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October 30, 2010

U.S. Economy Grew 2% as Consumer Spending Rises
By Daniel Kruger and Susanne Walker – Oct 30, 2010

Treasury 30-year bond yields climbed the most in 10 months in October as U.S. securities fell amid speculation that asset purchases by the Federal Reserve will reignite inflation.

The gap in yields on 30-year Treasury Inflation Protected Securities and comparable U.S. bonds, the breakeven rate that indicates trader expectations for prices over the life of the securities, widened yesterday to the most in five months. A sale of five-year TIPS this week drew the first negative yield at a U.S. debt offering as investors speculated returns will be positive when inflation rises. The Fed meets Nov. 2-3.

“People generally don’t want to fight the Fed,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas Securities Corp., one of 18 primary dealers that trade with the central bank. “One area you really don’t want to fight the Fed is TIPS breakevens.”

The yield on the 30-year Treasury bond rose 30 basis points, or 0.30 percentage point, to 3.99 percent, from 3.69 percent on Sept. 30, according to BGCantor Market Data. The 3.875 percent security due in August 2040 dropped 5 9/32, or $52.81 per $1,000 face value to 98 2/32.

Ten-year Treasury yields rose nine basis points to 2.6 percent, from 2.51 percent at the end of last month. They rose for six straight days through Oct. 27 as the securities slid for the longest period since October 2008. Yields on seven-year debt fell two basis points to 1.89 percent.

First Drop Since March

Treasuries overall lost investors 0.4 percent through Oct. 28, the first monthly decline since a 0.9 percent drop in March, Bank of America Merrill Lynch indexes showed. They’re up 8.3 percent in 2010, reflecting demand for the relative safety of government debt as the U.S. economic recovery faltered. The Standard & Poor’s 500 Index rose 6.1 percent this month.

Thirty-year bonds pared their monthly loss yesterday after primary dealer Goldman Sachs Group Inc. said any so-called quantitative easing by the Fed to spur the economy would likely include purchases of the maturity.

Data yesterday showed the Fed’s preferred inflation measure rose less than forecast, adding to speculation policy makers will boost asset purchases. The price gauge, a measure of personal consumption that strips out food and energy costs, rose at a 0.8 percent annual pace in the third quarter, less than the 1 percent median forecast in a Bloomberg News survey, according to Commerce Department figures.

U.S. gross domestic product increased at a 2 percent annual rate from July through September, in line with economists’ forecasts, Commerce Department data showed. The pace was 1.7 percent in the second quarter and 3.7 percent in the first.

Inflation ‘Trigger’

“We have softer-than-expected inflation data,” said Dan Mulholland, a Treasury trader in New York at primary dealer Royal Bank of Canada. “The GDP is a positive sign going forward, but inflation data will trigger whether or not the Fed does QE.”

The difference between yields on 30-year bonds and comparable TIPS widened 52 basis points to 2.59 percentage points, the most since May 13. The gap between 10-year notes and TIPS increased 33 basis points this month to 2.15 percentage points, the most since May 18.

“Inflation-linked bonds outperformed nominal Treasuries significantly because of expectations that a fresh round of quantitative easing will lead to inflation,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh.

Negative Yield

A $10 billion auction of five-year TIPS on Oct. 25 drew a yield of minus 0.55 percent. The bid-to-cover ratio, a gauge of demand that compares the amount bid with the amount offered, was 2.84, above the average of 2.38 at the previous 10 auctions of the security.

The U.S. also auctioned $35 billion in two-year debt, $35 billion in five-year securities and $29 billion in seven-year notes this week. The two- and five-year debt sales also had higher-than-average demand amid speculation the Fed’s efforts may not bring the economy back to full speed quickly.

Policy makers will probably announce next week asset purchases at an initial pace of $75 billion to $100 billion a month, strategists at primary dealer Citigroup Inc. including Brett Rose and Joseph Leary wrote in a note. While they forecast $500 billion to $750 billion in buys over six to nine months, they wrote that the central bank is unlikely to commit to a specific time period.

$2 Trillion

Other estimates for the ultimate size of an asset-purchase program range from $1 trillion at Bank of America-Merrill Lynch Global Research to $2 trillion at Goldman Sachs. Economists at both firms said the Fed will likely start by announcing $500 billion next week.

A resumption of asset purchases by policy makers would likely include 30-year Treasury bonds, Goldman Sachs said in a note to clients.

Buying 30-year bonds may cause the difference in yield between them and 10-year Treasuries to narrow, Francesco Gazarelli, a London-based analyst at Goldman Sachs, wrote in an e-mailed note. The gap in yields was 1.38 percentage points yesterday, versus a five-year average of 0.53 percentage point.

