Money Market Recap and Forecast

Treasury prices took a tumble on the heels of the February employment report two Fridays ago.  Yields, which move in the opposite direction of prices, rose and remained high all of last week.

There were no reports to encourage buying in Treasuries.  And Wall Street was pretty quiet.  Bond traders were concerned about the $84 billion in government debt going on the auction block, but demand was very strong.  Nevertheless, worry persists that huge supply will water down demand.

Monday and Tuesday were void of reports, and there might as well not have been any on Wednesday, considering it was on wholesale inventories for January.  They went down 0.2%.

Thursday’s report on first-time unemployment claims for the week ended March 6 showed another decline.  Claims dropped by 6,000 to 462,000, which was slightly lower than the 460,000 forecast.  The four-week average, which smoothes volatility, rose by 5,000 to 475,000 — the highest level since November.  And continued claims, those collecting benefits for more than one week, rose to 4.56 million.  But there was little reaction in bonds, as traders focused on the 10-year auction.

The U.S. trade deficit shrank to $37.3 billion from a revised $39.9 billion, but trading was unaffected.

Friday’s better-than-expected report on retail sales spurred selling, pushing the yield on the 10-year note even higher.  Sales rose 0.3% in February versus a 0.5% gain the previous month.  Excluding autos, sales rose 0.8%, better than January’s 0.6% increase.

The Reuters/University of Michigan preliminary consumer sentiment report for March unexpectedly fell to 72.5 from 73.6, pushing the yield on the 10-year back down.  The final report showed business inventories for January were unchanged.

Although mortgage rates ticked up during the week ended March 5, the Mortgage Bankers Association said that purchase applications rose 5.7%, while refis were off by 1.5%.  Some believe purchases will stay healthy as home buyers rush to meet the new tax credit deadline.

Unlike last week, there are several reports coming out that could influence trade, for better or for worse.

This week begins with Monday’s NY Empire State index on manufacturing conditions for March.  It’s expected to fall to 23.45 from 24.91, which could encourage buying in Treasuries.

However, trading could be subdued as this is the day prior to the Fed decision on interest rates.  Although no rate hike is expected, the markets will be looking for any clues about when that might happen.  They especially want to know if rates will remain low “for an extended period.”  This phrase probably won’t be removed on Tuesday, but when it is a big sell-off will likely follow.

Earlier in the day, data on February housing starts/building permits are due, with declines expected in both categories.  Starts could fall to an annual rate of 587,000 units from 591,000, while building permits are expected to decline to an annual rate of 587,000 from 591,000.

Separately, industrial production in February is expected to come in flat versus a 0.9% increase in January.  Capacity utilization should dip to 72.3% from 72.6%.  These reports could energize buying in bonds.

Wednesday the producer price index, or PPI, which checks for wholesale inflation, is not expected to find any.  It should show a 0.1% decline for February — far better than the energy-induced 1.4% rise the previous month.  Likewise, the more closely watched core rate, which eliminates food and energy prices, is expected to climb by a tame 0.1% versus 0.2% in January.

Thursday’s consumer price index, which checks retail price inflation, should show similar results.  Both the index and the core rate are expected to rise 0.1%, which bond traders should like.

First-time claims for the week ended March 13 are unpredictable.

The Philly Fed index on March manufacturing conditions could affect trading if it moves sharply up or down, as it has lately.  Right now it sits at 17.6, so three or four points either way could move Treasuries.

Leading economic indicators for February should rise 0.2% — a little slower than the 0.3% increase in January.  This report, however, usually has little impact on trading — nor does business inventories for January, which could rise 0.1%.

No reports are scheduled for Friday.

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