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Happy New Years to all. Well, 2012 is off to an interesting start, as a holiday-shortened week always has the potential for volatility, especially when an important piece of economic information is to be released like this week’s Employment Report. The week certainly started off with a bang as equity prices were up +1.5 percent on Tuesday but then moved pretty much sideways for the rest of the week. The week was comprised mostly of two counter-balancing forces fighting for dominance on a hypothetical teeter-totter. Those forces being increased economic growth in the U.S. versus a continuing fear of European crisis and recession.
In the U.S., the big news of the week was the employment situation. Whether viewing the ADP Report, the Initial Claims Report, or the Employment Report, the market was surprised to the upside. The Nonfarm Payrolls number came in at +200k (versus a consensus of +150k) with an unemployment rate of 8.5 percent, which was an improvement of 0.1 percent, while the consensus was for a deterioration of -0.1 percent to 8.7 percent. The Unemployment Rate is now at its lowest level since February 2009 and the number of jobs in the U.S. economy grew by 1.64 million jobs in 2011, the greatest amount since 2006.
The idea that the U.S. economy may be growing faster than previously thought helped to incite the movement of money out of safety into a little more risk. For the week, U.S. Treasuries gave up a bit of their rally. The two-year Treasury note was up 1bp to 25bps (still down 3bps over the past two weeks); the five-year note was up 2bps to 85bps (still down 13bps over the past two weeks); the 10-year note was up 7bps to 1.95 percent (still down 9bps over the past two weeks); and the 30-year bond was up 12bps to 3.01 percent (still down 5bps over the past two weeks).
As for continuing economic fears in Europe, there is now a record amount of deposits residing on the balance sheet of the ECB. In a sign of how wary European banks are becoming, that amount has now reached 455 billion euro.
Interest rates in Europe remain quite elevated. The Italian 10-year bond remained above the dangerous seven percent level, touching its highest yield since late November at 7.18 percent, before settling for the week at 7.13 percent. The Spanish 10-year bond spiked 68bps this week from 5.07 percent to 5.75 percent before closing at 5.71 percent. The French 10-year bond jumped from its low last week of 2.94 percent to a high of 3.41 percent before winding up at 3.37 percent. The safety-trade in Europe continues to be German bunds. The 10-year bund traded fairly close to 1.85 percent all week long, and it was a similar story for the two-year bund, trading near its all-time low yield of 14.2bps at 16.6bps.
The story out of Greece was actually rather tame this week. Yields were relatively unchanged this week with the Greek one-year note at 373.26 percent, the two-year note at 135.51 percent and the 10-year bond at 34.93 percent.
The euro, which has shown amazing strength throughout the entire financial crisis, may finally be showing signs of vulnerability as the economy of the eurozone weakens relative to its trading partners. The U.S. dollar reached a 15-month high versus the euro at $1.2698.
The spigot for issuing corporate debt was turned on this week, after a very normal “quiet time” around the holidays and year-end. GE had the deal-of-the-week with its $4 billion three-tranche transaction, which was comprised of $2 billion of a three-year note, $1 billion of a five-year note and $1 billion of a 10-year bond. Also in the market this week was Citigroup with its largest debt deal since 2009 with a $2.5 billion five-year note; Ford Motor Credit with a $1 billion two-part deal made up of $300 million of a three-year note and $700 million of a six-year note and Kraft with an 18-month FRN paying three-month LIBOR plus 87.5bps.