Monday Market Conditions

02/25/2008
US rate markets opened somewhat weaker this morning on weekend developments that Ambac will get a $3B lifeline, and global demand for riskier assets perking back up. The 'bailout' of the bond insurers was widely expected lat Friday so the reaction this morning isn't as bond negative since a lot of the action took place late Friday.

Jan existing home sales hit a few minutes ago; markets were expecting a decline of 1.8% to 4.80 mil units (ann). As reported sales were down 0.4% to 4.89 mil units; sales in Jan were 23.4% lower than in Jan 2007, inventories increased 5.5% with a 10.3 month supply, the median home price fell 4.6%. Too soon to say just how the markets will take the report, but the initial reaction was selling in the stock market and minor selling in the treasury and mortgage markets.


This week's economic data and estimates:

Tuesday:
Jan PPI (overall +0.3%, core +0.2%)
Feb consumer confidence (82.5 frm 87.9 in Jan)
Wednesday:
Jan durable goods orders (-4.0%)
Jan new home sales (-0.7% to 600K units)
Thursday:
Q4 GDP prelim, (+0.8% frm +0.6%)
weekly jobless claims (+3K to 352K)
Friday:
Jan personal income (+0.2%0
Jan personal spending (+0.2%)
PCE core inflation (+0.2%)
Chicago purchasing mgrs index (50.0 frm 51.5 in Jan)
U. of Michigan consumer sentiment index (70.0 frm 69.6)

Not only economic data this week but supply hits with the monthly 2 yr note auction on Wednesday, expected to be $24B and Thursday the 5 yr note, expected to be $14B.

On Wednesday and Thursday Fed head Bernanke will go to the House and Senate to meet the semi-annual requirements to testify on monetary policy and the economy. He has spent a lot of time at Congress in the past few weeks so we are not expecting any real bombs from him; however, when the Fed chief speaks markets pay a lot of attention.

The proportion of economists who forecast a U.S. recession this year more than doubled in three months, to 45%, according to a survey by the National Association for Business Economics. Of those, a majority expect the downturn to be "relatively muted,'' according to the poll of 49 professional forecasters taken Jan. 25 to Feb. 13. Less than 20% predicted a downturn in the previous poll completed Nov. 6. The spillover from the biggest housing slump in a quarter century, turmoil in financial markets and higher energy prices will cause growth to slow to an annual pace of 0.4% this quarter and 1,0% in the second quarter, the survey found. (Bloomberg) Economists and analysts on The Street are historically reluctant to forecast recessions, and when they do it is generally understated as to the depth and longevity.

Trade in the equity and bond markets is likely to be contained in the early part of the week. With economic data, Bernanke's testimony, and two Treasury auctions, markets should carry a slight negative bias in both stocks and bonds. That said, we can have more confidence in how the rate markets will act and less confidence on how the stock market will perform. The stock market is more emotionally charged that the bond market, thus the swings are difficult to predict. Technically, the bond and mortgage markets have a slight bearish bias now with the bellwether 10 yr note holding into support at between 3.80% and 3.85%. As has been the situation for months, if selling in the equity markets increases money will flow to Treasuries on trading. The long end of the curve will have a hard time ignoring the potential outlook for increases in inflation as most major global central bankers (including our Fed) continue to beat the inflation worry drum.

Investors continue to avoid buying mortgages in the current environment, causing mortgage rates to increase against the 10 yr treasury note. Scared to death about the appraisals and what will happen to the junk they purchased in the sub prime mania that has devastated the mortgage and residential industries. Got a home equity loan? Lenders are increasingly cancelling them, pulling the rug out from borrowers that thought they had the credit. New appraisals are causing lenders to contact those with home equity loans and simply canceling them, particularly in areas where property values are under pressure.