Market Analysis

Last week ended on a sour note for bonds.  A weak 30 year Treasury auction on Thursday started the slide for bonds (bond prices move in an inverse relationship to their yield/rate).  Then, Fed Chairman Bernanke made comments that the Fed would move quickly to tighten monetary policy (raise rates and pull cash out of the financial system) which were really nothing new.  However, the market responded to Bernanke's comments this time by selling bonds.  The recent rate increase by the central bank in Australia was viewed as the beginning of a global move towards tightening.  While investors know this will not happen right away, they still began to worry about the medium term (6 mo to 1 yr) positions in bonds.  When rates begin to rise, bonds that have been purchased recently will devalue because they will pay a lower yield. Even with the market action on Thursday and Friday, though, rates remain near historic lows.  The real question though is whether this week we will see a small bounce back to brings back some of the gains lost late last week or whether we will begin to see a steady climb to the low-to-mid 5's on the 30 year fixed which is where some analysts believe we will see a new short term equilibrium for mortgage rates until the next climb higher.  Unfortunately, even though this week's economic news is expected to be bond friendly (Sept Retail Sales released on Wednesday are expected to be poor and the Consumer Price Index released on Thursday is expected to show that inflation is tame), investors may use any small bounces that occur in bond prices to continue to sell their positions, which would not help interest rates.  Also, while the bond market is closed today for Columbus Day, the stock market is open and stocks are marching towards the 10,000 level on the Dow based on investor optimisim that 3rd quarter corporate earnings will be higher than expected.  This week will provide a test of that assumption as J&J (Tuesday), Intel (Tuesday after close), JP Morgan Chase (Wednesday), Citigroup (Thursday), Goldman Sachs (Thursday), Nokia (Thursday), Google (Thursday after close), IBM (Thursday after close), Bank of America (Friday) and GE (Friday) all report earnings this week.

Below is a recap of the economic calendar for this week:

Monday, Oct 12 

Bond markets are closed for Columbus Day.

Wednesday, Oct 14

September Retail Sales - expected down 2.1% including autos and without auto's expected up .3%.

August Business Inventories - expected down .9%

Minutes of the September Federal Reserve Open Market Committee meeting released - expected to show some level of disagreement among the committee about the strength of the economy and what changes should be made to current loose monetary policy.

Thursday, Oct 15

September Consumer Price Index (CPI) - expected up .2% and core rate (excluding food and energy) expected up .1%.

Empire State Manufacturing Survey - expected down slightly 17.5 after a sharp increase of nearly 7 points in September to 18.88 .

Philadelphia Fed Survey - expected down to 12.5 from last month 14.1.

Initial jobless claims for week ended 10/10 expected down by 1,000 after last week's unexpected 33,000 drop.

Friday, Oct 16

September Industrial Production and Capacity Utiliziation - production expected up .2%, capacity utilization expected unchanged at 69.6%.

Reuters/University of Michigan Consumer Sentimen Index - expected up to 74.0 from last 73.5.