Market reactions

09/05/2007

At 8:15 this morning the ADP payroll company came out with their estimate of non-farm payrolls for August.
ADP forecast is for job growth to be a whole lot weaker than what economists are thinking; +38K against +120K, but ADP doesn't include government jobs so we can add another 40K or so to their numbers, but it is still a lot weaker than what markets have thought. That said, ADP's estimates are not to be taken too seriously as they have missed by wide margins in their guesses since they began issuing forecasts. The reaction was selling in the stock index futures and some buying of treasuries. The 10 yr note once again fell to 4.50% but once again has failed to break it (see chart above). Two-year note yields fell more than 7 basis points, to 4.06%. Two-year Treasury notes rose as Eurodollar futures showed corporate borrowing costs are increasing, stoking speculation the Federal Reserve will cut interest rates this month to free up bank lending. LIBOR rates continue to increase ( a new six year high) as banks won't lend and many deals are tied to it; all this leads to more rational why the Fed needs to cut rates; to encourage more inter-bank lending that has all but dried up. The credit squeeze has not been lessened much in the past two weeks.

At 10:00 the NAR released their pending home sales data for July; sales fell 12.2% for contracts signed in July. It is the largest monthly decline since 2001 when NAR started reporting it. Yr/yr pending sales are -16.1%.

August domestic light vehicle sales jumped 9.5% to 12.7 mil, the strongest pace since February. Including imports, light vehicles rose 6.5% to 16.2 mil. The gain was most dramatic in light trucks which rose 13% to 7.6 mil as car sales came in at 5.1 mil. The gains in sales will filter through to retail sales and consumer spending when the data is released.

At 2:00 this afternoon the Fed will release its Beige Book, the details from the 12 Fed districts on the economy. It includes a lot more detail than the headliners that we see through the month so it will get some attention from the markets.

There are still many out there that are arguing against a rate cut in two weeks; they must be hungry for press coverage. The markets have already factored in a cut; if Bernanke doesn't cut by 25 BPs on the 18th the bond market and stock market will take a huge dive. Interest rates will increase at the long end by 20 to 25 BPs, driving mortgage rates up about the same and adding yet another nail in the lid in working out the sub prime problems. A 25 BP cut wouldn't be a signal the Fed has abandoned its inflation fight, nor would it necessarily be seen as a green light for lower rates and a declining economy. It would however, give the markets what they have already discounted and won't spark a significant rally in interest rates.

The weekly MBA mortgage applications index were up 1.3% last week, with purchasing applications edging higher by 0.4% and refis climbing 2.3%. The fixed 30-yr mortgage rate was up at 6.42% from 6.41% while the 15-yr and 1-yr adjustable rate mortgage were flat at 6.10% and 5.62%, respectively.

Technically; the 10 yr treasury, driver for mortgages has continued to find resistance at 4.50%, unable to break it for the past five sessions; and sitting right on it at 10:00 today. Given the recent improvement in interest rates based on the safe haven buying and the view the Fed will cut the FF rate; it will take a lot now to cut through 4.50%. With employment report coming on Friday we don't expect 4.505 to crack. The stock market action will continue to weigh on how the interest rate markets perform.