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.
Last Wednesday night, as we waited for news out of Brussels concerning the size and the shape of the European support package, I felt like one of those New Year’s revelers in Times Square waiting for the ball to drop. There was certainly a feeling of relief to get the recent past behind us, but also a bit of foreboding as to what may lie ahead.
The market reacted very positively on Thursday to the news of an increase to $1.4 trillion for the European rescue fund (EFSF) and that the haircut on Greek debt would be 50 cents on the dollar. Stocks toasted the news, with the Dow up over +400 points before settling at 12,208, up about 3 percent. Gold and oil were also up on the day as money moved out further on the risk curve.
Also supporting the move into riskier assets was the release of the third quarter GDP report. The first look at third quarter growth came in right at the consensus of +2.5 percent. This was the fastest the U.S. economy has grown since the fourth quarter of 2010. Also in the third quarter, the U.S. economy regained its former pre-financial-crisis size. The estimate for real GDP in the third quarter was $13.35 trillion, slightly greater than the $13.33 trillion in the fourth quarter of 2007.
U.S. Treasuries once again experienced a volatile week as investors shifted their preference for risk. At one point, there was a very strong bid for the five-year note and the yield dropped under 1.00 percent. For the week, the two-year note was up 2bps to 29bps; the five-year note was up 7bps to 1.13 percent; the 10-year note was up 10bps to 2.31 percent; and the 30-year bond was up 11bps to 3.37 percent.
On Friday, we witnessed a little bit of sobriety after the high of Thursday’s “hopium” induced rally. Stocks in the U.S. and Europe were a bit lower, as were gold and oil. Bond yields in the stronger countries dipped slightly while those in the weaker countries rose a bit.
On the short-end of the yield curve, funding costs continue to rise. For the 36th consecutive day, the three-month LIBOR rate rose, settling at 42.94bps, the highest it has been since August 2010. The LIBOR-OIS spread reached the widest it has been since July 2009 (over two years!), touching 34.66bps and the TED spread hit its highest level since June 2010 at 42.47bps.
The Commercial Paper (CP) market finally broke its recent 14-week contraction streak. The CP market grew by +$11.8 billion to $961.1 billion outstanding. This was the fourth week in a row the total for the entire CP market was less than $1 trillion. The ABCP market snapped its 10-week long contraction as well, and increased by +$8.8 billion to $312.9 billion outstanding.
For the first time in 14 years, the U.S. Treasury is considering adding a new security to its quiver of debt offerings. They are analyzing the depth of investor interest in a Floating Rate Notes (FRNs) program.
In addition to continuing to monitor the situation in Europe, next week with be quite busy with month-end, the FOMC meeting on Tuesday and Wednesday, and the always-important Employment Report to be released on Friday.
To all you ghosts and globins out there, be careful.