The Fed’s Beige Book said the economy “generally continued to improve.” “While many Districts described the improvements as only moderate, most Districts stated that gains were widespread across sectors…Manufacturing continued to lead…often with reports of increased hiring…Most Districts experienced at least slight gains in consumer spending (NY cited robust sales)… Business services improved in most Districts…Loan demand was either unchanged or up slightly in most Districts.” CRE was mixed and half the districts noted “pockets of weakening” in residential real estate markets. A few districts “noted actual or expected disruptions to sales and production as a result of the tragedy in Japan.” “Most Districts reported signs of improvement in at least some of their labor markets…Wage pressures were described by most Districts as weak or subdued, but higher commodity costs were widely reported to be putting increasing pressure on prices. Energy prices were cited most often, but raw materials in general were an increasing concern of businesses. The ability to pass thru cost increases varied, with mfr’s generally finding less resistance to price increases than either retail or construction.”
The 10 yr note auction was somewhat weak as the yield of 3.494% was a touch above the when issued of 3.48-3.49%. The bid to cover at 3.13 was slightly below the 12 month average of 3.15 and the lowest since Dec. Treasuries are now in a game of multiple tugs of war. With the backdrop of T minus 2 1/2 months to the end of the Fed’s latest asset purchase program, Treasuries are torn by building inflation trends on one hand and the economically contractionary nature of the rise on the other. Inflation expectations in the 10 yr TIPS are just off a 5 year high at 2.64%. Bottom line, treasuries have come off their highs in response.