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Recovery Concerns Resurface
by: Bondsquawk October 15, 2010 | about: CCX / DIA / GLD / IEF / IGOV / QQQQ / SPY / TLT


by Maulik Mody

Stocks declined as increased jobless numbers and a widened trade deficit spiked concerns about the recovery. Investor’s confidence in betting that the Fed will take action increased after prices of wholesale goods rose at a very sluggish rate in September. Treasuries continued to slide and yields ended higher across the spectrum.

Economic Data

Initial jobless in the week ended Oct 9 increased by 13,000 to 462K after the claims filed for the previous week were revised upwards by 4000. Continuous claims declined to the lowest level in a year, now at 4399K.

The trade deficit for August widened more than forecast to $46.3 billion as cheaper import prices and increased demand for foreign autos and capital equipment overshadowed the gains by exports. Exports gained 0.2% compared to 2% in July, surpassed by a 2.1% increase in imports in August. Goods and services imported grew by 2.4% and 0.5% respectively, and while exports of goods remained flat, services exported gained 0.7%. The trade deficit can be narrowed only when the U.S., whose economy is mainly service oriented, starts meeting its own demands for goods and increases export of services.

In other reports, the wholesale price of goods excluding food and energy showed a sluggish 0.1% growth for a second month as inflationary pressure decreases. The Producer Price Index excluding food and energy prices grew by merely 0.1% in September, reported the Labor Department. The Fed expressed in its last meeting that is will aim its monetary policy at, among other things, increasing inflation expectations. The economy seems to be in a lull, where neither inflationary nor deflationary pressures are strong enough to cause any change in its current state.

Interest Rates

Treasuries continued to slide on increased supply, pushing yields higher across the curve (click on chart to enlarge). Long termed Treasuries fell the most as seen in the 10 bp increase In the yield on the 30-Yr, which ended at 3.92%. The benchmark bond fell as its yield pushed 7 bp higher to 2.51%. The belly of the curve rose as the 5-Yr ended 7 bp higher at 1.18%. The 2-Yr yield fell 2 bp to .38% to push the front end of the curve slightly higher.



Inflation expectations, as indicated by the yield differential between the 10-Yr Treasury and an equal maturity inflation indexed bond (TIPS), widened 8 bp to 2.14%. (click on chart to enlarge)



Yields were mixed across the Atlantic. France’s benchmark 5-Y bond ended flat at 1.65%. Germany’s 5-Yr bonds slipped slightly as its yield ended a basis point higher at 1.43%.

Yields were mixed among the peripherals nations. Yield on Portugal’s benchmark bond tightened 10 bp to 4.65%. Ireland’s 5-Yr bond yield gained and pushed its yield 21 bp lower at 4.91%. Greece bond ended its rally as its yield gained 24 bp to 8.78%. Spain’s 5-Yr bond cut its losses from Wednesday as its yield slipped 4 bp to 2.91%.

Across The Capital Markets

Stocks slipped on poor economic data. The S&P retreated 0.45 to 1173.81. NASDAQ ended 0.3% lower at 2435.38. The VIX index gained higher to 19.88.

The DXY dollar index weakened further to 76.542. Euro advanced against the dollar to 1.4084. The cable (GBP/USD) gained to 1.6011.

Gold continued to scale new heights as it ended at 1381.15.
About the author: Bondsquawk

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