Market Update Monday, 2nd December 2013: US Treasury yields Rise, Non-farm Payrolls due to come out Friday

By Musabbir Mazhar

Investors were engaging in a sell-off today of the US 10 year treasury and caused its prices to fall – yields rose 5 basis points or 0.0005 to 2.80% as ISM (Institute for Supply Management) data came out positive. This yield level is highest seen since the last 10 days. Investors were caught up on the thought that the Fed will start tapering their stimulus purchases due to Economy recovering. ISM factory index rose to 57.3 in November from 5.4 in October, along with other components – these show a positive expectation for a good US Non-Farm Payrolls (NFP) report due to come out this friday. If the actual NFP report is higher than expected for November then it shows the economy is growing and given that the next Fed meeting is on Dec 17-18 where they might decide about the potential tapering of stimulus date – this is important.

Simply said- a good NFP report would push the yields higher as there will likely be more selloff of treasury securities. US economy is expected to rise next year, and home prices may be expected to rise 4-5% in 2014. While unemployment rate threshold set by Fed is 6.5%, currently it’s still above 7% (7.3% in October). Although market expects Fed to start tapering the QE program in the second half of 2013 if not earlier, the Federal Funds rate will likely only increase much later, probably end of 2015 or in 2016.

The S&P/TSX composite index ended 24.17 points higher at 13,419.57. In US, the S&P 500 fell to 1,800.90, down 0.3%. The Dow Jones Industrial Average fell 77.64 points to 16,008.77. Most selling was near the end of the day.

In US, coal is losing demand for electricity generation in Power plants as natural gas prices decreases in the Eastern Area. There is excess supply in Marcellus shale (rock formation which has the potential to produce more natural gas than Saudi Arabia) in the Eastern region of US where insufficient gas pipelines serve the area. In Pennsylvania and West Virginia electricity prices fell – in Penn, prices average $1.83 per million BTUs for Natural gas in October, whereas prices are much higher in other parts of the country. NYMEX Natural gas was at $4.0 per million BTU.

For a background,natural gas prices surged to under $2 per M BTU in 2012 and that caused the increase in demand in its use in power plants and boosted to 30% in US from 21% compared to 2008. Coal lost demand and many plants shut down. But as gas prices have increased since then, coal has got some demand back.
OPEC members are meeting tomorrow at Vienna to talk about the supply allocation of oil as Iran and Iraq are expected to increase supply in the market – this means that some or all of Saudi Arabia, Kuwait and UAE would have to cut supplies since the OPEC tries to control the supply to control prices.