Friday Market Conditions

02/15/2008

The February Empire State index fell 21 pts to -11.7 as new orders fell to -11.9 and shipments fell -21 pts to -4.9. Prices paid rose as prices received edged lower as the lack of manufacturing pricing power doesn't provide much inflation risk. Markets were forecasting the index at +7.5; in Jan the index sat at 9.0. Any reading in the indexes under zero indicates contraction. Put this report with the Philly Fed business index last month and the evidence is undeniable that the US economy is slowing quickly and with the credit market seize-up the outlook for a recession is gaining more credibility.

Jan industrial production was on target, up 0.1% with factory usage (cap utilization) was slightly better at 81.5% from 81.4% in Dec.

The U. of Michigan consumer sentiment index, expected at 76.5 from 78.4 at the end of Jan, fell to 69.6---should be supportive to the bond market and a negative for stocks, however the initial reaction has not improved prices in the bond market.

Net foreign purchases of US treasury coupons totaled a meager $1.4B in Dec. However, over the year 2007 net purchases by foreign investors exceeded the total of treasury issuance less maturing issues by $100B. Foreign buyers of US treasuries is one of the many reasons US interest rates are lower than they may be otherwise.

Nothing left on the calendars today; the bond market will close at 2:00 this afternoon (equities trade usual hours) and markets will be closed on Monday for President's Day. The rest of the day will see mostly position adjustments going into the long week-end. After the quick increase in interest rates this week and the short-covering rally in stocks Monday through Wednesday, the markets will likely see bonds do a little better and stocks possibly some weakness. Hard to handicap the stock market on a moment to moment basis though. The strong link between action in equities and the interest rate markets has momentarily been weakened a little. Inflation fears still infect long term treasuries, and the mortgage market remains toxic to investors as sub prime issues and the collapse of credit markets is far from over.
Technically, the 10 yr treasury note has so far successfully held its key support at 3.80%; yesterday the yield intraday popped to 3.83% and ended at 3.82%, but no follow-through so far today is encouraging for technicians.