* Philly Fed index drop soothes taper fears

* Drop in new jobless claims linked to holiday

* October Producer Price Index down 0.2 percent

By Luciana Lopez

NEW YORK, Nov 21 (Reuters) – Prices for U.S. Treasuries rose slightly on Thursday as investors weighed the likelihood of a pullback in stimulus by the Federal Reserve, even as economic data and Fed speakers sent mixed signals.

While jobless claims suggested the jobs market could be finding firmer ground, factory activity in the U.S. mid-Atlantic region slowed in November.

“The Philly Fed (manufacturing) number offset the decent claims data,” said Kim Rupert, managing director of fixed-income analysis at Action Economics in San Francisco.

The lack of a strong trend in economic data has left investors stymied, she said.

“It’s still very much a range trade until we can find some more definitive news that will give us more direction,” Rupert added.

Investors are trying to gauge when the Fed might pull back on its $85 billion per month in buying of Treasuries and mortgage-backed securities.

After policymakers, including Chairman Ben Bernanke, began hinting at an exit in May, yields on benchmark 10-year notes shot up more than 100 basis points over several months. But backpedaling by policymakers, as well as a slew of mixed data, have since given investors pause.

Even Federal Reserve speakers on Thursday did little to clarify the direction of policy.

St. Louis Federal Reserve President James Bullard, for example, said that accommodative bond-buying must continue for now despite possible inflation risks, in part because there are no signs of price rises so far.

But Richmond Fed President Jeffrey Lacker said price gains were likely to accelerate.

Lacker is not a voting member this year on the Federal Open Market Committee, though he said he remains opposed to the Fed’s current policy of buying $85 billion in bonds every month to try to stimulate the economy.

The benchmark 10-year Treasury note rose 1/32 in price to yield 2.788 percent on Thursday, compared to 2.791 percent late on Wednesday.

The 30-year bond rose 7/32 in price to yield 3.892 percent on Thursday, compared to 3.905 percent late on Wednesday.

Analysts said investors oversold Treasuries in the previous session after meeting minutes added to expectations that the Fed will hold interest rates at record lows for several years.

“The Philly Fed was quite weak but the market was dramatically oversold,” said Thomas di Galoma, co-head of fixed income rates at ED&F Man Capital in New York.

The U.S. Treasury also sold $13 billion of 10-year TIPS, or inflation protected securities, on Thursday at a high yield of 0.560 percent.

“This is the highest yielding 10-year TIPS auction since July 2011,” noted Thomas Simons, a money market economist with Jefferies & Co in New York.

For October, U.S. consumer spending was up more than expected while inflation remained flat. Consumer price for the last month showed a decline, which was largely unexpected; however, it will provide some room to Federal Reserve to continue with its current pace of bond purchases. Rise in consumer spending across a range of consumer good signals positive momentum for the U.S. economy in the fourth quarter.

Consumer spending may limit downside risk

According to the data from the Commerce Department, for October, retail sales or core sales excluding automobiles, gasoline and building materials was up 0.5% versus 0.3% in September. Retail sales, which most closely reflect consumer spending, were expected to rise 0.3% by the economists polled by Reuters.

Better numbers of core retail sales indicate that the consumer spending, which touched a two year low in the third quarter, may limit the downside risk to the economy growth, in the coming quarters.

A senior analyst at Moody’s Analytics told Reuters “Overall this suggests the consumers are supporting the current recovery.”

Housing market slowing

On one hand, where consumer spending is showing hopes of better growth, the housing market, which has been driving economic growth, showed signs of slowing down.

As per the data from the National Association of Realtors, sales of existing homes were down 3.2% in October while the median price of the previously owned home increased 12.8% from last year. Rising home values and increasing stock market prices are providing support to the consumer spending.

Inflation may worry officials

In a separate report, from the Labor Department, the Consumer Price Index was down 0.1% owing to a sharp decline in gasoline prices. For September, the index was up 0.2%.

