Tuesday Market Conditions

06/13/2008

April retail sales, expected to have declined, did; down 0.2%. However, ex auto sales retail was expected to be up 0.2% but jumped +0.5%. Prior to the 8:30 report the 10 yr note traded up 4/32, the initial reaction to better retail sent the note down 10/32 to -6/32 at 3.82%. This data will help lessen concerns over slowing consumption in the weeks ahead. The data showed slowing purchases at gas stations, even with gas prices rising just 0.4% after a Mar bump of 1.6%. Also at 8:30 April import prices jumped 1.8% with yr/yr at +15.4%, mostly due to the increases in oil prices. Export prices were up a mere 0.3%. Mortgage prices were unchanged prior to 8:30 but the knee jerk reaction pulled prices down 9/32 on the day. In the equity markets, prior to retail sales the indexes were weaker, on the reaction the key indexes recovered going into the 9:30 open.

March business inventories were reported at 10:00, expected to +0.4%, inventories were up 0.1%. Sales were reported up 1.0% with the inventory to sales ratio at 1.27 months, down from 1.28 months in Feb. The increase in sales will add the the upward revision to Q1 GDP.

The dollar got a boost on retail sales; the buck is hanging in a trading range these days as traders speculate whether or not the dollar deserves a rally. Crude unchanged, but gold is being slapped down hard (-$20.00)

LIBOR rates have been questioned in the past few weeks and now there is something being done to address concerns that banks that set LIBOR were understating the risks in sub prime loans last year. The benchmark interest rate for $62 trillion of credit derivatives and mortgages for 6 million U.S. homeowners faces its biggest shakeup in a decade as lawmakers question if banks are understating borrowing costs. The BBA, an unregulated London-based trade group, sets Libor by polling 16 banks each day on the rates they pay for loans in dollars, British pounds, euros and eight other currencies. LIBOR rates hit the spotlight in early April. While the BBA set the one-month dollar Libor rate at 2.72% on April 7, the Federal Reserve said banks paid 2.82% for secured loans later that day. Secured loans typically yield less than unsecured debt. Since then banks reporting of loan rates appear to be telling the truth, but prior to that it looks like they were lying through their teeth.

Federal Reserve Chairman Ben S. Bernanke said financial markets remain unsettled and the central bank will increase its auctions of cash to banks as needed. While markets have improved, they remain ``far from normal,'' Bernanke said today in the text of a speech to an Atlanta Fed conference at Sea Island, Georgia. ``We stand ready to increase the size of the auctions if further warranted by financial developments.'' Bernanke's comments contrast with those by Treasury Secretary Henry Paulson and Wall Street leaders including Vikram Pandit, chief executive officer of Citigroup Inc., who say the worst of the credit crisis is over. The Fed chief said it will take ``some time'' for financial firms to resolve the crisis by raising new capital and strengthening their management of risk. (Bloomberg) More likely Bernanke also believes the worst is over, but his willingness to add as much as needed is a salve for markets.

The bellwether 10 yr note, driver for the mortgage markets, continues to trade in a narrow range with the bias remaining bearish at the moment. That said, the 10 has staunchly resisted climbing above 3.92% (close) and equally refuses to crack 3.70% where we have strong resistance at 3.68%. This morning's retail sales took the wind out of the markets and sent yields up and prices lower, but well-contained in the range that we expect to continue. One huge headwind for lower rates is hitting bank accounts now; the stimulus checks are being sent out and all of the direct deposit checks have hit their target bank accounts. No doubt $125B of spendable cash will pump up the economy for a few months and with inflation fears always there, the prospects for substantially lower rates in the next month or two does not look good at the moment. That said, the seasonal factors are in our favor, with interest rates typically declining in the summer months.