Bearing Down on the End of the Quarter

The markets are opening up this morning on benign macro data and after a quiet weekend across the globe. Personal income for May came in just below consensus at 0.3% vs. expectations of 0.4%. Personal spending for May came in flat vs. expectations of a 0.1% increase. April’s personal income and personal spending were both revised down from 0.4% to 0.3%. Higher inflation in the form of the PCE Core pulled real spending growth into negative territory, with real personal spending declining 0.1% for the second straight month, the first time we have experienced that since March-April 2009.

The treasury market is preparing for the first auctions without QE2 next month. Today four-week treasury bills traded negative for the first time since January 2010, which compares to an average of 1.8% over the past decade. A negative rate effectively means investors are willing to pay the government to hold their money. An increase in demand near the end of the quarter is not unusual as banks typically spruce up their balance sheets to meet quarter-end reporting requirements.

There have been a number of estimates recently estimating the size of the Fed’s continuing demand for treasuries generated by its balance sheet, which is now $2.9 trillion. There appears to be roughly $300 million of maturities and interest coming from the portfolio, which should generate $25 billion per month in demand. About $110 billion of treasuries will mature in the next 12 months while approximately $10-12 billion of mortgage-backed debt and Freddie/Fannie debentures will also mature each month.

Gasoline prices have fallen along with declining oil prices. The average price in the US declined by $.11 last week to $3.69 per gallon. California is still closer to $4.00 gallon due to special blend requirements and higher taxes per gallon.

The auto industry is now starting to understand the risks of accepting all that government assistance during the financial crisis. The Obama Administration announced this morning that they want to push average fleet fuel efficiency to 56 miles per gallon by 2025. Auto makers are balking, saying it will add at least $3000 to the cost of an auto. It would appear that would also be a recipe for higher traffic fatalities as cars must get lighter and smaller to achieve those goals.

A positive data point for the employment market showed up in the Treasury Department’s tax withholding data. After turning negative at the end of May, the index rose by 1.9% as of last Wednesday. This data measures the year over year changes in withholdings, and tend to track well with initial jobless claims.

Stanley Black & Decker agreed to buy Niscayah for a 47% premium, or $1.2 billion. Bloomberg is reporting that acquisitions of US based targets grew by 35% to almost $500 billion YTD, up from #360 billion in 2010.

Cars 2 opened with a box office take of over $60 million this past weekend, making it the 12th Pixar movie to open #1.

Have a great day

Ned