August 10th, 2010 8:49 AM by Lehel S.
Global equity markets were lower last night and pushed the US key indexes down, at 8:30 the DJIA -105, the 10 yr note +8/32 at 2.81% and mortgages at 8:30 +3/32 (.09 bp). Asian stocks posted their worst day in 6 weeks on Chinese trade data as export/import growth slowed in July. Early this morning the National Federation of Independent Business data showed that small businesses are still not hiring, still concerned with the economic outlook and worried over what will come from Washington on health care and taxes. The small business sector accounts for most US jobs and their outlook has not shown any significant improvements for months.
At 8:30 the data or today; Q2 productivity expected to be up 0.1% was down 0.9%; the first drop since the end of 2008. Q1 productivity was however, revised from +2.8% to +3.9%. Q2 unit labor costs were expected up 1.4% but reported +0.2% with Q1 revised from -1.3% to -3.7%; the increase which is adjusted for efficiency gains, was the first gain in a year. The data confirms our view that the US economy is slowing going into Q2 and in Q3.
At 10:00 June wholesale inventories were thought to be +0.4%, as reported inventories increased just 0.1% with sales down 0.7%; the sale to inventory ratio at 1.15 month from 1.14 moths in May.
This afternoon the FOMC will issue its so-called policy statement at 2:15 concluding its meeting this morning. There is an unrealistic idea out there that the Fed can do things that will stop the slide in the recovery, an idea that is both unrealistic and unlikely. The Fed can do some things like cutting payments on reserves that some believe will loosen up and increase bank lending, the Fed could go back to some quantative easing by buying treasuries and/or MBSs to lower rates but lower rates are not the problem. This morning on CNBC one of my favorites, Mohammad El Erian from PIMCO commented that the answer for the economy is not at the Fed but with the Administration and Treasury. So far the Obama Administration has not had a cohesive plan, businesses are fearful and as long as that is the case the economy is in danger of falling back into recession. The statement this afternoon is being touted as one of the most important in a long time; maybe, but the likelihood of something earth-shaking is not good. The FOMC is not unified, there is a lot of disagreement at the Fed as to what it can or should do now.
In the meantime, at 1:00 Treasury will auction $34B of 3 yr notes. The auction will likely get a solid bid. Today's auction isn't much of a concern at the long end of the curve but tomorrow's $24B 10 yr note will be. Markets will need a very good auction today to ease the way into the 10 yr tomorrow. A weak or sloppy auction today won't bode well for the longer dated issues tomorrow and Thursday (30 yr bond).