ECONOMIC & BOND MARKET RECAP
By Rom Badilla, CFA – Bondsquawk.com
While the markets were focused on declines in both the retail and banking sector, pointing to a weakening recovery, economic data releases today suggest slight improvement as both durable goods and weekly jobless claims came in better than expected.
The U.S. Commerce Department reported that Durable Good Orders for May declined 1.1 percent which was better than surveys as economists were expecting a decline of 1.4 percent. Durable Goods increased to a revised April reading of 3.0 percent. Durables excluding Transportation increased 0.9 percent in May versus surveys of 1.0 percent and a revised prior period reading of -0.8 percent.
Initial Jobless Claims for the week ending June 19 remain elevated despite a slight decline from the prior week. People filing for unemployment benefits reached 457k as economists were expecting a print of 463k. The prior week’s figures were revised upward by four thousand to 476k applicants. The 4-week moving average, which has been hovering between 450k to 500k since last November, stands at 463k. An elevated number such as this is more in-line with further job losses. A moving average of below 400k is more in line with a recovery. Continuing Claims came mostly in line with surveys, at 4548k for the week ending June 12. The prior week was revised upward by 22k to 4593k.
U.S. Treasuries rallied to recent highs before meeting resistance and finished lower on the day. The yield on the 10-Year kissed the recent lows set in late May of 3.06 percent before rising late in the session. After all that is said and done, the 10-Year ended at 3.14 percent, a 2 basis point increase from the prior session. The Long Bond underperformed the rest of the maturity spectrum as the yield increased 4 basis points on the day to finish at 4.10 percent. The yield on the 5-Year closed at 1.95 percent, a move higher by 3 basis points while the 2-Year managed to inch up a basis point to a yield of 0.68 percent.
10-Year U.S. Treasury Yield – Intraday Chart
Despite the rise in the 10-Year yield, inflation expectations as indicated by the breakeven rate, which is the yield differential between fixed coupon 10-Year Treasuries and 10-Year Treasury Inflation Protected Securities (aka TIPS) declined. Breakevens declined almost 2 basis points to 1.95 percent.
10-Year Breakeven Rate – Historical Chart
Rates were lower across the Atlantic for developed economies. German 5-Year bund yields were lower by 7 basis points to 1.48 percent while French yields of comparable maturity ended at 1.98 percent, a drop of 5 basis points. U.K. 5-Year Gilts were also lower by 5 basis points to 2.10 percent.
Bond yields for peripherals caught a respite today as yields were generally lower. Spain 5-Year bond yields dropped 14 basis points to 3.60 percent. Portugal’s were down 6 basis points to end at 4.67 percent. Italy and Ireland were both flat and ended at 2.88 and 4.60 percent, respectively. The yield on Greece 5-Year bonds closed at 10.78 percent, a 7 basis point rise.
Greece Yield Curve – Daily Change
As mentioned earlier on Bondsquawk, Greece Credit Default Swap spreads spiked nearly 200 basis points to a spread of 1126, surpassing the wides set before the EU’s announcement of the bailout package. According to CMA, the cumulative default probability (CPD) now stands at 68.7 percent.
Greece 5-Year Credit Default Swap Spread – Historical Chart
Back stateside, credit markets weakened in sympathy with equities. The BofA Merrill Lynch High Yield Master Index widened 7 basis points to a spread of 689 over comparable maturity Treasuries. The U.S. Investment Grade Corporate Index inched up a basis point to a spread of 207. The U.S. Bank Index widened 2 basis points to a spread of 274.
Stocks got crushed today followed by disappointing earnings from retail stocks announced yesterday. The S&P 500 dropped 1.7 percent to 1073.69 while the Nasdaq finished at 2217.42, a loss of 1.6 percent. In response, the fear index aka CBOE VIX spiked 10.5 percent to 29.74.
The Dollar Index got dressed up for nothing and finished unchanged at 85.757. The Euro gained 0.2 percent to 1.2333 while the British Pound lost ground by 0.2 percent to 1.4935.
Gold spot prices continues its bull run as the metal advanced 0.5 percent to 1243.45.
The final tally for first quarter GDP numbers is set for tomorrow as surveys suggest a 3.0 percent increase. Also, the University of Michigan Confidence Index will be released which economists are expecting an index reading of 75.5.
