Jobless Claims rise and Durable Goods decline

Treasury prices dropped on Wednesday as stronger than expected economy data, via the better than expected New Home Sales report, pushed investors away from U.S. government debt obligations. The New Home Sales report showed a 17.50% jump in December, much better than the expected 3.50% increase. This better than expected number does not represent a recovery of Housing but it does provide a shot in the arm to a market which is still down 75% in monthly new home sales (which reached 1.3 million in 2005). By the end of the day, the 2-year note fell 1/32 yielding 0.63% while the 5-year note declined 7/32 to yield 1.98%. The benchmark 10-year note lost 22/32 of a point yielding 3.42% while the long bond declined 1 and 17/32 points to yield 4.59%.

The afternoon brought no surprises as the Federal Reserve Bank announced it will continue to keep rates at the current range of 0.00% – 0.25%. The Fed did acknowledge in its FOMC statement certain improving conditions in the economy but not at a fast enough pace. Furthermore, they reiterated their commitment to price stability while promoting full employment and stated that they will continue with the purchase of $600 billion of long term Treasuries.

“The economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions. Growth in household spending picked up late last year, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit…the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.” FOMC Decision January 26, 2010

Treasury prices are reacting to this morning’s economic releases which showed a slightly worst than expected reading in the weekly claims report. The 2-year Treasury is trading up 1/32 yielding 0.61% while the 5-year note has risen 2/32 to yield 2.01%. The benchmark 10-year note is currently trading 2/32 higher to yield 3.43% while the long bond has gained 7/32 to yield 4.60%. The Department of Labor released its weekly Initial Jobless Claims report showing that first time claims were higher than expected at 454,000 versus analysts’ estimates of a 405,000 increase. The Continuing Claims report also showed a higher than expected reading at 3.991 million versus the forecasted 3.873 million. The continuing claims revision for the previous week rose 36,000 to 3.897 million. More importantly, the more stable 4-week average number of Initial Claims jumped by 15,750 to 428,750.

The Durable Good Orders report, which shows the dollar volume of new orders, shipments, and inventory levels of products with a lifespan of at least 3 years, was also released this morning. This report is significant as it is considered an important indicator of future manufacturing activity and therefore, of future economic growth. This morning’s report showed that orders fell 2.50% in December, a disappointing number as analysts expected a 1.50% increase for the month. Meanwhile, Durable Goods Orders Ex-Transportation rose 0.50%, falling short of the 0.90% expected increase for the month. This unexpected decline in the headline number is attributed to a sharp decrease in Nondefense aircraft, which plummeted 99.50% in December. In other economic news, Pending Home Sales will be released at 9:00 am CST. Pending Home Sales, which tracks the number of home resales under contract, is expected to increase 1.00% for the month of December. This index is often used as a gauge to predict future home sales activity as these sales typically become existing home sales one or two months later. Finally, the Treasury will auction $29 billion 7-year notes at noon CST, completing $99 billion of new issuance for the week.