U.S. Treasuries suffered a setback Thursday when 3rdquarter GDP grew at a stronger-than-expected 3.5% clip. Economic growth was spurred by construction spending, a slowing of inventory reductions and a huge amount of government stimulus, which could inflate the numbers.
Treasuries see-sawed earlier in the week, as traders fretted over supply concerns (all the auctions went well), ups and downs on Wall Street, and good economic news. Last week also ended the Fed purchase of Treasuries, which was introduced in March to keep mortgage rates low. Whether the Fed or market conditions made it happen is under debate.
Tuesday's unexpected drop in consumer confidence boosted bonds. It fell to 47.7 from 53.4. Separately, Case-Shiller reported that home prices in August rose 1.2% in 20 major cities, but this had little impact on bonds.
A 3.6% drop in new home sales for September -- the first decline in six months -- sent stocks down on concerns regarding consumer strength and economic recovery, but Treasuries benefited from safe-haven buying. The 7.5-month inventory of unsold homes is at its lowest level since November 1982.
Durable goods orders rose by a predicted 1% in September, thanks to demand for machinery, capital goods and defense spending. This is the fourth increase in six months. Meanwhile, inventories fell for the ninth straight month.
Thursday's first-time unemployment claims showed a decline of 1,000 to 531,000, while the four-week average fell to 526,250. Once again, continued claims declined, with the number of people collecting benefits for more than one week dropping to 5.8 million -- the fewest since March.
Bonds responded well to early news Friday, as personal income for September was unchanged. Personal spending slid an expected 0.5% from its previous 1.3% gain, as "clunkers" ended. This confirmed that consumers have a way to go when it comes righting the economy. Core prices rose 0.1% -- good news for inflation-watchers.
Bonds closed the day with big gains that sent yields, which move inversely to price, tumbling due to a major sell-off in the equity markets.
The Chicago PMI on October manufacturing conditions jumped to 54.2 from 46.1, indicating expansion. And the University of Michigan consumer sentiment survey for October climbed to 70.2 from 69.4, perhaps signaling a more positive outlook.
In spite of a slight dip in mortgage rates during the week ended Oct. 23, the Mortgage Bankers Association reported a hefty decline in mortgage applications. Refinancings fell 16.2%, while purchase apps were down 5.2%.
Numerous reports are scheduled this week, but only a few pack a wallop. One is Wednesday's meeting of the Fed. Even though the Committee is not expected to touch interest rates, there is concern about a language change. The Fed has said repeatedly that it will keep interest rates low for an "extended" period of time. If "extended" stays there will be a big sigh of relief in the bond pits. If it's eliminated, selling will likely erupt as fears of a rate increase come to the fore.
Friday's employment report for October could impact the markets, but declines in job losses don't move the markets like the huge losses posted earlier this year did. Job losses are expected to come in at around 165,000; that's 100,000 fewer than the previous month. But the unemployment rate should rise to 9.9% from 9.8% in September.
Monday's ISM index on manufacturing conditions is another one to watch. It's expected to edge up to 53 from 52.7, which bonds would deem acceptable increase. Separately, construction spending for September is predicted to fall 0.4% versus a 0.8% rise in August.
In addition to Wednesday's Fed meeting, the ISM index on the service sector is due and could rise to 51.7 from 50.9. A larger increase might rattle the markets.
Thursday's first-time claims for the week ended Oct. 31 are unknown. Fortunately, the numbers are getting smaller and have less impact. The other report scheduled, 3rdquarter productivity, is expected to rise 5.8%, down from the previous 6.6% increase.
Quarterly earnings reports are also wrapping up, but they can definitely affect buying and selling in the bond markets. Whether or not that happens won't be known until it happens.
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