Yields Sink Thanks to Weakness in Retail Sales
Treasuries rallied, dropping most yields to new lows for the year, in response to data showing that consumer spending on goods fell sharply in November. The bond market was also encouraged by the apparent end of the presidential campaign, analysts said. Last night's Supreme Court ruling, which effectively makes George W. Bush the victor, enables bond investors to shift their focus from the political arena to the economy, "which continues to look rather disturbing," Goldman Sachs economist John Youngdahl said. The benchmark 10-year Treasury note rose 23/32 to 103 22/32, lowering its yield 9.6 basis points to 5.256%, the lowest since April 1999. The 30-year Treasury bond rose 1 2/32 to 111 13/32, dropping its yield 6.8 basis points to 5.466%, the lowest since February 1999. At the Chicago Board of Trade, the March Treasury futures contract gained 21/32 to 104 3/32. The news that retail sales ( definition | chart | source ) fell sharply in November prompted buying of Treasuries by suggesting that consumer spending, and thus the economy as a whole, is slowing. Retail sales fell 0.4% in November, widely missing economist forecasts that they would rise slightly. Economists polled by Reuters had forecast a 0.1% gain, on average. Much of the decline was in the auto sector, where sales fell 2.2%, the largest decline since June 1998. Excluding autos, retail sales rose 0.2%, only narrowly missing the Reuters consensus forecast of a 0.3% gain. Still, the results were an indication that the pace of consumer spending is weakening, economists and bond market analysts said. "They underscore the loss of momentum in the demand sectors of the economy over the last two to three months," Youngdahl said. The annual rate of retail sales growth slowed only slightly, to 5.8% from 6.1% in October. And total retail sales from January to June exceed the total for the same period last year by 8.7%. However a significant portion of the strength in retail sales lately has been in construction materials and gasoline, Youngdahl pointed out. When the economic growth rate (aka gross domestic product) is calculated, the consumer spending portion doesn't include retail sales of building materials. And gasoline prices have risen so much this year that they inflate the retail sales totals. When those items are also stripped out, Youngdahl says, retail sales increased a scant 0.25% a month in October and November. During the second quarter, when consumer spending grew at a 3.1% rate, the slowest since the second quarter of 1997, the same category increased an average of 0.4% a month. The prospect of slower growth increases bond investor optimism that the Fed will lower interest rates in the months ahead. Traders of fed funds futures upgraded the odds that the Fed will lower the key short-term interest rate by the end of January to 6.25% from the current 6.5% to 96% from 88%. Still, the rally surprised those who expected that a Supreme Court ruling in favor of Bush would have the opposite effect. Because Bush is seen as the preference of stock investors, and because he is seen as likely to run smaller federal budget surpluses than Al Gore would have, a ruling for Bush was expected to have at least a small negative effect on the bond market. Bond investors were relieved that the election is finally over, enabling them to concentrate on the slowing economy, A.G. Edwards fixed-income strategist Bill Hornbarger said. And because of the controversial nature of Bush's victory, they do not expect him to succeed in implementing major policy changes that would erode the projected surplus. "Certainly nobody has been given a mandate," he said. Today's large drop in the price of oil, which should lead to a lower inflation rate, also benefited the Treasury market, Hornbarger said. Tomorrow, the government will release the Producer Price Index ( definition | chart | source ) for November, which measures prices at the wholesale level. After a time, Treasury yields should continue to fall, provided that inflation and growth continue to ease, prompting the Fed to lower interest rates, Hornbarger says. The shrinking supply of Treasuries should also continue to boost their value, Youngdahl said. Even if growth continues to slow, federal budget surpluses will persist in the short-term, enabling the federal government to further curb issuance of new Treasuries, and to use surplus funds to buy back old ones from investors. Economic Indicators The weekly Mortgage Applications Survey ( definition | chart | source ) detected increases in refinancing and new mortgage activity as mortgage interest rates fell to new lows for the year. The Refinancing Index rose to 758.4, the highest since June 1999, from 663.9. The Purchase Index rose to 344, its highest reading in at least a decade, from 333.8. Freddie Mac ( FRE), the mortgage financing company, last week reported that 30-year fixed-rate mortgages averaged 7.54%, the lowest since July 1999. Import prices ( definition | chart | source ) rose in November while export prices were unchanged. The Import Price Index rose 0.2 %, but oil was largely responsible. Excluding oil, import prices fell 0.1%. The growth rate of import prices continued to slow, falling to 4.7% from 5.3% in October. Currency and Commodities The dollar rose against the yen and the euro. It lately was worth 112.38 yen, the highest since August 1999, up from 111.46. The euro was worth $0.8755, down from $0.8788. For more on currencies, see TSC's Currencies column. Crude oil for January delivery at the New York Mercantile Exchange fell to $28.74 a barrel from $29.68. The Bridge Commodity Research Bureau Index fell to 228.37 from 229.91. Gold for February delivery at the Comex fell to $271.20 an ounce from $273.20.
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