Treasuries Steady At Lower Levels...Waiting On European, FOMC Meetings
--Stone & McCarthy (Princeton)-- Treasuries have stabilized following the overnight and early morning losses, but prices remain significantly lower on the day out the curve. The market traded quietly and close to yesterday's closing levels in Asia overnight, but the selling pressure grew in Europe. Stocks were firmer as most European peripheral debt markets remained fairly steady relative to German markets, and Greek spreads to German debt tightened considerably. The rapid improvement in Greek spreads in the wake of the strong statements of support from France and Germany yesterday created a broader risk on trade in Europe, which also offered a lift to U.S. equity index futures and caused the bid for Treasuries to disappear. Solid demand for Spain's debt auctions added to the better risk on tone and selloff in Treasuries.
The market plunged to new lows during the early going in the U.S., although the very busy data calendar didn't appear to be the determinant factor. Although overall CPI grew by 0.4% in August, which was double the expected +0.2%, the Core CPI was still in line with expectations at +0.2%. Also, the jobless claims figures released at the same time were significantly above expectations at 428k (highest since June 24 week), and the Empire State Manufacturing Index fell to -8.82 from -7.72, while the median estimate had been for a small improvement to -4.00. There was, however, a negative reaction in European and U.S. debt markets to reports that Treasury Secretary Geithner may push European finance ministers to leverage the EFSF along the lines of the Treasury's TALF program.
Treasuries spiked to their lows of the day and stocks jumped higher following the 9:00am eastern time announcement that the ECB, in coordination with the Fed, the BoE, the BoJ and the Swiss National Bank, will conduct three 3-month US dollar liquidity-providing operations, which will cover the end of the year. The operations will be on top of the ongoing weekly seven-day operations.
Treasuries steadied after that, holding steady through the IP and Capacity figures. Capacity Utilization was a tick below expectations at 77.4%, but Industrial Production grew 0.2%, compared to a median estimate of 0.0%. Prices were drifting back toward the lows into mid-morning on early firmness in equities when the slightly weaker than expected Philly Fed release helped knock stocks from their best levels and offered Treasuries a small lift.
Treasuries have steadied in quiet ranges not too far from the lows since then even as stocks have been drifting higher again since the late morning. Although any additional equity market gains are likely to push Treasuries back toward the morning's lows heading into the close this afternoon, players are largely awaiting developments in
Europe and the FOMC meeting next week. The EcoFin meeting beginning tomorrow is the initial focus.
The risks over the next week appear weighted to the downside. Considering the recent pricing of Greek credit and CDS, market participants have priced in a Greek default. Although it is impossible to know the full ramifications of any contagion that would follow, European leaders appear prepared to forestall such a default in the near-term, so the risk is that any actions taken to support Greece could hit Treasuries ahead of the FOMC. At the same time, players have also braced for action by the Fed next week, and there is the possibility of a repeat of the November response. The market had already priced in a strong Fed response heading into the November 2010 FOMC meeting, so when the Fed announced the $600 billion Large Scale Asset Purchase program, there was a large 'sell the fact' response, which drove yields higher through mid-December.
John M. Canavan
canavan@smra.com
609.683.5237 xt110
