8/13/09

It was another crazy market yesterday. Mortgage backed security prices at 9:30 +4/32, at 10:15 -3/32, at 1:10 -20/32, at 3:00 -2/32. Volatility sent lenders re-pricing then doing it again in some cases; but so far have left the come back alone----no price improvement. Don't blame lenders; volatility is a huge problem for them also.
Yesterday we learned that the Trade Gap increased 4% in May, but widening less than was forecast. Exports were up, with imports up a tad more due to the cost of oil. Most of the increase in imports and exports in June was driven by higher prices, not higher volumes, but in inflation-adjusted terms the trade deficit fell to the lowest level in nearly 10 years! Yesterday’s FOMC minutes did…not much. “Economic activity is leveling out...inflation is subdued…conditions in financial markets have improved…household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit…businesses are still cutting back on fixed investment and staffing but are making progress…The statement goes on to say that Fed Funds will stay between 0-.25% for an extended period, To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October.”
Before the Fed meeting, the government debt market grappled with buying several billion of 10-yr. notes. Today is the $15 billion 30-yr bond auction. Currently the question is, what the demand will be like for investors who want to tie their money up for 30 years at today’s yield.
We already had Jobless Claims and Retail Sales. Retail Sales unexpectedly dropped. Import Prices were also down. In addition, Jobless Claims rose, whereas analysts expected them to drop. The number of folks collecting benefits fell to its lowest level since April, but the 4-week moving average rose – the first increase in almost two months.
Volatility continues at a high level; prices for mortgages and treasuries are churning around, but the path has been unpredictable. Technically the 10 yr note and mortgages remain slightly bearish as the economic outlook is improving. That said, there is little real solid conviction on the economic outlook. Lots of bullish talk to support equity market buying but the actual data so far hasn't matched the expectations. As always, it’s wait and see.