Thursday, 2/4/10 4:12 PM
Beatdown for the stock market today, driving money into treasuries and to a lesser extent into MBSs. It doesn't take a lot to beat the stock market down these days; it is failing on rally attempts on low volume and passing over economic data that beats estimates. The equity markets have already discounted the best possible scenario for the economic recovery, now some realization is sinking in (slowly) that the rosy outlook may be too rosy. This morning weekly jobless claims were up 8K to 480K with expectations of a decline of 15K unemployment claims. We sense a dangerous complacency among investors in equities, so convinced good times are here again, and that is a huge mistake based on the employment sector. If tomorrow's Jan employment data isn't up to estimates (unch on non-farm jobs), and unemployment higher than 10.0% the stock market will likely get tagged hard again and finally drive the 10 yr note rate under its resistance at 3.60% where it sits now.
Looking solely at US economic data is missing a key factor; the continuing softness in sovereign debt. Greece, Dubai, Portugal and apparent financial problems for the huge Las Vegas City Center may be the tip of that ice cube; debt crises are becoming more acute and could spread to other sovereign debt. Even in the US with the federal deficit at levels that are still not fully appreciated, the cost to fund the growing debt is going to bring our ability to pay into focus. Unlikely the US will default however, but the point here is that financial markets continue to be oblivious to the pit our debt and global debt may cause the US economy. Story on the wires; Harrisburg, PA, the state's capital is in such dire straits financially that the city may file for bankruptcy, who would have believed a year ago?
With the stock market headed for at least a 10% correction, many money managers are not worried; they say they expect it. An outlook that once the 10% decline in the indexes occurs it will be a buying opportunity is the mantra these days. That is a dangerous mind set; markets move up on the Wall of Worry, as long as no one is worried the equity markets may not stop at 10% declines. We have talked about it for months; the consumer isn't out of the recession, the housing sector isn't on the rebound (it is only not as severe as it was a year ago), and unemployment is far from recovering, the building blocks of a strong economy are made of whip cream. More than 7.2 million mortgage loans are now behind on payments and one million properties are now in real estate-owned status, according to the January 2010 Mortgage Monitor report from Lender Processing Services in Jacksonville, Fla. Home delinquency rates have surpassed 10%. The total foreclosure inventory rate is 3.2%, and the total non-current rate, which combines foreclosures and delinquencies, sits at 13.3%.
Falling stocks are generally good for the bond and mortgage markets; we expect that will be the case initially as equities continue to slide, but at some point as stocks fall concern of back-sliding into a double dip recession will drive politicians to try and spend out of it and increasing even more the debt the US is accumulating. Interest rates under that scenario would spike higher as the economic outlook deteriorates.
Tomorrow will be a very volatile day when the employment data hits, there will be revisions to previous months as well as the idea that non-farm jobs were unchanged in Jan with unemployment at 10.1%. We are not economists so we have no idea other than the estimates on what the data will show. What we are sure of though is that the rate of unemployment is much higher than the headline BLS number that will make the Saturday morning headlines. Equally, we are sure most traders are in agreement that unemployment is worse than the government would like us to believe. Although employment gets all the focus, tomorrow at 3:00 pm Dec consumer credit numbers will be out, consumer credit has crashed for the past nine months and is expected to be down $9.5B in Dec.
PRICES @ 4:00 PM
10 yr note: 98.08 +30/32 3.59% -11 BP
5 yr note: 99.26 +18/32 2.29% -12 BP
2 Yr note: 100.04 +6/32 0.80% -9 BP
30 yr bond: 97.17 +58/32 4.52% -12 BP
Libor Rates: 1 mo 0.228%; 3 mo 0.248%; 6 mo 0.385%; 1 yr 0.845%
30 yr FNMA 4.5 Feb: 101.09 +15/32 (.46 bp) (+6/32 (.19 bp) frm 9:30)
15 yr FNMA 4.0 Feb: 101.30 +11/32 (.34 bp) (+3/32 (.09 bp) frm 9:30)
30 yr GNMA 4.5 Feb: 101.21 +15/32 (.46 bp) (+6/32 (.19 bp) frm 9:30)
15 yr GNMA 4.0 Feb: 102.20 +10/32 (.31 bp) (+2/32 (.06 bp) frm 9:30)
Dollar/Yen: 88.92 -2.03 yen (dollar hit hard)
Dollar/Euro: $1.3740 -$0.0148 (dollar stronger)
Gold Apr: $1064.40 -$47.60
Crude Oil Mar: $73.10 -$3.38
Goldman-Sachs
Commodity Index: 485.86 -18.26
DJIA: 10002.18 -268.37
NASDAQ: 2125.43 -65.48
S&P 500: 1063.11 -34.17