10:51 AM
TAX CUT TALK: The U.S. government has begun mailing out $38 billion of tax rebates. The Treasury mailed out $3.3 billion of checks on Friday and will mail approximately 10 million checks per week for 10 weeks through September 24th. With approximately $13 billion of checks to be mailed each month for three months, retail sales will likely be boosted significantly. Indeed, with retail sales at roughly $300 billion per month, a mere $3 billion increase in spending will lift retail sales by one percentage point. Here is a link to the Treasury's web address for tax rebate information.
10:33 AM
Former Treasury Secretary Robert Rubin argued against ending the strong dollar policy, noting that ending the policy could result in inflation and higher interest rates. Rubin also said the recently approved tax cut was "most unwise" and a "significant diminution of future national savings." Rubin is testifying before the Senate Banking Committee hearing on the current account deficit that will also include former Fed Chairman Paul Volcker, as well as Goldman Sachs Chief Economist Bill Dudley and Morgan Stanley Chief Economist Stephen Roach. Dudley recommends shifting away from the strong dollar policy now "when demand for dollar-denominated assets is still strong and policy is credible, rather than under duress later." But he suggests shifting the emphasis to the economy rather than calling for a weaker dollar. "If the US economy remains more productive than its rivals and the US capital markets remain deeper and more liquid, then the flow of foreign monies to the United States should continue relatively smoothly and easily," according to Dudley. "The current account deficit probably would ultimately shrink, but in an orderly way that would not disrupt the ability of the US economy to grow and the nation to prosper." Roach's prepared remarks note that "an ever-widening current-account deficit implies that foreign investors will ultimately end up "owning" America -- unless, of course, something gives. And it usually does. What should give, in my view, will be the high-flying U.S. dollar."
10:20 AM
MORTGAGE TALK: Mortgage applications for home purchases rose last week for a second week, suggesting that the 2-month low posted during the July 4th week was likely due to poor seasonal adjustment for the July 4th holiday. For two straight weeks, mortgage applications for home purchases have been above the 1-year average, pointing to continued strength in the housing market. The recent strength underscores the notion that consumers remain confident enough about their job and income prospects to engage in spending on big-ticket items and the recent surge in new and existing home sales reinforces this notion. The recent strength in the housing market will benefit the economy for months to come. Indeed, studies show that the housing market exerts the bulk of its impact on the economy for up to 18 months or so. So, with housing turnover having reached a record in March, meaningful impact on the economy will likely be seen in the next few months as homeowners move into their new homes. Mortgage applications data also indicates that individuals are taking advantage of low interest rates by liquefying themselves via refinancing activity. The jump in refinancing has been particularly acute until just recently but remain robust. Last week, the Mortgage Bankers Association's index on mortgage applications for home purchases rose to 324.9 from 310.4 the previous week. The current level is above the 1-year average of 307.2. The Fed has frequently made note of the continued strength in the housing market with Greenspan noting that the impact of weak consumer confidence has been "modest." Mortgage applications for refinancing rose last week and remain in robust territory, albeit off the year's high. At 1581.4 (up from 1387.4 the previous week), the refinancing index is running almost 4 times higher than the 2000 average. Nevertheless, the trend has fallen a bit recently from extremely robust levels--the 2001 average is 2213.0--owing to the recent uptick in mortgage rates. Approximately $700 Bln of mortgages might get refinanced this year, close to1998's record pace. It is important for home purchases to stay strong as it speaks to consumers' perceptions about confidence and income growth. After all, it takes little in the way of confidence to refinance an existing mortgage. It is entirely another matter for consumers to engage in the purchase of a new home. If weakness in home purchases emerges, this lack of responsiveness would indicate that interest rates would have to be lowered aggressively in order to spark the degree of responsiveness necessary to revive the economy. Importantly, however, the jump in the refi index will help to liquefy consumer balance sheets and ultimately aid the economy. Indeed, in the refinancing boom of 1998-1999, consumers tapped into their home equity to the tune of $55 Bln, putting most of it back into the economy and paying off debts with the rest. Just as with the recent jump in issuance of corporate bonds, here again is another example of the process by which the Fed's rate cuts will ultimately lead to stronger economic growth and is a clear illustration of the Fed's actions in motion. Mortgage applications should continue to be watched closely to gauge the economy's responsiveness to lower rates. In Japan, for example, the lack of responsiveness (lending has fallen for 3 straight years) required that rates be brought down to zero.
10:05 AM
ECONOMY TALK: Existing home sales fell 0.6% in June to a 5.33 million annual rate, according to the National Association of Realtors, in line with expectations for a slightly larger decline to 5.30 million. The May rate was revised down to 5.36 million from the initial estimate of 5.37 million. Despite the decline, sales remain strong by historical standards. According to the NAR, the current volume of existing home sales matches the fifth highest month on record. The supply of existing homes for sale rose to 1.68 million, or about 3.8 months worth of supply. That's up from 3.4 months worth in May.