CPI, for a period of twelve months ending October, was up 1%, which is the smallest gain since October 2009. Economist expected the consumer prices to be unchanged for September. Excluding energy and food component, core CPI was up only 0.1%, for the third time in a row.

Core CPI, for the past 12 months, increased 1.7%, which is similar to the last months rise. Low inflation indicates that the Fed may carry on with its monthly $85 billion bond buying program for few more months.

Millan Mulraine, senior economist at TD Securities in New York told Reuters “”The inflation backdrop continues to be supportive to the Fed’s ultra-accommodative policy stance.”

JPMorgan agreed to pay a record $13 billion following a probe of its mortgage operation, Washington Mutual bad loans, and mass waivers on misrepresented products.

Specifically, JPMorgan knowingly bundled toxic loans into packages sold to unsuspecting investors.

But all’s well that ends well. 

JPMorgan was assessed a $13 billion fine but apparently did nothing wrong. As an added bonus, $7 billion of that $13 billion settlement is tax deductible. 

Please consider JPMorgan $13 Billion Mortgage Deal Seen as Lawsuit Shield

JPMorgan Chase & Co. (JPM)’s record $13 billion deal to end probes into mortgage-bond sales may save the bank billions more because of what the agreement lacked: an explicit admission of wrongdoing. 

Employees of JPMorgan and two firms it acquired knew some of the loans included in bonds didn’t meet underwriting standards, a fact not shared with buyers of those securities, the U.S. Justice Department said yesterday in a statement. That doesn’t mean the company misled investors, said Chief Financial Officer Marianne Lake, disputing how some state and federal officials characterized the deal. 

No Admission

“We didn’t say that we acknowledge serious misrepresentation of the facts,” Lake said yesterday in a conference call with analysts. “We would characterize potentially the statement of facts differently than others might.”

JPMorgan acknowledged the statement of facts — the settlement’s official narrative of events leading up to the infractions — without admitting violations of law, Lake said. The bank also denied any violations in an accompanying slide show. 

Separate agreements with the Federal Deposit Insurance Corp. and National Credit Union Administration, both disclosed yesterday, and an accord last month with the FHFA all contained explicit denials of wrongdoing by JPMorgan. 

Attorney General Eric Holder said in a statement. “JPMorgan was not the only financial institution during this period to knowingly bundle toxic loans and sell them to unsuspecting investors, but that is no excuse for the firm’s behavior.”

U.S. Attorney Benjamin Wagner in Sacramento, California, said a criminal investigation of the bank’s conduct in the sales of residential mortgage-backed securities began less than a year ago, and while “active and ongoing,” isn’t far enough along to say whether anyone will face charges.

The six biggest U.S. banks, led by JPMorgan and Charlotte, North Carolina-based Bank of America Corp., have piled up more than $100 billion in legal costs since the financial crisis, a figure that exceeds all of the dividends paid to shareholders in the past five years, according to data compiled by Bloomberg.

Penalty for Doing Nothing Wrong

As compensation to homeowners for doing nothing wrong, JPMorgan will devote $4 billion to consumer relief for affected homeowners, including principal forgiveness, loan modifications and efforts to reduce blight. 

Tax Deductions

JPMorgan’s $2 billion penalty (also for doing nothing wrong) isn’t tax deductible, but $7 billion in compensatory payments are, according to Chief Financial Officer Marianne Lake in the conference call. 

Ongoing Investigations

Bloomberg notes “The firm is still the subject of Justice Department probes into its energy-trading business, recruiting practices in Asia and its relationship with Ponzi scheme operator Bernard Madoff.” 

Expect those (nothing to see here, so please move along charges) to be swept under the rug as well, also with corresponding tax deductions, and of course “no admission of wrongdoing” by anyone.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com     

The US inflation numbers came in as expected this morning with year on year headline rate at 1.0%
and core to 1.7% despite a month on month decline in CPI of -0.1%.

The US Dollar index ti trading down 13pts this morning to 80.57, a new low for the last 9 days.

Drew Zimmerman

Investment & Commodities/Futures Advisor

 604-664-2842 – Direct

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dzimmerman@pifinancial.com