Thursday Market Conditions

9/13/2007
Rate markets started a little soft early this morning as the stock index futures were rallying ahead of the 9:30 open.
Interest rate markets made a strong move and are now adjusting to the coming FOMC meeting. The bond market became overbought technically, and with the FOMC meeting looming heavily some of those over optimistic buys are being closed out with nice profits. The Fed is likely to cut rates by just 25 basis points, not 50 as some have been espousing recently; the Fed won't want to show fear as it faces a declining economy and the prospects of having to lower rates again in Oct (and possibly again before the end of the year). The counter-balance to moving just 25 BP will likely come in the accompanying statement at the conclusion of the meeting; expect the Fed to keep talking inflation fears but ratchet up the view that the economy may be slowing more than what the FOMC thought six weeks ago at the last meeting.

Weekly jobless claims were up 4K to 319K last week, a little better than the 9K increase expected. The measure of layoffs has shown gains in 6 of the last 7 weeks as last week's large -22K (rev'd from -19K) decline pulled the level back below a comfortable level of 320K. New hiring seen in continued claims fell 6K in the week as the 4-week average reached a new 20 month high. Some very minor relief after the employment report last Friday sent recession chatter running.

At 1:00 this afternoon Treasury will re-open the 10 yr note issued in August to sell another $8B; foreign investors will not be too interested as they usually don't like re-opens, nevertheless the demand for the small $8B will be closely watched for demand strength with the yield at these lows.

At 2:00 Treasury will report the August budget data; estimates are for a deficit of $85.0B. The fiscal 2007 budget deficit (which ends at the end of this month) will be the smallest in four years as the economy was doing well for most of the fiscal year and tax revenues were up; it would have been nice if the spending gorge had been kept in check though. Congress and the administration spent money like they actually had it to spend; in terms of managing the budget, Washington doesn't give a ---- about it except to blame everyone else for the pork spending.

The equity markets opened strong at 9:30 and interest rates continued to increase as the exuberance lessens after the recent decline in rates. The decline in job growth in August shocked markets but now after three days the shock is wearing off and some of those buys based on a potential 50 BP cut are getting second thoughts. It is still all about the Fed and the coming cut. Some relaxation in the credit crisis this morning with the 1 mo LIBOR rate declining a little and talk that some big investors are now sniffing around in the commercial paper market; yesterday PIMCO said it was looking.

The dollar traded near a record low against the euro last night, but is stronger now than at the end of the day yesterday. The theory: speculation of slowing U.S. economic growth will prompt the Federal Reserve to cut interest rates, reducing the appeal of assets denominated in the U.S. currency. The dollar may have its longest losing streak since October 2004 as investors increase bets the Fed will lower its target rate on Sept. 18. The euro also gained after a report showed inflation in France, the second-largest of the 13 economies sharing the currency, unexpectedly quickened last month.