00 PM
ECONOMY TALK: "Doomsayers were out in force" at the Industry Standard's third annual Internet Summit. "They argued that stock prices must fall further, fundamentals remain rotten and that the Federal Reserve is fooling itself if it thinks that rate cuts will kick start the economy," according to the magazine's summary of the summit. "Most companies are too shell-shocked and focused on survival to have much energy for innovation," according to the Washington Post write-up, "Survival Trumps Innovation," which also notes that two Wall St. analysts (who asked not to be named but are probably in the speaker list) gave dire economic forecasts.
12:52 PM
FED TALK: Money supply growth slowed last week, as most forecasters had anticipated, but the money supply data continues to suggest that liquidity is plentiful. M3, for example, the Fed's broad measure of money supply growth, has gained at an annualized rate of 12.7% so far this year. This rate is extraordinary as is the year-over-year gain of 11.3%, a nearly 20-year high. While there's no doubt that the surge in money growth can be partly attributable to a shift in assets from equities to zero maturity assets such as money market funds, the increase is also the result of credit expansion, as evidenced by the robust level of corporate bond issuance so far this year; bond issuance is running close to double last year's record pace. While the data also hints at conservative attitudes that might not easily be changed, the flipside is that investors have ample cash to plough into the equity market if they become so emboldened. Investors might be encouraged to shift this liquidity back to stocks if the economy shows true signs of stabilizing. The shift to money market funds could be last longer than usual, given the severe and painful drubbing that investors took in 2000. Investors are clearly now more interested in the return of capital instead of the return on capital now that the financial bubble has burst. This has been the case in the Japan for 10 years and is a reminder of just how long lasting painful memories of stock losses can be. If investors do indeed stay away from stocks and therefore invest less in the economy, economic weakness will surely be the result. In turn, the Fed will have to cut rates still-more aggressively in order to battle the classic elements of a liquidity trap--the so-called pushing-on-a-string dilemma that occurs when cutting interest rates produces no response in the economy. But the gains in the money supply also suggest sufficient liquidity exists for a recovery in the economy.
12:31 PM
SPREAD TALK: Wal-Mart said to price $1.5 billion of 2-year notes at +52 basis points over Treasuries and $1.5 billion +84 basis points over Treasuries. The supply calendar for the rest of the day and week is very light in terms of the number of new issues expected to price.
11:55 AM
The 9-day RSI (relative strength index) on the front-month T-bond future is higher today, edging back toward overbought levels. At 61.0, the 9-day is up from 58.7 yesterday but below the overbought readings seen much of the past week. A week ago, for example, the 9-day reached as high as 74.29 before the current sideways price action and yesterday's sharp drop in the market helped to relieve some of the overbought condition (on a scale of 0-100, 70 is considered overbought and 30 is considered oversold). Sideways consoldidations are generally perceived bullishly but fundamental factors would likely be necessary to spur the market higher.
11:29 AM
The yield curve has steepened this morning as the short-end outperforms on a variety of factors. The 2/30 yield spread is about 3 basis points steeper today at 165 basis points, the widest spread since July 10. The short-end got an early boost from this morning's economic data as the market eventually focused on the weaker-than-expected durable goods report rather than the jobless claims data, which were better than expected but influenced by seasonal factors. Weakness in equities, which continue to struggle to string together consecutive gains, added to the support for two- and five-year notes. The S&P 500, after rising 1.6% Wednesday, is down about 0.6% today. So far this month, the S&P has posted consecutive gains only once, on July 12 and 13. Supply may also be contributing as the market anticipates next week's refunding announcement, which is expected to bring about $29 billion in new five-year, 10-year and 30-year issuance. And Wal-mart launched a $3 billion offering of two- and five-year notes today, which may have brought in some short-term buying in Treasuries.
11:16 AM
BUY-BACK TALK: The Treasury's completed its buy-back of $1.0 billion of callable U.S. Treasury bonds in the February 2010 to November 2014 maturity range. The average maturity on their debt purchase was 6.9 years. They received $6.078 billion in bids, for a cover ratio of 6.08:1, with an average yield of 5.131%. The Treasury bought just 2 of the 10 issues eligible to be bought, likely leaving some dealers disappointed that their offers were not accepted. They are therefore likely left with some unwanted supply. Here is a link to buyback information from the Treasury Department.
11:03 AM
FED TALK: Fed Governor Meyer did not address monetary policy or the economy in his testimony before a House subcommittee on reform of federal deposit insurance.
10:51 AM
MORTGAGE TALK: Here is a link to current mortgage rates, according to Freddie Mac. They reported that last week 30-year fixed mortgage rates fell as the bond market rose in response to strong-than-expected economic data. Mortgage rates have been drifting lower since reaching a high of 7.24% in the week ended June 1st but remain above the 2001 low of 6.89% set in the week ended January 12th. Mortgages rates are not likely to go much lower unless either the equity market falters or evidence emerges suggesting that the Fed's rate cuts are failing to revive the economy. Adjustable rate mortgages, however, could continue to fall in lockstep with the Fed's rate cuts and in fact reached a 2-year low a few weeks ago. The average 30-year mortgage rate averaged 7.03% last week versus 7.08% the previous week. The average 15-year fixed rate mortgage fell to 6.58% from 6.65 the previous week, while the average 1-year adjustable mortgage rose to 5.72% from 5.62% the previous week, (short-term interest rates respond more directly to the Fed's rate changes because the Fed controls short-term rates; the market controls long-term rates. As a result, 1-year rates might continue to fall). The recent fall in mortgage rates, wherein the average 30-year fixed has fallen sharply from the 2000 peak of 8.64% to its recent low of 6.89%, has prompted a vigorous response from consumers. Indeed, mortgage refinancing levels have risen 600% on a weekly basis compared to last year. Mortgage applications for home purchases also been strong, remaining above the 1-year average. For the housing market to continue to benefit from current low mortgage rates, both consumer confidence and income growth must stay strong. These factors are the two key pillars for a strong housing environment. Mortgage applications will be critical data to watch as they will reflect upon the degree of responsiveness in the economy to the Fed's rate cuts. The greater the degree of responsiveness, the less the need for deep rate cuts, and vice versa. But with the average 30-year fixed rate still close to 7%, consumers are likely to continue to engage in refinancing activity and this will help to improve their balance sheets. But the peak in refinancing activity has likely already occurred. Importantly, the refi activity will help to boost confidence at a time when consumers are facing a barrage of bearish news on the economy.
