August 6th, 2011 8:18 AM by Lehel S.
Yesterday the bond and mortgage markets were essentially unchanged, the stock indexes all a little better. This morning rates are lower and prices higher as US stocks open down hard. Early this morning comments and actions from the ECB confirms that Europe's financial system may be in worse shape than was thought. The ECB will offer euro banks all the money they need for six months in a re-purchase deal to help shore up banks that are in worse shape than markets thought. Jean Claude Trichet, ECB President, while couching his language, nevertheless sounded concerned and sentEurope's markets lower and US equity markets opening weaker.
European officials are trying to stop the region’s sovereign debt crisis spreading to Italy andSpain. While the comments suggest the ECB is reluctant to shelve further rate increases, traders are looking for signs that the central bank will take direct steps to shore up the bonds of crisis-hit nations.
The world is increasingly focused and concerned over the US economic outlook after a month's worth of data has been much weaker than most were expecting. No job creation in the US, no housing rebound now or on the horizon and weaker earnings coming from businesses. In an effort to keep its economy from falling Japan this morning intervened in the currency markets to sell yen in an attempt to weaken the currency. No country wants its currency to strengthen these days, a weaker currency is good for exports; it a race to see who can beat their currency down against other global competitors.
Weekly jobless claims at 8:30 were down 1K to 400K; continuing claims 3.73 mil from 3.72 mil last week. With employment report tomorrow morning and not a significant change, claims didn't generate much interest with traders.
Nothing left on the calendar today; the focus in the bond market will center on how US stocks perform and positioning for tomorrow's July employment report. The "consensus" is unemployment unchanged at 9.2%, non-farm jobs +75K, non-farm private jobs +100K. If the report is better than estimates look for strong selling in the overbought bond market, and big increases in oversold stock indexes; regardless of how markets act though, the trends in stocks and bonds will remain in tact.
At 9:30 the DJIA opened -136, NASDAQ -44, and S&P -14; the 10 yr at 9:30 +8/32 at 2.58% -3 bp and mortgage prices +7/32 (.22 bp) frm yesterday's close.
How much lower will interest rates decline? We are looking for the 10 yr note to slide to 2.36% eventually, but the move lower from here is likely to be choppy with increasing two way trading. Although the bond and mortgage markets are in near term overbought readings on all of our momentum measurements, the outlook remains bullish for lower rates as the US and global economic outlook has deteriorated recently.