September 20th, 2011 7:18 AM by Lehel S.
The back and forth pattern that characterizes the US financial markets continues today; after a strong rally yesterday in the bond and mortgage markets this morning both markets started weaker. Ditto for the equity markets, down yesterday and up this morning. The every other day direction is so predictable these days, it can be traded with little concern by day traders that are currently dominating markets.
At 8:30 August housing starts, expected down 2.4% to 590K, declined 5.0% to 571K. August building permits expected down 2.0% to 585K were up 3.2% to 620K. Not much reaction to the data; these days US economic data is a second tier concern with markets completely and totally fixated on every word coming out of Europe over Greece's debt issues. Europe continues to grapple with a solution for debt insolvent countries; Greece, Portugal and Ireland and the bigger economies of Spain andIreland.
Greece held “productive” discussions with European officials yesterday about the country’s bailout. The government will hold another call today as European leaders squabble over the terms of a July agreement and the prospect that they will be forced to channel more money to keep Greece in the currency union. The IMF said that the program carried out by the government had produced “impressive fiscal consolidation,” while the EU in Brussels yesterday that the European Commission has not demanded more of Greece than was agreed to in the international aid program for the country.
The IMF said the global economies are in a dangerous situation with another recession increasingly likely. German investor confidence fell less in September than analysts had estimated. Its index of investor and analyst expectations, which aims to predict developments six months in advance, declined to minus 43.3 from minus 37.6 in August. Economists had projected a drop to minus 45, according to the median of 37 estimates in a Bloomberg News survey.
S&P, as expected, downgraded Italy's debt to A frm A+, saying slower growth and a “fragile” government may derail the nation’s ability to reduce its debt burden. Portugal’s 10-year yield rose by the most in two weeks.
The FOMC meeting gets started today, a two day affair leading to tomorrow's policy statement and belief the Fed will officially announce "Operation Twist" as it is being dubbed. Many now are confident the Fed will act; if it doesn't the long end of the curve (10s and 30s as well as mortgage markets) will likely be hit hard. The Fed will decide to replace short-term treasuries in its $1.65 trillion portfolio with long- term bonds, according to 71% of 42 surveyed economists. The move, is to bend the yield curve, will probably fail to reduce the 9.1% unemployment rate, 61% of the economists said. Among those, 15% predict it will be “somewhat harmful.”
Looking over the wires this morning it appears there is little in the way of understanding what "Operation Twist" will do for the economy. Stories hitting that the stock indexes are better this morning on belief the Fed's expected move will help the economy. Wed don't subscribe to that thinking; lower long term interest rates that are supposed to go lower on the Fed move will have little if any impact on unemployment, will not likely motivate small businesses to spend or hire, and won't do much for the housing sector. Banks are scared to death to lend with regulators stepping down on them with more red tape and not understandable regulations. The we have the FHFA launching law suits against the large mortgage lenders demanding re-payment of as much as $800B for what FHFA is saying were faulty loans; and telling Fannie and Freddie to increase fees by as much as 10 basis points. Washingtoncontinues to be unable to get out of its own way, suing banks so late in the game is counter-productive and sends a message that lenders are at risk for anything they do and hindsight will be the way bureaucrats will do things; is it any wonder banks won't lend?
The MBS markets are dragging today; at 9:50 the 10 yr note had recovered its earlier price declines and traded up 5/32 at 1.94% -1 bp while mortgage prices at 9:50 -6/32 (.18 bp). The stock indexes opened a little better at 9:30 but at 10:00 were weakening.