July 25th, 2011 11:53 AM by Lehel S.
Treasuries and mortgages opened weak this morning; over the week-end no real progress with the debt ceiling increase as political gamesmanship continues. Democrats and the Pres want debt ceiling increase large enough to avoid having to deal with it next year ahead of the elections, while Republicans are trying to get a plan that increases the ceiling but only enough to get through several months then back to the debate.
The impasse has boosted the chance Standard & Poor’s will lower the U.S. credit rating from AAA within three months to 50%, according to PIMCO, the largest bond managers in the world. Mohammad El Erian said in an e-mail last week. “In most likelihood, a last-minute political compromise will avoid a default but will leave the AAA rating extremely vulnerable,” ...... “stock markets around the globe will look to price in a greater uncertainty premium on account of political squabbles in the world’s largest economy and the increasing risk that it may lose its sacred AAA rating.” Over the weekend there was a lot of concern that equity markets would fall hard frm Asia to Europe and in the US; the DJIA is opening weaker this morning but not nearly as bad as some were expecting.
The way the debating in Washington is proceeding it isn't going to sit well with markets. TheUS interest rate markets are likely to begin factoring in a risk premium based on concerns that rating agencies may lower the US credit rating based on the reluctance of politicians to step up and make major decisions on increasing revenues and cutting spending. As it looks now what actually occurs will not satisfy rating agencies; at least that is the present fluid thinking. A rapidly moving target now with the deadline coming on rapidly making it questionable whether Congress can put it all together in time to avoid default.
No economic releases today; this week Treasury will auction $99B of notes. The Fed isn't buying treasuries anymore but the auctions two weeks ago didn't appear to be pressured as a result.
This Week's Economic Calendar;
9:00 am Case/Shiller May 20 city price index (-4.4%)
10:00 am July consumer confidence index (56.0 frm 58.5)
June new home sales (+0.4% to 320K annualized)
1:00 pm $35B 2 yr note auction
7:00 am Weekly MBA mortgage applications
8:30 am June durable orders (+0.4%; ex transportation orders +0.5%)
1:00 pm $35B 5 yr note auction
2:00 pm Fed Beige Book
8:30 am weekly jobless clams (-3K to 415K; cont claims 3.688 mil frm 3.698 mil)
10:00 am June pending home sales (-3.0%; +8.2% in May)
1:00 pm $29B 7 yr note auction
8:30 am Q2 advance GDP report (+1.6% frm +1.9% in Q1)
Q2 employment cost index (+0.5%)
9:45 am July Chicago purchasing mangers index (58.0 frm 61.1)
9:55 am U. of Michigan consumer sentiment index (63.8 unch)
Gold this morning making another record high as concern over the US credit rating possibly being lowered by the rating agencies.
Asian stock markets fell today, Europe's markets also lower; at 9:30 the DJIA opened -96; the 10 yr note -13/32 3.01% and mortgage prices -9/32 (.28 bp).
Equity markets didn't open as badly as many were expecting with no debt ceiling deal in placebut the indexes are slipping a little from the 9:30 open, as they do fall the bond market is finding support. Although interest rates are higher this morning and prices lower on mortgages, if the stock market continues to slide as the day rolls on the bond market will likely improve. Conversely, any improvement in equity markets will push yields higher and prices lower. Technically the bond and mortgage markets are still not throwing off bearish reads but any more selling and the short term outlook will turn bearish. On the outlook for lower rates, we do not expect rates will fall much on any rallies. The 10 yr note has put in a double bottom on the yield chart, not a good sign. If the 10 yr note yield closes above 3.05% the next target would be 3.25% then 3.40%; mortgage rates will follow.