Market Snapshot 1/12/2012

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Rate markets started early this morning a little weaker; at 8:30 two data points brought the treasury and mortgage markets back to unchanged. Weekly jobless claims were expected up 3K to 375K, as reported claims jumped 24K to 399K; continuing claims up 19K, the 4 wk average at 381,750 frm 374K last week. Dec retail sales were expected up 0.3%, as reported +0.1%, ex autos and trucks expected up 0.4%, as reported down 0.2%. Retail sales the weakest since last May. Two reports that should dampen the outlook for increased growth of the economy; they didn’t have the impact we would have thought. Prior to the 8:30 reports the DJIA futures were trading +70, at 9:15 +22; the 10 yr note prior to 8:30 down 7/32, at 9:15 +1/32. Mortgage prices unchanged at 9:15.  

At 9:30 the DJIA opened +15, the 10 yr note slipped to -1/32 at 1.91% unch and MBS prices unchanged. The US markets are ignoring the weak retail sales and increase in unemployment claims in favor of the constant and inconsistent news out of Europe. Yesterday there were reports that Germany’s economic outlook was worsening with manufacturing slowing, talk that Europe would fall back into recession. This morning European Central Bank President Mario Draghi said there are some signs the euro-area economy is stabilizing even as the sovereign debt crisis poses risks to the outlook. “According to some recent survey indicators, there are tentative signs of stabilization of economic activity at low levels,” Draghi said at a press conference in Frankfurt today after the ECB kept its benchmark interest rate at 1 percent following two straight reductions. “The economic outlook remains subject to high uncertainty and substantial downside risks,” he added.  

Spain and Italy successfully sold notes this morning. Spain auctioned 9.98 billion euros ($12.7 billion) of bonds maturing in 2015 and 2016, including a new three-year benchmark security, twice the maximum target of 5 billion euros set for the sale. The yield on the three-year notes was 3.384 percent, compared with 5.187 percent when the nation sold similar notes in December. Italy sold 12 billion euros of Treasury bills, meeting its target, and its borrowing costs plunged. The Rome-based Treasury sold 8.5 billion euros one-year bills at a rate of 2.735 percent, down from 5.952 percent at the last auction. The auctions were stronger than expected providing a razor thin idea that Europe’s debt issues may be waning; an idea completely wrong, Europe is headed for default and in our view another recession, the second in the last three years. That said, there isn’t any strong conviction regardless of ones outlook for Europe.

At 10:00, Nov business inventories, expected up 0.4%, were up 0.3%; sales up 0.3%; the inventory to sales ratio unchanged from Oct at 1.27 months. No reaction to the report.

Next up today; at 1:00 Treasury will auction $13B of 30 yr bonds, re-opening the 30 yr issued in Nov. The 10 yesterday and the 3 yr auction Tuesday saw good demand, likely the 30 yr will also.

At 2:00 Treasury will report the Dec deficit expected -$79.0B.

Will interest rates continue to fall? Hard to handicap the outlook given the mess in Europe; so far the technical are holding but losing a lot of momentum with investors and to some extent with traders. On recent rallies the 10yr has not declined to its previous lows, on selling it hasn’t increased more than previous selling bouts. A coiling spring with the trading range narrowing each day suggests a breakout is coming, the direction yet to be determined. The outlook for the US economy is being ratcheted up, there hasn’t been any new shocks out of Europe’s banking and credit crisis, keeping the bond and mortgage markets in narrow ranges. Safety trades into treasuries is waning, however traders and investors are reluctant to sell US treasuries.