Monday Market Conditions

9/17/2007
Pressure in the rate markets again this morning as traders and investors, once totally sure what the Fed will do tomorrow are chickening out as the time shortens.
It is the same every FOMC meeting, everyone is sure what the Fed will do until the time they do it, then the weaker shorts or longs are dumped. The 10 yr note is testing its key support at 4.50% this morning; a break and close above 4.50% won't look good to the technical traders as in doing so it will also crack a longer term trend line and the 20 day moving average. We still see just 25 BPs with a statement implying the Fed will stand ready to adjust to market conditions as they unfold ("data dependent" as they say).

This morning the August NY Empire State manufacturing index hit lower than forecasts at 14.7 from 25.1 in August; economists projected the index would drop to 18. The index measuring the manufacturing outlook for six months from now eased to 48.8 from a two-year high of 50.4 in August, the measure of new orders fell to 13.6 from 22.2 in August. A gauge of shipments fell 5.1 from 28.8, the report showed. The index of inventories rose to 3.2 from minus 2.2. The index of prices paid for raw materials climbed to 35.1 this month from 34.4 in August. A measure of prices received increased to 11.7, the highest since February, from 3.2. Most believe the decline in manufacturing will be slow if at all due to export demand as the dollar declines.

A run on England's Northern Rock Plc: the U.K. mortgage lender bailed out by the Bank of England last week, tumbled to a seven-year low in London trading after customers lined up at branches across the country to withdraw their savings. Unnecessary panic, but panic nevertheless. Bank of England Governor Mervyn King has spent the past month trying to stay above the fray as the U.S. subprime-mortgage collapse roiled credit markets. Now he's getting dragged in, whether he likes it or not.

Looks more like the credit crisis is easing more; today the 1 mo LIBOR rate is at 5.50% that's down from 5.90% at its peak a week ago, and down 11 basis points from Friday.

Greenspan is all over the place with his interview last night on CBS's 60 minutes and all through the day with snippets on CNBC; this evening at 9:00 CNBC will have an hour long interview. Greenspan is selling his new book. He admitted last night that he didn't see the correlation of the lax mortgage lending and low interest rates in the past few years and its impact on the credit markets. He defended his lowering of rates to 1.0% on the FF rate in light of the lack of inflation pressures which exist today but not then. He has taken heat recently for keeping rates so low that it was the cause of the recent crisis in credit and the sub prime mess. This is America and what we do best is to look to blame someone any time a problem exists and it isn't just confined to the financial markets. One thing that jumped out last night was he made a comment that in his vision inflation will be the next battle front. Did you know: Greenspan is left handed, and that he hand wrote his entire book while in the bath tub? (water on the brain?)

The next conundrum: If Bernanke and his colleagues aim to avoid the mistake of 1998 (not lowering quick enough) and opt for caution, they risk a recession. If they push ahead with big rate cuts and growth proves resilient, they could find themselves with rising inflation, fueled by record oil prices and a slumping dollar.

Technically, so far the 10 yr note has tested support at 4.50% and has successfully held it.