Treasury and mortgage prices opened slightly lower this morning with stock indexes trading better. Stocks advanced and the euro strengthened while German bonds fell after Greek lawmakers approved austerity plans to secure rescue funds. Passage of the austerity bill puts the spotlight on a meeting of euro-area finance ministers Wednesday that must decide whether to approve the second bailout. Rioters protesting the measures battled police and set fire to buildings in downtown Athens. Austerity cuts are so severe that citizens are revolting, although parliament approved the budget cuts 199 to 74. In this constantly fluid situation, it presently looks like Greece will avoid default getting the needed funds. The key to approval of the budget is Germany. If Germany likes it, it will get done, if not, no deal. Greece’s debt problems are less a market factor today than it was a few months ago, Markets have adjusted to whatever occurs with a strong bias that the EU, ECB and IMF will not let Greece go down now; later it is likely but not now.
After little data last week markets will face a number of key data points this week. The FOMC minutes will attract a lot of attention. Was there much discussion about another QE from the Fed? The Fed and private analysts are presently at odds over the economic outlook this year and next. The Fed lowered its GDP forecasts for 2012 and 2013 while private forecasts have been more optimistic. Last week someone tossed out 15,000 or the DJIA and Barron’s put the number on the cover of this week’s paper. The Fed isn’t buying it, seeing the economic recovery still very vulnerable. As long as the data continues to improve as it has for most of the last two months, the Fed will not launch a new round of stimulus, it may however increase the purchases of MBSs to keep mortgagerates from increasing much. That said, in our view if interest rates increase mortgagerates will also but much less than treasuries if the Fed continues to buy.
At 930am the DJIA opened up +50, the 10-Year Note was down -2/32 at 1.99% (+0.5%) and mortgage prices were down -1/32 (.03 bp). Quiet so far this morning with no data to look to and not much enthusiasm about the Greek budget approval. Traders and investors are believing that Greece will now get the funds to avoid default now. A short term fix but markets don’t look forward more than a week or so these days.
The President will put forth his 2013 budget today; a ritual that in some sense has little meaning these days. Congress hasn’t passed a budget in three years and won’t likely do it this year. He calls for $1.5 trillion in tax increases as well as spending to boost jobs as part of a 2013 budget request that projects the deficit shrinking next year to $901B (2012 deficit projected at $1.3 trillion). The tax increases would mostly fall on the wealthy, through a new 30% minimum tax on those earning more than $1 million annually, allowing Bush-era tax cuts to expire for families taking home more than $250,000 and capping the value of itemized deductions for top earners at 28%. No news that Republicans don’t agree. Most of the President’s budget has already been opposed. Next month Republicans will come up with their budget. In the end there will be no Congressional approval of any budget with politicians deadlocked in ideological gridlock.
