This article was excerpted from the latest issue of EconWatch, a summary of the latest economic data releases from the previous week.
Read the full report.
Congratulations to all, as we have survived yet another year of the “Times of Trouble” (see Russia 1598 – 1613). 2011 was a year that started out on a positive note only to suffer through the trials and tribulations of economic, political and even environmental challenges.
As the year began, the market thought it was only a matter of time before the Fed would tighten interest rates to cool the economic growth and potential inflation here in the U.S. In early February, the market was pricing in a 100 percent probability of the Fed raising interest rates by the end of 2011 (guess that did not happen).
We witnessed the “Arab Spring;” the Japanese earthquake, tsunami, and nuclear catastrophes; and a bailout of Portugal. We once thought interest rates in Greece were high with the two-year note at 18.51 percent and the 10-year bond at 13.83 percent - how quaint. We began to question the creditworthiness of Italy and Belgium. In the U.S., we battled through debt-ceiling and credit-rating “crises.” We saw gold soar to $1917.90/oz and oil plummet to $75.71/barrel. We observed the Fed announcing that interest rates would remain “near zero” until mid-2013, and we began to wonder if France had the financial wherewithal to withstand the financial crisis. We had to pull out our history books and look-up the “Twist.” We watched the ECB tighten interest rates by 50bps, only to see it ease by those same 50bps. We saw Italy and Spain flirt with the “crossing the Rubicon” level of seven percent on their 10-year bonds. Quite a year indeed!
This week was relatively free of any earth-shattering news. There were ongoing concerns about Europe as the size of the ECB’s balance sheet ballooned to a record 2.73 trillion euro and the Italian 10-year bond auction as not as strong as some expected.
The U.S. Dollar and U.S. Treasuries continue to benefit from all the uncertainty in Europe. The dollar reached a 15-month high of $1.2858 versus the euro, before trading off a bit to $1.2961. For the week, the two-year Treasury note was down 1bp to 27bps; the five-year note was down 8bps to 90bps; the 10-year note was down 10bps to 1.92 percent; and the 30-year bond was down 14bps to 2.92 percent. Also benefitting to this flight-to-safety was Germany, whose two-year bund touched a new all-time low yield of 14.2bps.
We continue to witness year-end funding pressure. The three-month LIBOR rate reached 58.10bps, the highest it has been since July 2009 and the LIBOR-OIS spread widened to 49bps, the highest it’s been since May 2009.
European interest rates still indicate continued market wariness as Italy was the main focus of the week. The Italian 10-year bond is currently trading at 7.03 percent after touching 7.13 percent earlier this week. On a more positive note, the yield on their two-year note continued to fall after soaring to a record-high of 8.12 percent last month. The note is currently trading at 4.95 percent.
Greek government yields continue to remain elevated. The Greek one-year note pressed up against the 400 percent level as its yield touched an all-time high of 383.58 percent before dropping marginally to 354.92 percent, while the 10-year bond is still at a very high 34.85 percent.
This coming Friday we will we receive the December Employment report. Will the recent improvements in the level of Initial Unemployment Claims augur a stronger U.S. employment picture?
Wishing all a very happy and prosperous New Year!