Thursday Market Trends

09/06/2007

Started out weaker in the interest rate markets, prices declined a little at 8:30 on reports that same store retail sales were beating expectations.
The consumer appears to defy most of us that believe the economy will weaken as a result of the housing market decline and sub prime re-sets coming. The better retail sales reports put a slight dent in the solid view we have that the Fed will cut rates in the 18th by 25 BPs. While we will continue our view that the Fed will cut, we have to agree that consumer spending is holding up and in turn will make the FOMC think more about not cutting rates. That said, the Fed should cut a little; it won't increase inflation concerns or set the economy on the path of overheating, a cut will however keep the present low interest rates where they are now----no cut and interest rates will rise given the markets (stocks and bonds) have completely factored in a cut at the present levels.
Weekly jobless claims were expected to decline about 14K, they fell 19K to 318K; last weeks claims were revised up an additional 5K from what was originally reported so the decline is in line with forecasts. Also at 8:30 Q2 productivity was revised to +2.6% from +1.8% on the preliminary read last month; markets were looking for +2.4%. Unit labor costs were revised lower to 1.4% but stand at a strong annual growth rate of 4.9%. The presumed inflation pressure from unit labor costs is a worry at the Fed but likely to be shelved at the September 18 FOMC meeting as the financial problems take top priority.
The last of the economic data today was at 10:00 with the ISM services sector data; expectations were for the overall index to fall to 54.5 from 55.8 in July, the index was at 55.8; new orders index at 57.0 frm 52.8, prices paid at 58.6 frm 61.3, and employment fell to 47.9 frm 51.7.
The MBA released the foreclosure and delinquency data frm July. Sub prime foreclosures are at 2.72%, serious delinquencies at 9.27%; seriously delinquent ARMs at 12.4%. Prime mortgages show a 0.98% delinquency.
The day is punctuated with Fed speakers all over the place; but with the FOMC meeting less than two weeks away we do not expect much juice from any of them. St. Louis' Poole in London at 11:00 on jobs and trade followed by SF's Yellen and Fed Gov Kroszner in SF on Asian banking at 11:30. Atlanta's Lockhart will talk on the economy at 12:25 with a Q&A while Dallas' Fisher talks regional economics in New Mexico at 2:00.
The European Central Bank left interest rates unchanged today, shelving plans for an increase as the U.S. housing slump threatens to curb economic growth. The collapse of the U.S. subprime-mortgage market has made banks reluctant to lend, pushing up the cost of credit and causing turmoil on world financial markets. The ECB earlier today added 42.2 billion euros ($57.7B) in emergency cash to ease a credit drought that had pushed overnight deposit rates to a six-year high. In a left handed way, the decision of the ECB to not increase rates puts additional pressure on the Fed to lower rates on the 18th.
Tomorrow the August employment report at 8:30; the markets should be generally quiet today ahead of the release with some slight selling bias in the bond and mortgage markets. The equity market performance will continue to influence the rate markets; so far today the equity market and bond market are not much change.