“It’s the first time we’re hearing someone voice the opinion publicly that the Fed’s going to have to do something different in terms of QE,” said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. “Goldman’s a respected voice on the street saying the Fed’s going to have to go out to 30s to do something.”

Oct. 29, 2010, 4:58 p.m. EDT
U.S. stocks end a strong October nearly flat

By Donna Kardos Yesalavich, MarketWatch

NEW YORK (MarketWatch) — U.S. blue chip stocks edged up Friday while the Standard & Poor’s 500 index fell slightly in a quiet end to a strong October as investors bided their time before next week’s Federal Reserve meeting and midterm elections.

The Dow Jones Industrial Average (DOW:DJIA) closed up 4.54 points, or 0.04%, to 11118.49.

Microsoft (NASDAQ:MSFT) was among the Dow’s best performers with a 1.5% rise. The software giant’s fiscal first-quarter profit climbed 51%, benefiting from a continued strong response to the Windows 7 operating system and Office 2010. Microsoft is also the Dow’s best performer this month, up 9.1% over the period.Read about Microsoft’s results.

Chevron and Merck helped limit the Dow’s gain. Chevron (NYSE:CVX) fell 2.2% after the oil major’s third-quarter earnings and revenue missed analysts’ expectations. Merck (NYSE:MRK) dropped 1.7% as the company’s earnings excluding items topped Wall Street estimates, but revenue fell short of forecasts. Read more on Chevron.

The technology-heavy Nasdaq Composite (NASDAQ:COMP) rose 0.04% to 2507.41. The Standard & Poor’s 500-stock index (MARKET:SPX) was nearly unchanged at 1,183.26. The health-care sector slumped as Merck weighed.
Monthly returns

Friday, which marks the 81st anniversary of the Crash of 1929 known as “Black Tuesday,” was the final trading day of what has been a strong October for stocks. The Dow climbed 3.06% during the month and the S&P 500 rose 3.69% for October, the Dow’s best October since 2006 and the S&P 500’s best October since 2003.
Microsoft thrashes expectations

Even without the glamour of an iPad or another novel technology hit among consumers in its product lineup. Dow Jones Newswires’ George Stahl reports.

This month’s climb has come on growing expectations that next week the Federal Reserve will announce more stimulus and midterm elections will lead to a Republican takeover of the House.

“We’ve got a huge week next week,” said Jim Paulsen, chief investment strategist at Wells Capital Management. “Today’s market may just be the perfect reflection of that quandary — how big a position do you want to take leading into that?”

Data released Friday showed the economy expanded in the third quarter at a slightly faster pace compared to the previous quarter, but growth remains too weak to cut unemployment any time soon. Gross domestic product, the value of all goods and services produced, rose at an annual rate of 2.0% after climbing 1.7% in the second quarter. Economists had expected 2.1% growth. Read about U.S. GDP.

The data showed inflation remains very soft. The Fed’s preferred gauge, the price index for personal consumption expenditures excluding volatile food and energy items, rose an annualized 0.8% in the third quarter, below the second quarter’s 1% increase.

The GDP report “means we’re not growing fast enough to make a dent in the unemployment rate,” said Jeff Applegate, chief investment officer at Morgan Stanley Smith Barney. He said that only adds to the case for the Fed to unveil a quantitative easing program next week.

Other economic figures released Friday were mixed. Consumer-sentiment data from Reuters/University of Michigan showed the consumer mood darkened at the end of October, while the Chicago Business Barometer, formerly known as Chicago PMI, edged up from September and topped expectations. Read more on consumer sentiment.

The dollar weakened slightly, with the U.S. Dollar Index (BOARD:DXY) , which tracks the U.S. currency against a basket of six others, off 0.2%. Meanwhile, Treasurys edged higher, pushing the yield on the 10-year note (U.S.:UST10Y) down to 2.62%. Crude-oil futures fell while gold futures were flat. Read about bonds.

Among stocks in focus, Genworth Financial (NYSE:GNW) tumbled 9.9%. The life insurer’s operating earnings unexpectedly dropped as stronger international operations couldn’t offset weakness in life and mortgage insurance. S&P Equity Research cut its target price on Genworth’s shares following the report. Read more in financial stocks..

Adding to the downward pressure on the insurer’s shares, hedge-fund manager Steve Eisman said on Genworth’s third-quarter conference call that the company isn’t meeting its cost of capital in any of its businesses. He suggested Genworth consider shutting down some businesses and use the money saved to buy back shares. Read more on Genworth.

Monster Worldwide (NYSE:MWW) shares soared 26%. The employment website operator struck an optimistic tone as it reported stronger-than-forecast bookings in its third quarter, leading the company to narrow its loss projection for the year. The third quarter was the first since early 2008 that Monster has seen revenue, bookings and deferred revenue all grow year-over-year.

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