November 16, 2015
Prior Week Summary
The markets traded with a moderately strong tone last week, with rates falling across the duration spectrum, led by the strength of the 5-year part of the curve, which fell by 8 basis points. The curve reversed a part of the recent steepening trend, as the spread between the 2-year and 5-year notes narrowed by 3 basis points. The week started with a disappointing announcement from the Labor Department that import prices declined by 0.5% in October (consensus -0.1%) while the September figures were revised downward to -0.6% from -0.1%. Petroleum prices (-2.1%) were the largest factor leading to the decline, followed by a decline in prices for industrial supplies (-1.4%). The trade weighted dollar has continued its impressive rally of late (EUR/USD $1.073) which suggests we may see additional weakness in prices in coming months and continued difficulty in the manufacturing sector.
Separately, the Labor Department reported on Thursday that applications for jobless benefits held steady at 276,000 for the first week of November, in line with market consensus. At the same time, the number of people filing continuing claims for jobless benefits rose slightly (5,000) to a total of 2.17mm. The Labor markets remain a bright spot for the economy as many analysts estimate we are making meaningful progress towards the goal of full employment.
Also contributing to the rally in duration, the Commerce Department reported that retail sales rose by a lackluster 0.1% in October, less than the 0.3% gain forecasted prior to the release. The market did not place much weight on the relative strength of the core retail sales figure(+0.3%), which excludes sales of motor vehicles and gas station purchases. The data suggests that consumers are not spending the money being saved at the pump caused by lower fuel prices as we approach the crucial holiday spending season.
Lastly, to cap off a busy week, the Commerce Department reported that wholesale prices unexpectedly fell by 0.4% in October, the second consecutive month of declines. Declining prices at the producer level illustrates the important interplay between the strength of the dollar and the efficacy of monetary tightening as it relates to the Fed’s inflation mandate.
The Look Forward
Another active week on the data front this week with updated figures on consumer prices, industrial production, and housing starts upcoming. The Fed will be releasing the minutes from the October meeting on Wednesday, and traders are likely to scour the report for any updated indications of the Fed’s intentions. The Treasuring is looking to sell $13B in 10-year TIPS on Wednesday.