ECONOMIC AND BOND MARKET RECAP

By Rom Badilla, CFA – Bondsquawk.com

Today’s economic data releases came in mostly in-line with expectations. Personal Incomes for May increased by 0.4 percent which were below consensus estimates of 0.5 percent while Consumer Spending increased by 0.2 percent versus surveys of 0.1 percents. Income gains were driven by increases in wages as firms increased productivity and added more hours to the work week. As income gains came in above spending, the saving rate rose to 4.0% from 3.8% a month prior.

The Personal Consumption Expenditure (PCE) Core Price Index came in slightly higher at 0.2 percent versus consensus views of 0.1 percent. According to BNP Paribas’ Senior Economist, Julia Coronado, today’s surprise reading is a result of the imputed portion of the index which includes services like bank and medical services where there is no observed price. The market-based core index which is calculated using observed prices increased 0.1 percent which was in-line with expectations.

The Chicago Fed National Activity Index, which is a indicator on the current state of economic activity and inflationary pressures, came in at a reading of 0.21 for May. Economists were expecting a reading of 0.32 after a revised prior period reading of 0.25. A reading below zero reflects below trend growth in the overall economy as well as declining inflation pressures.

In addition, the Dallas Fed Manufacturing Activity survey declined in June by 4.0 percent versus a consensus gain of 3.2 percent. The survey increased by 2.9 percent in April. According to the text, the Dallas Fed conducts the Texas Manufacturing Outlook Survey monthly to obtain a timely assessment of the state’s factory activity. Data for today’s survey were collected June 15-23, and 105 Texas manufacturers participated. The survey included questions regarding whether output, employment, orders, prices and other indicators increased, decreased or remained unchanged from the prior month.

On concerns that the U.S. economy may falter, U.S. Treasuries rallied across the curve. The yield on the 2-Year declined even further to 0.62 percent, a drop of 3 basis points from Friday. The 5-Year declined 8 basis points to a yield of 1.82 percent and the yield on the Long Bond decreased 6 basis points to 4.00 percent. As we discussed earlier this month, the yield on the 10-Year Treasury appears to be free and clear of the 3.10 technical barrier after closing the day at 3.02 percent, a decline of 9 basis points from Friday’s close.

While I think that the deflation story still has some legs to it and the 10-Year could reach to a 2.75-2.90 percent yield before the year is out, I would not be surprised to see some short-term profit taking here as we move into quarter-end. In addition, Non-Farm Payrolls and Unemployment figures are released this Friday so it’s possible that market participants clear the deck in terms of risk toward the end of this week as they await further clarity on the health of the economy.

Inflation expectations as indicated by the yield differential between the 10-Year and 10-Year TIPS declined 4 basis points to a breakeven rate of 1.91 percent.

Across the Atlantic, government bond yields were generally mixed among developed economies. German 5-Year Bunds declined 3 basis points to a yield of 1.47 percent while the yield on France’s 5-Year widened to 2.05 percent, an increase of 2 basis points. 5-Year U.K. Gilts where unchanged on the day at 2.09 percent.

Greece government bond yields continue rise on concern of an impending default or restructuring. While the yield remained the same for the 2-Year at 10.11 percent, the 3-Year maturity spiked 22 basis points to 11.30 percent. The 5-Year added 10 basis points to finish the session at 11.02 percent while the yield on the 10-Year closed at 10.59 percent to 17 basis points.

For the rest of the peripherals, bond yields were mixed. The yield on Spain’s 5-Year gained 9 basis points to close at 3.70 percent. Portugal’s declined 4 basis points to 4.67 percent while the yield on Italy’s 5-Year increased 8 basis points to 3.00 percent. Ireland 5-Year bond yields were flat and closed at 4.58 percent.

Back stateside, the credit markets were generally tame.  The Merrill Lynch High Yield Master Index increased to a spread of 693 basis points over comparable maturity Treasuries.  The Investment Grade Index widened a basis points to a spread of 208.  The spread on the U.S. Bank Index was unchanged at 274 basis points.

Agency Mortgage Backed Securities continue to outperform Treasuries. The yield differential between 30-Year Conventional MBS priced at par and the 10-Year declined a basis point to a spread of 73. For the month, the spread has declined 12 basis points suggesting strong investor appetite.

Stocks oscillated back in forth into and out of positive territory before closing down for the day. The S&P 500 Index declined 0.2 percent to 1074.57 while the Nasdaq lost 0.1 percent to 2220.65. The CBOE VIX Index edged higher by 1.6 percent to 29.0.

The Dollar Index advanced 0.5 percent to 85.696. The Euro declined 0.7 percent to 1.2277 and the British Pound gained 0.3 percent to 1.5105.

Gold spot prices ended at 1238.95, a decline of 1.3 percent.

Tomorrow, we have the release of S&P/Case Shiller Home Price data for April which is expected to reflect a decline of 0.1 percent from the prior month. In addition, Consumer Confidence for June will be released which surveys suggest a slight index level decline to 62.5 from 63.3 in the previous period. As mentioned, Nonfarm payrolls and Unemployment numbers, which is slated for a Friday release, highlight the week.

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