10:00 AM
ECONOMY TALK: Here is a link to the existing home sales data.
9:42 AM
One of the key reasons for the early weakness in the Treasury market is supply. Aside from $12 billion of 2-year T-notes, corporate supply should total at least $8 billion today. Corporate supply has been relatively light of late and high levels of supply tends to spark investor interest in corporates. This is drawing attention away from Treasuries.
9:37 AM
COMMODITY TALK: Crude oil is expected to open higher this morning after gaining more than 1% overnight on reports that OPEC has agreed to cut its output by 1 million barrels as of Sept. 1. Crude prices have risen in the last three consecutive sessions on anticipation of such an announcement from OPEC and today's gains may be limited. Inventory levels were generally as expected, with the American Petroleum Institute reporting a decline of 712,000 barrels. The market was looking for a decline of about 500,000 to 1 million barrels. Gasoline inventories fell 2 million barrels, also in line with expectations. Gasoline futures gained about 1.1% overnight but remain near their lowest levels since January 2000 after hitting a record high in May.
9:14 AM
SPREAD TALK: Emerging market bond spreads have widened this morning on reports that the Argentine Senate will delay a vote on the proposed zero-deficit plan until next week. The Senate, controlled by the opposition Peronist party, was expected to pass the plan today and the market was mostly concerned with modifications that might be made. Concerns about a possible default by Argentina on the country's $130 billion debt had caused emerging market spreads to widen until recently, when it appeared the government was making progress in building a coalition to support the austerity measures. But renewed default concerns have caused the Argentine subindex of J.P. Morgan's Emerging Market Bond Index Plus to widen by about 40 basis points this morning to 1454 basis points. The overall EMBI+ has widened by 9 basis points to 895 basis points, the high for the week. The index most recently peaked at 977 basis points on July 12, the highest level since November 1999.
9:03 AM
SPREAD TALK: Speculative-grade credit spreads narrowed slightly yesterday but stayed near a 6-month high. Concerns about the economic outlook and the technology sector continue to be the main influence on spreads. Poor reaction to earnings from several prominent technology firms has contributed to the most recent widening episode. Yesterday, the S&P speculative-grade credit index narrowed 3 basis points to +1,005.6 basis over Treasuries. That's not far from the 6-month high of 1,022.1 basis points set last Wednesday. The index is now 40 basis points above the mid-point of the 2001 range of +880 to +1074 basis points. But spreads could soon narrow further if the economy shows further signs of stabilizing during the summer months.
9:02 AM
BUY-BACK TALK: The Treasury will buy back up to $1 billion in callable bonds maturing between February 2010 and November 2014 on Thursday. There are 10 issues eligible for the buyback. Here is a link to buyback information from the Treasury Department.
8:45 AM
The yield curve is virtually unchanged today ahead of the Treasury's bond buyback announcement at 9:00 a.m. and two-year note auction later today. With the government buying the long-end and selling two-year notes, the curve might be expected to flatten somewhat but the record is mixed. The curve flattened in both April and June in the weeks when the Treasury auctioned two-year notes and bought back bonds, but steepened during the same week in January, February and March as the broader trend had the larger impact. Last year was equally mixed, with the curve steepening in five of the seven weeks when there was both a bond buyback and a two-year auction. The 2/30 spread has been stable lately, ending the New York session between 158 and 160 basis points in each of the last five sessions.
8:37 AM
Eurozone bond yields are higher this morning on continued signs that the European Central Bank will hold off on a rate cut despite rising expectations. ECB member Ernst Welteke said in a newspaper interview that he is "cautiously optimistic" about the economic outlook for Europe and that "monetary policy is no obstacle to an economic recovery," according to wire reports. With yields near one-month lows, selling came in despite a report showing just a 0.1% rise in German producer prices in June, although the year-over-year rate was still high at 4.3% (vs. 4.6% in May). Gains in the euro (+0.5% vs. the dollar) and weakness in equities (German Dax -0.6%) were not enough to support bonds and the 10-year German yield is up 2 basis points at 4.96% while two-year German yields are up 2 basis points at 4.18%.
8:09 AM
Tuesday's call/put ratio in T-bond futures was 1.24:1, down from 1.76:1 on Monday. That dropped the 10-day average to 1.48:1, above the one-year average of 1.30:1 but below the 1.50:1 level that can signal excess optimism in the contract. In 10-year notes, the 10-day average held at 2.06:1, still well above the one-year average of 1.43:1. |
