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Traders Eye Bond Market to Get a Read on Rates

Friday, 16 Mar 2012 | 8:59 PM ET

Traders in all markets will be watching the bond market in the week ahead, to see if higher interest rates are here to stay.

Traders work on the floor of the New York Stock Exchange.
AP
Traders work on the floor of the New York Stock Exchange.

The dramatic rise in rates in the past week was a shift in the dynamic of markets, and traders want to see if it will stick. The move came after the Federal Reserve Tuesday ended its rate meeting with no new sign that it would carry out another so-called quantitative easing program.

The Fed did upgrade its view of the economy slightly, and a number of Wall Street economists reversed cuts made to first quarter growth estimates the week earlier, when they saw stronger February retail sales data Tuesday.

“Investor behavior is going to be the key to next week,” said John Briggs, senior Treasury strategist at RBS.

Even with rising yields, stocks had their best week since December, with both the Dow and S&P 500rising 2.4 percent. The S&P 500 cracked the psychologically important 1400 level for the first time since June 2008, ending the week at 1404. Gold sold off, while the dollar rose in response to the rising yields but still finished the week slightly lower.

The 10-year yield rose to 2.301, from 2.04 the week earlier.

“We’ve gone from a 1.80 to 2.10 (percent 10-year) range since October, and now we’re in the process of feeling out what we think will be a higher range of 2.10 to 2.40, with it not being established yet,” said Briggs.

Rising rates are normally not seen as positive for stocks, but rates are so low and analysts do not expect yields to rise so much they would challenge equities. Treasury strategists say the equity market’s strength is another factor supporting yields, but they do not yet see a big rotation of money from bonds to stocks.

“What’s happening is the economy is getting stronger. People can’t stand to believe that that would actually be true, but that’s what’s happening. That’s the simple story. The Fed hasn’t believed that either. Clearly, the economy is not going to be in the pits forever,” said Richard Bernstein, CEO of Richard Bernstein Advisors.

What to Watch

There is mostly housing data on the economic calendar, but weekly jobless claims will be especially important since this is also the survey week for the March employment report, and economists will start handicapping the next jobs report.

“Clearly the focus now is on U.S. data in a way we’ve not see in the last six to nine months,” said Jens Nordvig, head of G-10 currency strategy at Nomura. “Even the claims number next week is going to be important because that’s the payroll-related number.”

There are several Fed speakers, including Fed Chairman Ben Bernanke who teaches a class at George Washington University School of Business Tuesday and Thursday. There is also a trickle of earnings news, including reports from Oracle , FedEx and General Mills .

The next earnings season is also around the corner, so the stock market will be sensitive to any warnings from corporate America.

“I would look for the market to be weak next week,” said Steve Massocca of Wedbush Securities. He said preannouncements have gotten more negative and that’s a bad sign for stocks.

“I’m looking for a correction. I’m looking for a Maalox moment,” Massocca said. “I don’t see a reason for a big correction. If we had a lot of people loaded up on stocks, I would say we’d have a bigger sell off, but we don’t.” Strategists have been looking for a correction since stock indices returned to the high water mark of 2011 several weeks ago, but now stocks have moved well beyond that and are up more than 25 percent since October.

Thomson Reuters said this week that the first-quarter earnings season has the highest level of negative preannouncements since the first quarter of 2009. It said there have been three negative earnings preannouncements for every positive one.

In the fourth quarter, earnings grew 9.4 percent, the first single digit gain after eight quarters of double-digit profit growth.

Thomson Reuters said information technology and consumer discretionary companies are less negative, while health care and telecom companies have not issued any positive guidance. Of 17 health care companies that reported, 15 expect to miss analysts’ estimates, it said.

Bernstein said profit growth is a concern. “The core crude material PPI has a very high correlation to the profit cycle, and it’s now negative year over year, for the first time in this cycle,” he said. “While that’s not a good sign, it doesn’t’ mean you have to have a profit recession.”

The action in the oil market will also be important in the coming week, as financial sanctions against Iran take hold and jittery oil traders react to every headline. Rising gasoline prices are becoming increasingly worrisome, and were the biggest contributor to the 0.4 percent gain reported in the CPI Friday. They also hurt consumer sentiment, sending it lower for the first time since August. Oil on the Nymex ended the week at $107.06 per barrel.

“People should not get too bearish too quickly. There’s a lot of things to get cautious about, but that’s always true during bull markets,” said Bernstein.

Monday

Earnings: Adobe Systems

0835 am New York Fed President William Dudley on economy

1000 am NAHB survey

Tuesday

Earnings: Tiffany, Oracle, Cintas, Jabil Circuit

0830 am Housing starts

1245 pm Fed Chairman Ben Bernanke lectures on the Fed and its role at George Washington University School of Business

0530 pm Minnesota Fed President Narayana Kocherlakota at Washington University in St. Louis

Wednesday

Earnings: General Mills, Discover Financial, Herman Miller

1000 am Existing home sales

Thursday

Earnings: FedEx, Dollar General, Nike, Accenture, Gamestop, Lululemon, Silver Wheaton, Signet Jewelers, UTI Worldwide

0830 am Initial jobless claims

0900 am St. Louis Fed President James Bullard at Asian investment conference, Hong Kong

1000 am FHFA home price index

1000 am Leading indicators (Feb)

1245 pm Bernanke lectures at George Washington University

1630 pm Fed balance sheet

1630 pm Money supply

Friday

Earnings: Darden

1000 am New home sales

0145 pm Bernanke makes opening remarks at Fed conference on central banking and the financial crisis

0230 pm Atlanta Fed President Dennis Lockhart speaks to students at Georgetown University

Follow Patti Domm on Twitter: @pattidomm

Questions? Comments? Email us at marketinsider@cnbc.com

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  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • Sharon Epperson is CNBC's senior commodities and personal finance correspondent.

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

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