June 23rd, 2011 7:30 AM by Lehel S.
Treasuries and mortgage markets were rallying early and got an additional boost at 8:30 on weekly jobless claims. Claims were thought to be about unchanged, as reported up 9K to 429K, the 11th week in a row over the key 400K level. Labor said six states were "estimated" due to computer issues so we don't really know what impact that might have had on the data. The data this week is the data that will be used to get to the employment data for the month of June. Last week's claims were revised higher, to 420K from 414K. Continuing claims were about unchanged, from 3.698 mil to 3.697 mil. The 4 wk moving average on claims was unchanged. The slightly weaker report added to the rally moving the 10 yr note from +12/32 to +18/32 on the initial reaction. The stock market was hit yesterday, the DJIA down 80, at 8:45 this morning the index traded down 86 points and falling.
Yesterday Ben Bernanke and the FOMC meeting confirmed what most had known for two months, the US economy isn't growing much. The Fed lowered its outlook for GDP to +2.7% this year; earlier this yr the Fed was forecasting 4.0% growth but has been lowering the forecast at each FOMC meeting since Feb. Bernanke's press conference is shaking the economic bulls both late yesterday and this morning. For all the debate and discussions about the economy it is becoming more difficult to paint lipstick on the outlook. We have warned for months the economy won't grow much as long as confidence levels remain low.
The FOMC policy statement, its revisions for GDP growth less than previous, and Bernanke's press conference yesterday have cast an "official" pall on markets. Most traders had already recognized the economic slide, now with the Fed joining in the current sentiment has sunk to a new recent low. Increasing concerns of weakness in the outlook were confirmed by the Fed, the final so-called authority.
The decline in confidence in Washington is multiplying rapidly, as it does businesses are less willing to hire and consumers less willing to spend. It should be apparent now that consumers are smarter than most in Washington, getting their budgets under control. In the past consumers were responsible for 70% of GDP, over the next year or two if the economy is to gain growth it will rest on US exports. The short response to that, the US cannot grow if we have to rely on increasing exports.
At 9:00 the IEA (International Energy Agency) held an emergency press conference. The IEA is going to release 60 million barrels of oil to make a move to revive the global economies that are slipping quickly; 2 mill barrels a day for the next 30 days. America will release 30 mil of the total. In Europesovereign debt problems continue to drag on worsening its outlook. Oil prices at 9:15 down $4.30 (see below for 10:00 level); gold is being slammed this morning on the dollar strength, down $28.00.
The dollar rose against all of its 16 major counterparts after Bernanke signaled yesterday that the central bank won’t add to stimulus measures that could erode the value of the currency. The euro weakened against the greenback before European leaders begin a two-day summit in Brusselstoday to discuss Greece’s financing needs as the nation struggles to stave off default. That the EU, IMF and Germany and France and Greece cannot get to finality is evidence that Europe's debt problems spread far more than just Greece and the tenuous condition facing the EU and its currency. How the Greek situation is resolved will likely set the tone for Spain, Ireland and Portugal and possibly Italy and then the EU overall.
At 9:30 the DJIA opened down 145, S&P -17 and NASDAQ -33. The 10 yr note 2.92% -6 bp and mortgage prices +8/32 (.25 bp). Running for the door with oil prices and gold falling. Yesterday's FOMC meeting, Bernanke's comments and the never-ending saga in Greece are piling on this morning. The 10 yr note though so far has not cracked 2.90%. The rest of the day in US financial markets will likely see increased volatility.
At 10:00 May new home sales, expected down 4.6%, were down 2.1%. 6.2 month supply. 319K units annualized. Median sales price $222,600 down 3.4% yr/yr. No immediate reaction in the markets on the data.
Although the 10 yr still hasn't pushed to test recent low yields, we will revert to floating overall except for closings occurring in the next 7 days. The Fed has finally agreed that the economic outlook isn't good and with inflation under control and Europe still slipping the bond and mortgage markets should hold. How much lower interest rates can decline is still a huge question in my mind, but there is little reason now to worry that rates will increase. The 10 yr note continues in its 10 basis point yield range. We expect market volatility to remain high for the next week or so.