July 29th, 2011 7:40 AM by Lehel S.
Treasuries and mortgages were better early this morning on the failure of the House to pass its "plan" yesterday as was expected based on comments frm Speaker Boehner through the day. Safety moves into treasuries as Congress and the Administration move closer to a possible default is driving longer dated treasuries lower and with them mortgage rates. There is a lot of talk as you know, that theUS will suffer a decline in its credit rating by the rating agencies. Based on reports this morning 75% of investors in treasuries said they would not change their investments or jettison treasuries if in fact the downgrade actually happens.
At 8:30 more improvement in treasuries and mortgages with the advance GDP report for Q2 showing the economy grew just 1.3% against general estimates of +1.9%. Q1 GDP was revised lower, from +1.9% on the final read last month to +0.4%, a huge revision lower. Forecasts of 85 economists in the survey ranged from 0.9% to 2.9%. At $13.27 trillion in the second quarter, GDP has yet to surpass the pre-recession peak. The GDP estimate is the first of three for the quarter, with the other releases scheduled for August and September when more information becomes available. Consumer spending from April through June showed the smallest gain since the second quarter of 2009, when the economy was in recession. The slump reflected a 4.4% decline in purchases of durable goods like automobiles. Q2 employment cost index increased 0.7%; yr/yr up 2.2%.
Markets spent a lot of gray matter yesterday on the idea the Boehner plan would pass the House late yesterday; it didn't happen as conservative Tea Party members refused to go along even with Boehner flexing his leadership muscle. Even if the House would have passed its plan the Senate had made it clear it would be dead on arrival if it had reached the chamber. The next step isn't' clear; that said there are countless opinions about what will happen and what the impact will be under various scenarios.
President Obama is scheduled to talk about the impasse on the debt ceiling at 10:20 this morning.
More data at 9:45 when the July Chicago purchasing mgrs index hit; forecasts were for an unchanged index at 61.1, as reported 58.8; employment at 51.5 frm 58.7, new orders at 59.4 frm 61.2 and prices pd at 71.7 frm 70.5. Another weak report however the stock market didn't seem to react much to it, as the key indexes were already down hard from yesterday's closes. Treasuries and mortgage markets did add to their gains on the release, the 10 yr note yield dipped to 2.86% down 2 bp below its level prior to the report; mtgs jumped 4/32 (.12 bp in price)
At 9:55 the U. of Michigan consumer sentiment index, expected at 64.0 frm 63.8; was 63.7. The 12 month out expectations index at 55 frm 52. No reaction to it.
The bellwether 10 yr note this morning fell to 2.87% close to the 2.85% seen a month ago. WithWashington in current gridlock on the debt ceiling investors are piling into safety positions, in US treasuries. That Congress and this Administration are at an impasse at the moment is surprising to me; I really believed they would act responsibly, always overestimate the will of politicians even though I set the bar exceptionally low.
At 9:30 the DJIA opened -130, the 10 yr note +20/32 at 2.88% -8 bp and mortgage prices +10/32 (.31 bp).
The bond and mortgage markets are testing last month's low yields this morning. Given the mess in Washington the potential for even lower rates has increased; however, we have to respect the technicals and the momentary double bottom in yields if rates don't push lower. The next few days are critical.