Market Analysis

The Federal Reserve announced yesterday that they would purchase $600 billion of US Treasury notes through June 2011.  The initial market reaction was slightly negative.  Bonds were up in the morning prior to the announcement and then turned negative for several hours  following the announcement and ended slightly better at the end of the day.  This morning bonds are improved.  The  prospects to steady to fractionally lower rates depend now not on the Fed but on economic data.  If the data comes in weaker than expected, analysts expect rates to stay near current levels for the near term.  However, if economic data comes in better than expected , rates are expected to start to climb in anticipation that the Fed will be successful in increaseing inflation to their target growth rate of 2.0 - 2.5%.  At that level, a US Treasury yielding 2.5% will deliver a 0% real  rate of return (after inflation).  Also for foreign investors who also have to translate US dollar yields back into their home currency, the after-inflation, after-currency translation rate of return could be negative if the dollar continues to weaken.   This takes us back to the "fear" trade.  The "fear"/"flight-to-quality" trade that started when Lehman collapsed and continued through late summer with the Euro Zone debt crisis may be running its course.

In economic news today, Initial Unemployment Claims for the week ended 10/30/10 came in at 457,000 which was higher than the 437,000 to 445,000 level the market had been expecting.  Continuing Unemployment Claims for the week ended 10/23/10 came in at 4.340 million which was lower than the 4.386 million the market had been expecting.  3rd Qtr Productivity came in up 1.9% and Unit Labor Costs came in down 1.0% vs the .9% to 1.0% expected for both of those measures.  Tomorrow's October Non Farm Payroll report is expected to show 60,000 additions to payroll, with all of the additions coming from the private sector.