Anthony Hood
Equity Investment Capital
Office: 949-891-0067
Email: tony@equityinvestmentcapital.com
website: www.equityinvestmentcapital.com
Building Strong, Lasting Relationships; One Client at a Time.
Wednesday, August 11, 2010
After the FOMC statement yesterday ratifying the view that the US economy is struggling to hold on and the urgency that pushed the Fed to more quantative easing by buying more treasuries, global stock markets are being hit with 2.0% losses so far. Here in the US the DJIA futures at 9:00 had the DJIA down 146 points, the 10 yr note +14/32 at 2.72% -5 bp and mortgage prices +8/32 (.25 bp) frm yesterday's close. Also adding additional; pressure, reports from China show its economy is softening a little.
At 9:30 the DJIA opened down 130 points, the 10 yr note +15/32 at 2.71% -6 bp and mortgage prices at 9:30 +8/32 (.25 bp).
For the past two months markets have wrestled with the outlook for economic improvement, most in the equity arena were willing to ignore the facts that unemployment and huge declines in consumer wealth would drag the recovery down; meanwhile the bond market wasn't buying that view and rates fell. Although the data has been more negative, the bullish idea that we could have an increasing recovery lead by improved earnings from businesses but without the consumer drove equity prices up (or at least held them from declines), has been dashed on the rocks of reality. Economic improvement cannot gain traction without increased consumer spending, and so far consumers are not joining in Wall Street's dream. That the Fed was pushed to more easing is evidence that worries are mounting that the economy could fall back. No so-called double dip taking the economy back to its nadir, but enough concern that the Fed did what it did not want to have to do.
Not only the Fed's moves yesterday that is rattling markets today, the National Federation of Independent Business released their July report on small business outlooks and it wasn't good. Small businesses according to the data are not about to start hiring, worrying about all the unknowns coming from the boobs in Washington (health care, taxes and tight credit). Small businesses, defined as businesses that employ less than 500, see little sunshine in the near future and rightfully have little reason to hire. When we look at the NFIB report and the Fed's actions yesterday the picture being painted isn't pretty.
At 8:30 this morning the June trade balance showed the US ran another deficit of $49.9B, about $7B more than was thought. Trade deficits are the norm as the US is no longer a manufacturing Mecca with higher costs that make us non-competitive in the global markets; the US imports more than we export. Not much reaction to the data as it is a fact of economic life as it has been for two decades.
Up next today; Treasury will auction $24B of 10 yr notes at 1:00 this afternoon. Later, at 2:00 Treasury will report the July budget data, estimates are for a deficit in July of $169B.
How much lower will mortgage rates fall? How much lower will the bellwether 10 yr note fall? How long will it take to drive rates to their absolute lows? Obviously most of it depends on the economic outlook and as the calendar ticks off, what can be expected from the Nov elections. In the meantime the Fed will continue to buy treasuries (5 yr and 10 yr notes primarily), the speed of which depends on the principle paybacks on the $1.25T of MBSs the Fed owns. Traders and analysts will work hard to anticipate the speed of pay downs of the MBSs; slow pay downs will keep treasury rates from declining rapidly; conversely, the faster the pay downs the faster interest rates will slide.
To unsubscribe from TBWS Rate Alert e-mails, please click here.
Please do not reply directly to this e-mail. TBWS Rate Alert will not receive any reply message.
For questions or comments, visit our Forums or Contact Support via ratealertsupport@thinkbigworksmall.com.
