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Closing Out August

08/29/2010
The capital markets continue to navigate through some strong headwinds in the form of softening economic data. The final week of August presents three major economic reports.  Following are the consensus estimates for each of those reports.

- China PMI 8/31 9:00pm                               Last Month 51.2            Consensus This Month 51.0
- ISM Manufacturing 9/1 10:00am                   Last Month 55.5            Consensus This Month 52.5
- U.S. Total Employment 9/3 8:30am              Last Month -131,000      Consensus This Month -100,000
- U.S. Private Employment 9/3 8:30am           Last Month +71,000       Consensus This Month +45,000
- U.S. Employment Rate 9/3 8:30am              Last Month 9.5%           Consensus This Month 9.6%

Please note that in terms of forecasting U.S. unemployment figures, Goldman Sachs has been extremely accurate in 2010.  I tend to focus more on their forecast than the consensus. To that point, Goldman is expecting a far more disappointing report on Friday, especially in Private Sector jobs.  GS expectation: Total Employment -125,000 Private Employment 0 Rate 9.6%.

In terms of the recent trading activity of the capital markets, the fixed income and energy markets traced out intriguing reversals this week. On Wednesday, August 25, the 10 year U.S. Treasury traded to 2.41%, its lowest level since January 2009. Also on Wednesday, the 30 year U.S. Treasury traded to 3.46%, its lowest level since March 2009.

However, both the 10 and 30 year yield surged on Friday, August 27, potentially establishing a significant change in trend. The Treasury market is at the top of my watch list currently and I urge investors to keenly watch if Treasuries have, in fact, traced out a significant reversal.

On Wednesday, August 25, the Department of Energy reported a significant rise in oil inventories. The oil futures market responded that day, selling off to $70.76, its lowest level in two months. However, by the close of business on Friday, a potentially dramatic change in trend was traced out, as oil futures reversed the selling pressure and advanced to a weekly close @ $75.17.

The reversals in Treasuries and oil are, at the very least, concrete examples that investors should avoid the "go to cash" premise rather actively trumpeted this past week. Please take a look at the six charts below.

US 10 YR TREASURY 7/2/10 TO 8/27/10

Source: Bloomberg

US 30 YR TREASURY 7/2/10 TO 8/27/10


Source: Bloomberg
 
US 10 YR TREASURY WEEKLY 9/5/08 TO 8/27/10


Source: Bloomberg
 
US 30 YR TREASURY WEEKLY 9/5/08 TO 8/27/10


Source: Bloomberg 

SPOT OIL FUTURES 6/9/10 TO 8/27/10


Source: Bloomberg 

DOE OIL INVENTORIES

Source: Bloomberg

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