Initial Jobless Claims jumps while Trade Deficit narrows

Good morning,

Treasury prices dropped on Wednesday as U.S. stocks rallied after a strong performance in European markets which was fueled by a strong $1.62 billion Portuguese bond auction which had 80% foreign participation. For the record, the Dow Jones Industrial Average rose 83 points to reach 11,755, the highest level since August 2008.

The Treasury department had a strong $21 billion re-opening of a 10-year note which drew a yield of 3.388%. Yesterday’s reopening had a bid-to-cover ratio of 3.30, higher than the previous’ 10-year auction of 2.92 and the 10-auction average of 3.14. By the end of the day, the 2-year note lost 1/32 to yield 0.60% while the 5-year dropped 2/32 to yield 1.98%. The 10-year note eroded 6/32 to reach 3.37% while the 30-year bond declined 21/32 to yield 4.53%.

The Fed Beige Book was also released yesterday, and in another supportive factor of the economic recovery, the report stated that all Fed districts saw modest to firm gains in the areas of manufacturing, retail and non financial services while showing less favorable conditions in financial services and real estate The report also mentioned that most districts have an optimistic outlook for 2011. “Most Districts indicated that business contacts were positive about the outlook, although still generally cautious. The Dallas District noted modest increases in optimism and positive outlooks across a range of sectors, Chicago stated that contacts were cautiously optimistic about the 2011 outlook, and New York cited widespread optimism about the near-term outlook; The St. Louis, Minneapolis, Kansas City, and San Francisco Districts all pointed to planned increases in hiring by their contacts as evidence of expected strengthening in business activity in 2011. Fed Beige Book, Jan 12^th 2011

Treasury prices are continuing yesterday’s drop as market participants react to this morning’s Jobless Claims report and the Producer Price Index. Currently, both the 2-year and 5-year notes are trading 1/32 lower yielding 0.61% and 1.04% respectively. Meanwhile, the 10-year note has declined 2/32 in value to yield 3.38% and the 30-year bond is trading 7/32 lower to yield 4.54%. Providing mixed signals on the labor market recovery, this morning’s release of the Initial Jobless Claims report by the Department of Labor showed that first time claims rose more than expected during the latest week to 445,000; analysts were expecting claims to only increase to 410,000. More concerning is the fact that the more stable 4-week average number of initial claims also rose to 416,500 versus the 411,000 number registered previously. However, Continuing Claims dropped more than anticipated and below the 4 million mark to 3.879 million, analysts were expecting a less significant drop to 4.088 million. Meanwhile, the previous week was upwardly revised by 24,000 to 4.127 million.

Additionally, the Producer Price Index was released with a slightly higher than expected “headline” level on a month-to-month basis at 1.10% versus the anticipated change of 0.80%. Meanwhile, Core PPI, which does not include the volatility in the food and energy sectors, increased in line with expectations at 0.20% for the last month of 2010. On a year-over-year basis, PPI rose 4.00% or 0.20% higher than expected. However, Core PPI YoY actually increased less than forecasted at 1.30% versus 1.40%. Finally, the Commerce Department announced that the Trade Balance narrowed in November by 0.3% to -$38.31 billion versus the expected -$40.50 billion. Although both imports and exports increased during that period, the rate increase in exports was greater going from $196.82 billion in October to $197.96 billion the following month as it was driven by a sharp increase in civilian aircraft (18.70%), consumer goods (7.00%) and computer accessories (5.80%).