Market Analysis

Bonds improved yesterday on a surprise from the post meeting statement from the Federal Reserve which extended by 1 year the period during which the Fed expects to keep their Federal Funds rate at near 0.   The Fed said, ".....the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014."  The announcement by the Fed is an attempt to incentivize corporate and institutional investors into investing in riskier assets that would generate growth for the economy.  Essentially the Fed is telling investors that they are not going to earn more than the rate of inflation by investing in "safe" assets and that the Fed will do whatever it can to make sure that Fed policies are accomodative of growth so that "risky" assets have as good a chance as possible of producing better returns.  This announcement is being viewed as a better alternative for the Fed than announcing a new bond buying program.

In economic news, Initial Jobless Claims for the week ended 1/21/12 came in at 377,000 which almost matched the 375,000 economists were expecting.  December Durable Goods Orders came in up 3% which was better than the 2% expected and November Durable Goods Orders were revised up from 3.7% growth to 4.3% growth.  December Durable Goods Orders excluding the more volatile automotive component were up 2.1% which was much stronger than the .7% expected growth.

Bonds are slightly improved this morning as investors are anxious that a deal has not yet been announced between Greece and its private sector creditors. No key economic data is being released today. This week interest rates will be most heavily influenced by the Greek debt negotiations (a deal being announced would be expected to put upward pressure on rates), activity in equities as a result of corporate earnings announcements (so far, results have been mixed), the results of the US Treasury auctions (investors are looking to see whether demand will wane as the flight to quality trade of those seeking safe haven from Europe was seeming to unwind) and Friday’s initial estimate of 4^th Qtr US GDP (estimates are for over 3% growth).

Below is a recap of this week’s economic calendar.

Tuesday, January 24

• US Treasury sells $35 billion of 2-year notes

Wednesday, January 25

• December Pending Home Sales – expected down 3.0% vs up 7.3% in November
• Federal Reserve Open Market Committee (FOMC) post meeting announcement – in light of the fact that Jobless Claims have been coming in better than expected, the Fed is expected to be guardedly optimistic that the economy is improving. No change in the Fed Funds rate is expected
• US Treasury sells $35 billion of 5-year notes

Thursday, January 26

• December Durable Goods Orders – expected up 2% vs up 3.7% in November. Excluding Transportation, Orders are expected to be up .7% vs up .3% in November
• Initial Jobless Claims Week Ended 1/21 – expected 375,000 vs 352,000 the prior week
• December New Home Sales – expected annualized pace of 321,000 vs Nov pace of 315,000
• December Leading Indicators – expected up .7% vs up .5% in November
• US Treasury sells $29 billion of 7-year notes

Friday, January 27

• Initial Estimate 4^th Qtr US GDP – expected growth of 3.2% vs 1.8% growth in the 3^rd Qtr
• Final University of Michigan January Consumer Sentiment Index – expected 74.2 vs 74.0 initial estimate

Our market update with an analysis of this week's economic calendar will be published tomorrow.  No key economic data was released today.

Bond markets continued with their negative bias today.  The 10 Yr US Treasury yield has climbed to 2.07%.  Mortgage-backed securities issued by Fannie Mae and Freddie Mac are showing less volatility than US Treasuries. 

Bonds continue to experience selling pressure.  This week's lower than expected Initial Jobless Claims report in the US and reports that International Monetary Fund is working to increase its ability to provide support for the European financial crisis is causing investors who had been "long" on bonds to question their positions.  Once again the US 10 Yr Treasury note has moved above 2.0%.

In economic news, December Existing Homes sales came in at an annualized pace of 4.61 million which was better than the 4.55 million analysts had expected.

Bonds are under pressure this morning as a result of a sharp drop in Initial Jobless Claims for the week ended 1/14/2012.  Claims dropped to 352,000 vs 402,000 for the prior week.  Analysts had been expecting a 385,000 figure. 

In separate economic news, the December Consumer Price Index (CPI) was unchanged vs expectations for a .1% increase.  The Core CPI (excluding food and energy) was up .1% which matched expectations.  December Housing Starts came in at an annualized pace of 657,000 vs expectations for a 673,000 figure.  December Building Permits came in at an annualized pace of  679,000 which almost matched expectations for a 680,000 figure.  Finally, the Philadelphia Fed Index came in at a reading of 7.3 vs expectations for a 10.0 reading.

Stocks are up slightly and bonds relatively flat with a slight negative bias.  Markets are responding to news that the International Monetary Fund (IMF) wants to increase its bailout fund by $500 billion so that it can be prepared to assist in containing Europe's debt crisis.

In economic news, the December Producer Price Index was down .1% vs expectations for an increase of .1%.  The Core PPI (excluding food and energy) was up .3% which was higher than the .1% expected.  December Industrial Production came in up .4% vs exectations for a .5% increase.

Bonds opened negatively and stocks up this morning. US Treasury notes have moved to break even. Mortgage-backed securities are still slightly in the red. Markets are responding to a lower than expected decline in growth in China which reported 8.9% growth for the 4^th Qtr 2011. Equity investors are shrugging off Friday’s after-close downgrade by S&P of nine Eurozone governments including France (from AAA to AA+), Austria (from AAA to AA+), Slovenia (from AA- to A+), Slovakia (from A+ to A), Spain (from AA- to A), Malta (from A to A-), Italy (from A to BBB+), Cyprus (from BBB to BB+) and Portugal (from BBB- to BB). S&P also downgraded the European Financial Stability Facility (from AAA to AA+).

Below is a recap of this week’s economic calendar:

Tuesday, Jan 17

• January Empire (NY) Manufacturing Index – came in at 13.5 which was better than the 10.0 expected and 9.5 for December.

Wednesday, Jan 18

• December Producer Price Index (PPI) – expected up .1% vs .3% increase in November. Core PPI (excluding food and energy) expected up .1% which would match November’s increase.
• December Industrial Production and Capacity Utilization – Production expected up .5% vs down .2% in November. Capacity Utilization expected up to 78.1% from 77.8% in November.

Thursday, Jan 19

• Initial Jobless Claims Week Ended 01/14/11 – expected 385,000 vs 399,000 the prior week.
• December Consumer Price Index (CPI) – expected up .1% vs unchanged in November. Core CPI expected up .1% vs up .2% in November
• December Housing Starts and Building Permits – Starts expected at annualized pace of 673,000 vs prior pace of 685,000. Permits expected at annualized pace of 680,000 vs prior pace of 681,000
• January Philadelphia Fed Index – expected 10.0 reading vs 10.3 in December

Friday, Jan 20

• December Existing Home Sales – expected annualized pace of 4.55 million vs prior pace of 4.42 million