Market Post: Munis Struggle to Get to Work After Quiet Wednesday

The tax-exempt market was struggling to gain momentum Thursday morning after a quiet Wednesday due to the Yom Kippur holiday.

"It's a little quiet today," a New York trader said. "There is not much going on yet." He added only a few deals are left in the primary to be priced Thursday and that Monday and Tuesday were much busier than the quiet latter portion of this week.

In the primary market, Bank of America Merrill Lynch is expected to price for institutions $392 million of Port of Oakland, Calif., bonds, rated A2 by Moody's Investors Service and A-plus by Standard & Poor's and Fitch Ratings.

PNC Capital Markets is expected to price for institutions $169 million of Allegheny County, Pa., general obligation bonds, rated A1 by Moody's and A-plus by Standard & Poor's. The first series consists of $115 million of GO debt followed by $54 million of refunding bonds.

In the competitive market, Massachusetts should auction $1.2 billion of short-term notes in two pricings of $600 million each. The notes are rated MIG-1 by Moody's and SP-1-plus by Standard & Poor's.

On Wednesday, the 10-year and 30-year Municipal Market Data yields fell four basis points each to 1.73% and 2.90%, respectively. The two-year was steady at 0.30%.

Treasuries were weaker Thursday morning. The benchmark 10-year yield and the 30-year yield rose two basis points each to 1.64% and 2.81%, respectively. The two-year was steady at 0.26%.

In economic news, new orders for manufactured durable goods sank 13.2%, or $30.1 billion, to $198.5 billion in August. The plunge in orders follows three consecutive months of increases and was the largest drop since a 14.3% decline in January 2009.

The overall decline was worse than the 4.5% slide economists had expected.

Excluding transportation, new orders dropped 1.6%. That contrasted with the 0.3% gain excluding transportation that economists had expected.

"Even after excusing for the volatility of aircraft orders, the shifting seasonality of auto shutdowns, and the general noisiness of the data, these orders data are putrid," wrote economists at RDQ Economics. "Every major category of orders declined over the last three months and only a few sectors have now seen a rise in orders versus August 2011. The thesis that manufacturing activity is likely to struggle [for] the remainder of the year continues to build."

They added, "While the weakness in this report is exaggerated by the aforementioned factors, the underlying message of weakening manufacturing is very clear and consistent with that from the ISM survey and the majority of regional manufacturing surveys over the summer. We believe that weakness is tied to problems in Asia and Europe as well as uncertainty over the tax environment for 2013."
In other economic news, real gross domestic product increased at an annual rate of 1.3% in the second quarter of 2012, falling short of the 1.7% growth reported during the preliminary estimate. Growth decelerated from the first quarter of the year which was a 2% increase over the last quarter of 2011.

"The only good thing in this GDP revision was an upward restatement of second-quarter economy-wide economic profits," wrote RDQ economists. "Nominal GDP growth in the quarter is now a paltry 2.8%. This restatement of second-quarter activity will provide ammunition for those at the Fed who want to do more. Normally we would not ascribe to such a view but with the economy growing so slowly, the fiscal cliff looming, and Washington in campaigning mode, there is growing risk that a 2013 tax shock could push the economy into recession."

Also, initial jobless claims fell 26,000 to 359,000 for the week ending Sept. 22, the lowest level in almost two months. Claims fell more than the 8,000 drop to 378,000 expected by economists.

Continuing claims fell 4,000 to 3.271 million for the week ending Sept. 15.

"The drop in initial jobless claims in late September is the second piece of better-than-expected labor-market news this week following the improvement in consumers' perceptions of the availability of jobs," wrote RDQ economists. "We should not read too much into any one initial claims reading, especially when claims had been boosted by Hurricane Isaac earlier in the month. Perhaps the labor market is not quite so moribund as recent data have suggested."