10:46 AM
COMMODITY TALK: Crude oil prices are down about 0.4% this morning as the market retraces some of its recent gains. The September contract hit a two-week high of $26.97 on Wednesday on word that OPEC had agreed to a 1 million barrel production cut beginning Sept. 1. But after rallying for four consecutive sessions and failing to move above $27, the contract has pulled back modestly today. Natural gas is little changed after surging 10.3% on Wednesday. Warmer weather and a smaller-than-expected rise in inventories boosted natural gas Wednesday. Profit-taking took the contract down some this morning but prices have since moved back to around unchanged. The CRB commodity index is down about 0.15%, led by a 0.9% drop in sugar and a 0.6% decline in cattle.
10:04 AM
SPREAD TALK: Speculative-grade credit spreads narrowed again yesterday for a fifth day 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 10.1 basis points to +994.5 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 31 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.
10:02 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.
10:02 AM
ECONOMY TALK: The Conference Board's index of help-wanted advertising fell to 58 in June from 60 in May, its lowest level since April 1983. The index bottomed at 59 during the 1990-91 recession. A year ago, the index stood at 82.
9:37 AM
ECONOMY TALK: Here is a link to a table of data on the ECI.
9:28 AM
SPREAD TALK: Emerging market spreads are relatively stable as the market awaits further developments in Argentina. J.P. Morgan's Emerging Market Bond Index Plus is little changed, down 4 basis points at 888 basis points. The Argentine subindex is also tighter, falling 13 basis points to 1426 to reverse about half of Wednesday's widening, which came after the Argentine Senate delayed a vote on the proposed zero-deficit plan until next week.
9:07 AM
INTRADAY TECHNICAL COMMENTARY by John Kosar, Bridge News: Sep bond futures are now trading completely below important support near 103 2/32, which indicates that the intraday (hourly) uptrend initiated July 10th is no longer valid. 103 2/32 now becomes important overhead resistance (5.552% is the 30-year cash yield support equivalent) Thursday. As long as it contains futures on the upside, and/or 5.552% contains yields on the downside, continued lower prices and higher yields will be anticipated day to day.
8:45 AM
ECONOMY TALK: The economic data have been largely a wash for Treasuries as durable goods fell more than expected, the employment cost index was generally as-expected and jobless claims fell far more than expected. Durables orders fell 2.0% in June, double the 1.0% decline the market was expecting and down from a 2.7% rise in May. Ex-transporation, durables orders fell 1.5% as transportation orders fell 3.3%. Defense orders also contributed to the weakness, falling 14%, and orders for communication equipment dropped 20.8%. Non-defense capital goods orders fell 3.4% after posting a 1.4% decline in May. Jobless claims fell 51,000 to 366,000, the lowest since March 24 and well below expectations for a reading of 405,000. But claims posted a big rise two weeks ago as auto plants shut down for summer retooling and the latest report reflects some reversal of that. Still, continuing claims fell to 3.087 million from 3.104 million. The employment cost index rose 0.9%, near the market consensus estimate of +1.0%. Wages, which account for about 70% of the index, rose 1%, slightly above expectations for a 0.9% rise. Benefits also rose 1%, slightly weaker than the 1.2% rise that was expected. The sharp drop in claims and the weaker-than-expected durable goods report appear to have largely offset each other as the bond futures contract is unchanged after some initial volatility. The overall picture is one of continued weakness in the factory sector and employment, with wage pressures abating with a lag.
8:30 AM
ECONOMY TALK: Here is a link to the jobless claims data.
8:30 AM
ECONOMY TALK: Here is a link to the employment cost index report.
8:30 AM
ECONOMY TALK: Here is a link to the durable goods report.
8:20 AM
Eurozone bond yields are higher this morning, particularly in the short-end, after eurozone money supply increased more than expected. Eurozone M3 rose 6.1% year-over-year in June, up from 5.1% in May and above the market's expectations for a 5.9% rise, hurting the case for a rate cut by the European Central Bank. The euro has dropped about 0.5% vs. the dollar and two-year German yields have risen 3 basis points to 4.205%. Ten-year German yields are up 1 basis point at 4.975%. Equities have also contributed to the negative tone in bonds, as many of the major indexes are up 1% or so (German Dax up 0.95%).
7:58 AM
Wednesday's call/put ratio in T-bond futures was 1.12:1, down from 1.24:1 on Tuesday. The 10-day average fell to 1.30:1, matching the one-year average and a neutral reading. In 10-year notes, the 10-day average dipped to 2.00:1 from 2.06:1, still well above the one-year average of 1.43:1. |
