7/32 to yield 2.12%. The benchmark 10-year note dropped 15/32 to yield 3.53%. Similarly, the long bond fell 1 and 1/32 points to yield 4.56%.

Treasury prices have marginally changed this morning with gains on every maturity but the 30-year bond. Currently the 5-year note has appreciated 2/32 to yield 2.10%. The benchmark 10-year note has also risen 2/32 in value to yield 3.52%. Meanwhile the price of the long bond has eroded 4/32 yielding 4.60%. On the economic front, The Department released its weekly Initial Jobless Claims report showing that first time claims dropped by 3,000 during the latest week to 420,000; analysts were expecting claims to increase to 425,000. However, the previous week’s number was upwardly revised to 423,000 from 421,000. Continuing Claims was the only disappointing part of the report as it showed a higher than expected reading at 4.135 million. Analysts were expecting Continuing Claims to be 4.115 million. The more stable 4-week average number of initial claims also dropped to its lowest level in over 2 years to 422,750 versus the 428,000 number registered previously.

Housing Starts, which measures both privately owned housing units started and authorized by building permits, was released with slightly higher than expected results. The report indicates that housing starts reached 555,000 in July, a MoM increase of 3.93%. The result was better than what analysts estimated would be a 550,000 increase. The previous month's report was upwardly revised from 519,000 to 534,000. Taking a closer look at this report we see that single family homes accounted for 465,000 (a 6.90% increase) while multiple family homes contributed 90,000. Meanwhile, the building permits report was weaker than expected at 530,000, versus a consensus of 560,000. Investors pay close attention to both Housing Starts and Building permits as they are considered good indicators of home sales and spending in general

The Philadelphia Fed will also be releasing its index at 9:00 am CST. Analysts are expecting a positive reading, yet lower than November’s 22.5 level, for the month of December at 15.00. Finally, the Federal Reserve is expected to purchase another round of Treasuries focusing on 2013 - 2014 maturities in a continuous effort to boost the economy by trying to keep interest rates low.

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