Economic data was sparse this week. Market players had to wait until Friday to get new information on retail sales and inflation. The reports were generally in line with expectations, that is if one looks beneath the surface. But headline figures frightened fixed income players, and bond prices collapsed. The stock market saw relatively good action this week. The Dow suffered a bit, but the NASDAQ composite index posted a three-day winning streak for the first time since September!
Consolidation phase
The stock market is off to a rocky start this year, surging on a surprising rate cut by the Fed and sinking back on poor corporate earnings. This week, market players appeared to ignore earnings warnings as the NASDAQ composite managed its big (yet brief) winning streak. Most major averages slipped Friday, and the Dow once again under performed the Nasdaq composite. For the most part, stock investors have decided that profit figures are going to be soggy through the first half of 2001. Any news that supports growth in the second half of this year is viewed favorably. Market players are also concluding that the Fed will probably lower rates by only 25 basis points at the end of the month instead of by 50 basis points, a popular expectation earlier in the week.
Treasury prices collapse on 'horrid' economic indicators
Treasury yields surged today in a shortened trading day schedule (in anticipation of the Martin Luther King holiday on Monday). The headline figures on inflation were higher than expected while headlines on retail sales were stronger than expected. To bond investors, the reports pointed to stronger growth with inflationary pressures. But a close look at the data shows that retail sales were soggy and should have been friendly news for the bond market. Similarly, a higher core PPI was due mainly to motor vehicles, sales for which are plunging and incentives around the corner. Moreover, there was no inflation in the pipeline. Nevertheless, it seems that bond investors thought the figures were "simply horrid" and thus concluded that the Fed would not act aggressively at the January 30-31 FOMC meeting. Bond players are now pricing in a 25 basis point cut at the end of the month rather than a 50 point reduction. The price collapse in the bond market may have been overdone on Friday. The yield on the 30-year Treasury is 23 basis points higher than a week ago! At the same time, the 2-year note yield is up a whopping 33 basis points! Perhaps the bond market rallied too far last week and the pendulum swung way to the other side this week. There will be room for correction in the next couple of weeks as more economic data comes out.
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Light economic week spells bad news for bonds
