August 3rd, 2011 4:53 PM by Lehel S.
Interest rates were better again overnight; the debt ceiling del is all but done, the Senate is scheduled to vote at 12:00 today with more votes than needed to send the bill to Obama for his signature. Politically both parties can claim some form of victory but neither party can leave this with much satisfaction and without eggs all over their faces. While the debt ceiling will cover all of 2012 as Obama wanted, the recent battle over spending vs revenue increases has just begun.
Now we turn back to the economy, and that isn't a pretty picture. GDP growth in Q1 was revised to almost flat (+0.4% frm 1.9%), Q2 advance GDP up 1.3% well off +1.9% expected and likely to be revised lower when we revisit the data next month. This morning June personal income was up 0.1% as expected, spending expected up 0.1% but fell 0.2%.
There still is the media firing up the flame of a possible down grade of US debt by S&P. We have no idea about what the rating agency will do but in the end it won't matter much. As we noted yesterday, a down grade of US debt essentially down grades all other sovereign debt whether or not S&P agrees. The US is still the strongest credit in the world, and will stay that way. Although the recent debt ceiling debates were painful to watch, it is the beginning of a serious debate and major decisions that eventfully will shrink government, lower spending and increase revenues. Eventually taxes will increase (or some forms of increased revenues), spending will be cut, Medicare and Social Security will be revamped. Painful but necessary; as long as the can gets kicked down the road the deeper the hole the US falls into. It is now up to American voters; in 2012 the election results will set the path to a balanced budget (over time) or send the US into debtors prison (over time).
Recent reports on the economy have been much weaker than even the pessimists believed.Personal spending down in June, possibly the temperatures and the heat from Washington soured consumers. Yesterday's ISM July Manufacturing data was the lowest reading on the main index since July 2009 at 50.9; a read below 50 would imply actual contraction. Tomorrow the ISM services sector report, expectations are 53 on the index from 53.3 in June; another weaker than expected reading will drive equity indexes down and continue to swift decline in US interest rates.
This is employment week; tomorrow the ADP payroll people will provide their guesstimate at +100K non-farm private jobs. Friday the official BLS report, unemployment unchanged at 9.2%, non-farm jobs +85K, non-farm private jobs +100K; a rare occurrence when ADP and BLS are both expected at the same level. The actual data will as usual be well off the estimates.
Gold set another new all-time high this morning; driving it is the reality that no country wants its currency to appreciate. Weaker currencies are good for exports, with Western economies teetering on another recession gold is becoming a new reserve "currency". We continue to hear forecasts of $2,000.00/oz.
The DJIA opened -40, 10 yr note at 2.70% -5 bp and mortgage prices at 9:30 +8/32 (.25 bp).
Technically the bond market is obviously bullish, that said, our momentum oscillators are now in overbought levels suggesting we may see some price declines in the next day or two. It will not change the longer bullish outlook but some short term pullback is likely coming. The 10 yr note and mortgage rtes have plummeted in a very short timeframe; the 10 30 basis points in 4 days, mortgages 25 basis points.