Interest Rate Roundup

Wednesday, January 31, 2007

Lots of data, little reaction

Tons of data has been hitting the tape. In the past half hour or so, we learned that ...

* The economy created 152,000 jobs in January, according to ADP Employer Services. This report pre-dates the "official" Bureau of Labor Statistics report, due out Friday. ADP has a checkered history -- last month, it forecast a drop in jobs of 40,000 and the official figures showed a gain of 150,000. We'll see if ADP does better this time. It's January forecast is roughly in line with the consensus forecast of economists polled by Bloomberg -- 150,000.

* The employment cost index gained 0.8% in the fourth quarter, down from 1% in Q3 and below forecasts for a similar 1% gain this time around. Interestingly, total compensation was actually the strongest in construction (up 1.1%), retail trade (up 1.1%), education (up 1.4%) and leisure (1.4%). That last two make sense to me. The first two, not so much.

* Q4 Gross Domestic Product rose 3.4% year-over-year. Personal consumption was strong, up 3.7%, thanks to a big jump in durable goods consumption. Private investment was weak -- down 1% YOY -- thanks to a gigantic 12.6% plunge in residential fixed investment (think housing collapse here). Government spending was up fairly significantly as well, 2.8% YOY, thanks to a big pop in national defense spending and state and local spending. Could the state/local surge be due to the lagged effect of surging home prices ... which have resulted in a tax windfall for towns, counties, and states? That'd be my bet.

* So what about the price/inflation indices? Let's look at the annual rate figures there. The core personal consumption expenditures price index rose at a 2.1% rate. While that key measure watched by the Fed is down from 2.2% in Q3, it's still higher than the 1% to 2% range the Fed would like to see.

In early bond market action, traders aren't doing much. 10-year Treasury yields are up about 2.5 basis points, while long bond futures are down 6/32. Looking at the longer-term picture, however, the bond bulls are on the ropes. With yields still below the federal funds rate across the board ... the data continuing to bury the idea of a Fed rate cut ... and bond futures holding below key technical resistance, the door is open to further price declines and rate rises.


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