Monday Market Conditions

05/05/2008

Some rebound in the bond and mortgage markets this morning after selling Friday drove yields to levels that were very close to drop dead support; but by 10:00 all the early gains have been erased . The 10 yr yield hit 3.88% on Friday, settled at 3.86& and closed in one 3.92% that we still believe will be tested. Early volume in bond and mortgage trading this morning was paper thin as investors and traders were left with very little news to work from. Stock index trading prior to the 9:30 open added a little support to rate markets as the indexes were pointing to a lower open.

Markets in Japan and England are closed for holiday today, adding the thin trading activity. The only data this morning came at 10:00 with the ISM services sector report. The overall index was expected to be about unchanged at 49.5 frm 49.6 originally reported in March. The overall index jumped to 52.0 and March was revised to 50.2; new orders component at 50.0 from 50.2, price index at 72.1 frm 70.8, and employment index at 50.8 frm 46.9. Any index read over 50 indicates expansion. Treasury and mortgage prices resumed selling on the report.

This week's Economic Calendar is thin:
Wednesday:
8:30 Q1 productivity (+1.2%)
10:00 March pending home sales
1:00 $15B 10 yr treasury note auction
3:00 Mar consumer credit (+$6.3B)
Thursday:
8:30 weekly jobless claims (-12K)
10:00 Mar wholesale inventories (+0.4%)
1:00 $6B 30 yr bond auction
Friday:
8:30 Mar trade balance (-$61.3B)

The BofA/Countrywide deal is on shaky ground. Last week talk surfaced that BofA would not agree to guarantee all of Countrywide's debt, sending a clear message that the original deal will be re-negotiated. Talk this morning is that BofA, which originally offered $7.00/share may now only want to pay $2.00. Some analysts are suggesting BofA should just walk away from the deal altogether.

Back in the news: Former Federal Reserve Chairman Alan Greenspan said the U.S. has slipped into an "awfully pale recession'' and may continue to languish for the rest of the year. "We are clearly receding,'' with economic growth now at about zero percent, he said in an interview with Bloomberg News. Greenspan, who now consults for clients including Deutsche Bank AG, also said it was too soon to declare the end to the credit crisis stemming from the collapse in the subprime mortgage market. "Until there are stabilized prices of homes, and I think they have a good way to go down, you still have prospective losses'' for financial companies and investors. "It's too soon to tell'' if the worst of the credit crunch is over, he added.

Commodity prices are not going to decline as many have been recently espousing! Yes there has been speculation that has driven prices higher, and yes the dollar weakness has added to the increase of all commodity prices. However, demand for oil, grains and metals shows little signs of abating. Food shortages are are escalating and will continue as the formerly "under-developed countries expand economically. For food; the world is facing a serious shortage of ending stocks (stocks after harvest) and so far the US grain belt is well behind in planting this year. Crude oil is moving back to $120.00, trading now at $118.72 +$2.40; gold is up $13.00. The dollar is trading weaker this morning.