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Prospects daily: U.S. Treasuries dip on improved U.S. economic indicators

Global Macroeconomics Team's picture

Important developments today:

1. Treasuries lower on strong economic data

2. U.S. durable goods maintain growth

3. European PMI hits strongest point since 2007; German business confidence improves


Treasuries lower on strong economic data. U.S. Treasuries extended their losses in early trading on Wednesday, pushing yields up to their highest in two months or more as durable goods orders in February climbed for a third month. Growing worries about the massive incipient supply of government debt also weighted negatively on prices. Yields on the benchmark 10-year Treasury bond increased 9 basis points (bps) to 3.7907%, its highest since February 23, while those on 5-year notes increased to 2.51%, the highest level since January 14, according to BG-Cantor Market Data. The government will auction a record tying $42 billion of five-year notes this afternoon in a sale that follow yesterday’s auction of two-year notes which drew lowest demand since December—investors bid for just 3 times the amount on offer.


Source: Commerce Department


U.S. durable goods maintain growth. Orders for durable goods rose for a third straight month in February, gaining 0.5% (m/m) on January’s orders, signaling that a revival in demand is likely to further strengthen recovery in the manufacturing sector. According to the Commerce Department’s breakdown of February demand, orders for durable goods excluding transportation equipment increased 0.9% (m/m) higher than median market expectations for a 0.6% figure, on business spending on new equipment and inventory restocking. Improved demand for overall durable goods was able to compensate for a second successive monthly decrease in automobiles, which fell 1.9% (m/m) in February. Momentum in orders has been positive for nine months now; indeed, on a three month moving average, annualized basis, orders were up 18.8% in the last month, the fastest pace in over two years.

New home sales in the U.S. decrease. The housing market continued to show signs of stress with the Commerce Department’s release today of the number of new homes sold, which fell to an annual rate of 308,000 units. In some part, the weak sales data for February is the result of severe winter storms in the Northeast, where sales fell 20% compared to January. However, home sales have been sluggish throughout the winter, despite the extension of the federal homebuyers’ tax credit to April 30.

European PMI hits strongest point since 2007. The Euro Zone flash Purchasing Managers’ Index (PMI) for the manufacturing sector increased to 56.3 in March from 54.2 in February, while the PMI for services increased to 53.7 from 51.8. As a result the composite index grew at the fastest pace since 2007, to 55.5 in March from 53.7 in February, signaling that the Euro Area recovery is gathering speed once again after pausing in the fourth quarter. Weakness in the euro, which has dropped about 11% against the dollar in the last four months, is making European manufacturing exports more competitive, and fueling factory output in Germany and France in particular.

German IFO shows improved business confidence. Business confidence in Germany surged to a two-year high in March, according to the monthly survey carried out by the IFO Research Institute. The monthly Business Climate Index rose to 98.1 in March from 95.2 in February, exceeding its long-term average of 96. The current conditions assessment notably increased to 94.4 from 89.8, signaling that business and investor confidence remains high despite stagnation in GDP during the fourth quarter, together with weak indications of economic performance over the first two months of the year.

Japanese exports continue to improve. Exports from Japan in year-over-year terms were up 45% from their level in February 2008. Notably, exports to the United States, which had thus far been lagging, were up 50.4% (y/y), the fastest pace since 1984, adding to the strong demand from China and other Asian countries that have propelled the Japanese export recovery. While export demand remains strong overall, on a monthly basis, Japanese exports were down 1.7% (m/m) in February. But the momentum in export growth remains very strong, coming in at 75% (3 month moving average, saar) for February, which decreases the probability of a double-dip in Japanese export growth this year.


Among emerging markets:

In Latin America and the Caribbean, Chile’s economic growth could range between 1 percentage point and 1.5 points lower as a result of the earthquake that occurred last month, causing massive destruction, according to Deputy Finance Minister Rodrigo Alvarez. The government plans to spend as much as $30 billion in reconstruction, and estimates that the total cost of the catastrophe is close to 17% of GDP with the cost of rebuilding infrastructure placed at $20.9 billion. Mexico’s retail sales unexpectedly declined 1.8% year-on-year in January on higher taxes.

In the Middle East and North Africa, Egypt’s economy may expand 5.8% in the fiscal year ending June 2011, according to Magdy Rady, a Cabinet spokesman.

In Sub-Saharan Africa, South Africa’s consumer price inflation eased to 5.7% in February from 6.2% in January, reaching lowest levels in three years, as a stronger rand helped bring down imported inflation. Delays in implementing Kenya’s stimulus package have resulted in a much weaker-than-expected performance in the second half of 2009, according to Prime Minister Raila Odinga.

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