Monday

1/13/2009

No economic releases to think about today, but this week does have a lot to look at, mostly confirming weakness in the economy (nothing new). At 9:00 this morning treasuries were trading weaker in price, 30 yr mortgage prices were down 9/32 frm Friday;s close but 15 mtg prices traded better, +5/32 frm Friday. (see below for 10:00 levels).

The Obama stimulus package is not yet finalized but markets are slightly more positive that it will help, and is motivating a very slight increase in investors' willingness to accept a little more risk. More talk from traders that market fact but if investor appetite for risk increases a little the demand for low rate treasuries will lessen and pressure treasury rates higher. So far though there is no hard market evidence investors are ready to dump treasuries in favor of mortgages and/or corporate bonds. What we do see is that recent market action isn't as aggressive in buying treasuries as in the past few months. The 10 yr note yield is trading in a 10 basis point range between 2.40% and 2.50% for the past week while mortgage rates have declined a little.

Q4 earnings are starting to dribble out; this week earnings will grab most of the attention in the equity markets with some sighs of pain and some positive surprises mixed in. The market is expecting the worst on any economic news so it won't take a lot to get a stock market bounce if we see some better than expected earnings, conversely worse than expected news is mostly baked in the cake. The stock market is too bullish at these levels in our judgment.

This week's Economic calendar:
Monday; (no releases)
Tuesday;
2:00 Dec Treasury balance ($33.0B)
Wednesday;
7:00 weekly MBA mortgage applications
8:30 Dec import and export prices (N/A)
Dec retail sales (-1.1%; ex auto sales -1.2%)
10:00 Nov business inventories (-0.5%)
2:00 Fed Beige Book (Fed's details on the economy)
Thursday;
8:30 Dec PPI -1.9%; ex food and energy components +0.1%)
Weekly jobless claims (+33K to 500K)
NY Empire State manufacturing index (-25.0 frm -25.8 in Dec)
10:00 Jan Philadelphia Fed business index (-35.0 frm -32.9 in Dec)
Friday;
8:30 Dec CPI (-.10%, ex food and energy +0.1%)
9:15 Dec Industrial production (-0.8%)
Dec factory usage (74.7% frm 75.4 in Nov)
9:55 U. of Michigan consumer sentiment index (60.0 frm 60.1 at the end of Dec)
2:00 Bond and Mortgage markets close early ahead of Monday's MLK holiday

Mortgage interest rates declined last week with the Fed stepping up and bought its first clump of MBSs from Fannie and Freddie as part of the $500B purchase of MBSs previously announced (last Nov). This morning some minor retreat but still holding rates in the high 4s and low 5s. The MBS markets remain unsettled and not functioning well. Wholesalers are moving in and out with pricing either aggressive or restrictive depending on their volume flows. With most wholesalers now out of the business those left are fighting volume flows when the mortgage markets rally hard as they did last Monday and Tuesday.

The FOMC in the minutes from the Dec 15-16 FOMC meeting, which were released last week, detailed the dismal state of the US economy and effectively promised to maintain extremely low interest rates for an extended period of time. The FOMC also said it is considering expanding its current liquidity programs and is considering explicit quantitative easing through the purchase of large quantities of longer-term Treasury securities.