April 19th, 2011 7:32 AM by Lehel S.
Treasuries and mortgage markets began flat today after yesterday's nice improvements.Markets still reacting to yesterday's announcement from S&P that it lowered US debt from stable to negative; not a down grade in the debt rating but a signal that unless our politicians do something real in reducing debt spending and increase taxes soon the debt rating may be lowered. While we believe it highly unlikely US debt ratings will actually be lowered, it was nevertheless a shot across the bow to Washington that time is running out on the spending binges that have been the norm for the last eight years.
S&P and the other rating agencies took serious and deserved heat for continuing to rate the junk mortgages created in 2002 to 2007 as AAA. Now it appears the rating agency isn't going to make the same mistake. After watching Washington fumble around for the last year and unwilling to make the hard choices, S&P's action yesterday may have pushed politicians to address the US instead of focusing on their own political careers.
Yesterday's market reactions were just the opposite of what conventional wisdom would expect after the S&P announcement; stocks should have rallied and interest rate markets should have spiked higher, the dollar should have declined. None of that occurred; stocks were slammed on weaker earnings and money didn't leave the bond market. Where would investors go with their wallets? Gold, it did increase to a new record; to the stock market that most now believe is overdone with economic outlooks being revised lower; there is nowhere to go except stay put in treasuries. By mid-morning yesterday the initial selling seen in bonds and improvements in equity indexes, investors and traders went back to other economic fundamentals; stocks fell and the rate markets improved while the US dollar rallied nicely against the Euro currency.
Mary Miller, undersecretary of Treasury made one of the most curious comments about S&P's announcement, saying S&P "underestimates" US political leadership. Where has she been for the past 10 yrs? Our politicians have been spending and growing the government for years with little interest in fiscal responsibility. The Fed under Greenspan and now under Bernanke has been telling Congressional committees for years to get with fiscal discipline in their various testimonies. Congress yawned and kept right on greasing the pig; hopefully S&P's action will be taken more seriously than the Federal Reserve.
March housing starts and permits out at 8:30, starts lower than expectations, while permits better. March starts were expected to have increased 7.8%, as reported starts up were up 7.2%; Feb starts however were revised higher, to 512K units from 479K and -18.5% frm 22.5%. Permits up 11.2% against estimates of +3.9%; 594K from 534K in Feb. There was no market reaction to the data; no one believes housing is going to rebound this year.
Yesterday we reported that PIMCO had established a short position on US treasuries, that they did, but this morning after being criticized for being anti-American PIMCO has established a long position in the bond market. The fund had to have taken a loss on shorting, PIMCO swings a heavy hammer but it too at times gets it wrong.
The US stock market at 9:30 opened 31 points on the DJIA, mortgage prices unchanged and treasuries also unchanged.
Now that the S&P action has been somewhat digested, there isn't much scheduled through the rest of the week. Last night Passover began and Friday is Good Friday; trading volume should decrease through the rest of the week. Lower volume can at times juice up volatility, unless there is unexpected news markets will have little to chew on through the rest of the week. That said, no one was expecting the S&P news.
Looking at the economic outlook, it has generally been revised lower by now after comments and forecasts from the IMF, the NFIB and various economists and analysts. As coming data reflects a slowing the bond and mortgage markets should hold lower rates. A moving target as we have said previously. This is earnings season, so far not as strong as thought, but there is a lot to go.