Monday Market Conditions

09/10/2007

After the huge improvement in interest rates on Friday, the bond market is starting the day holding the gains but taking a breather and not improved much.
The stock market trading in the futures markets prior to the 9:30 open was better taking away the stock market/treasury market rotation (DJIA fell 250 Friday). There is no real economic releases today, and not much on the economic calendar until Friday so trade will continue to be driven recession outlook and more importantly, the $120B of commercial paper that must be rolled over in the next few weeks (the Fed does allow commercial paper as collateral at the discount window, a significant relaxation). Many are now concerned that the credit crisis is actually bigger than the estimates and forecasts, with dire consequences to the economy that would be more severe than a simple "normal" recession. While we wouldn't take total exception to the increasing concerns about the financial system, we are not yet ready to jump off the bridge yet.
Today with no scheduled news, the market will be directed by how the equity market performs. The technical's in the rate markets are reaching near term overbought reads on all of the momentum oscillators; possibly some consolidation at these levels, but the bullish trend will remain in tact as long as the bellwether 10 yr note doesn't climb back over 4.50%. The Fed is going to cut 25 BPs on the 18th, that and at least another 25 BPs is already discounted in the present levels.
Atlanta Fed's Lockhart is talking on the economy now, nothing of substance yet; SF's Yellen goes at 11:00 at an economic conference and Dallas' Fisher hits at 1:00. Fed Gov Mishkin will talk later tonight at 7:30 on the economy. Coming on the heels of Fri.'s brutal job number, the Fed's take will be paramount to form opinions on the coming policy meeting. Philly's Plosser already talked down the significance of the decline in jobs this weekend, but many believe the FOMC now has the cover to cut. Bernanke will talk tomorrow in Germany.
With the FOMC meeting next Tuesday, and not much economic data until Friday this week, the bond and mortgage markets will pay attention to the equity market and move inversely with it. Also always in the background is the potential for more shoes to drop in the credit markets.
Washington Mutual's CEO Killinger is calling the current housing crisis "the perfect storm". Countrywide has been in the headlines this weekend cutting jobs, but that isn't real news given the circumstances. WAMU has so far dodged the spot light but they won't for much longer, no one in the business is going to escape the housing depression (yes depression); Wells and other huge banks might be able to cover up the problems as they have access to all the money they need, but they too will pay the same price as recent headliners.