The confidence that has recently enveloped the Treasury market seems to be evaporating, or so one could reason in light of yesterday’s jump in the yield on the benchmark 10-year Note.
As of Thursday’s close, the 10-year yield was 4.64%, up sharply from Wednesday’s 4.59%. At one point yesterday, the yield was nearly 4.67%. As a result, the 10-year yield is near its previous highs of late October, when 4.68% was briefly touched.
What’s going on? There’s no shortage of theories circulating, ranging from the usual suspects to some fresh catalysts for anxiety. To be sure, some pundits are still predicting an economic slowdown, if not worse, including the estimable Economic Cycle Research Institute. But those with the opposite view have the upper hand at the moment. Indeed, adding to the momentum among the latter is yesterday’s 25-basis-point hike in the European Central Bank’s key rate to 2.5%. Warning of inflation risks in 2007, ECB head Jean-Claude Trichet explained that he was intent on nipping the threat in the bud. Did the Europeans frighten traders in the Treasury market?
Another candidate for thinking that higher rates are still coming is the realization that the federal government’s deficits may be deeper in red ink than previously thought. There’s much debate about whether deficits and higher rates are truly linked, but expectations of bigger government debts can still move bond prices. On that note, Govexec.com, the website for Government Executive magazine, yesterday reported that the Treasury Department sent a “little-noticed” study to congressional leaders “that paints a bleaker picture of the nation’s finances than is widely accepted and is beginning to attract attention as lawmakers prepare for election-year budget battles.”
Meanwhile, Treasury Secretary John Snow told the San Francisco Chronicle that wages are at a “tipping point.” He predicted that they’ll start rising. “For the last three months or so, real wages are up something like 1.5, 1.6 percent,” he said.
Cabinet members like to speak of such things, and are forever suggesting that sunnier days are just around the corner for the masses. But at this particular juncture, investors might think twice before dismissing Snow’s outlook. The economy, after all, has been showing signs of strength recently, as we noted yesterday. Adding to the optimism is yesterday’s update on weekly jobless claims: the advance figure for seasonally adjusted initial claims was 294,000 for the week through February 25, the Labor Department reported on Thursday. That’s the seventh straight week of a below-300,000 reading, convincing many economists that the labor market is clearly growing.
Monthly Archives: March 2006
THERE’S NO STOPPING JOE
Joe Sixpack’s demise as a consuming animal has been widely predicted for some time, but greatly exaggerated, to judge by yesterday’s update on personal income and outlays for January.
The Bureau of Economic Analysis reported that personal income rose by a healthy 0.7% in January over December. But as is the inclination these days, Joe and his counterparts across the country spent more than they made in the first month of 2006 by elevating spending by 0.9%.
The trend of spending in excess of income is nothing new in the American economy. Deficit spending generally is very much the fashion these days, in both government and on the homestead. And if one defines the money supply by the M3 series, the central bank seems only to happy to make sure that everyone has enough paper to keep the spending train in motion.
One only has to look at the state of Joe’s income and outlays to find the evidence of said rolling on the consumer front. Indeed, for the third month running, the percentage change in consumption expenditures has risen at a rate above that of personal income’s advance. Going back over time, that’s far from atypical. To be sure, elevating one’s spending by a pace that exceeds income growth will eventually hit a brick wall, although one could die waiting for such economic constraint to kick in when it comes to our beloved Joe.
SHADOWS, CLOUDS, FORECASTS AND DOUBTS
“The boom is over.” So says David Lereah, National Association of Realtors’ chief economist, regarding the extraordinary bull market that is, or at least has been the residential housing market. In comments published in today’s Wall Street Journal, he observes, “Investors are pulling out in a lot of the nation’s hot markets, and that’s adding to the cooling.”
Some fresh data updates lend support to Lereah’s analysis. On Monday, the Census Bureau reported that sales of new houses slipped 5% in January from December’s tally, and the fall was evident across the country.
Optimists were quick to counter that new home sales are but a small slice of the total of house transactions. A far larger sample of residential sales trends can be found in the monthly count of existing home sales. But that too showed weakness, when the January update was released yesterday by the National Association of Realtors. Total existing-home sales–including single-family, townhomes, condominiums and co-ops–backtracked by 2.8%. What’s more, sales were 5.2% below the 6.92 million-unit level in January 2005, according to NAR.