Treausries and mortgages opened a little soft early this morning with Europe’s stock markets better and trade in U.S. futures pointing to a better open at 930am. At 830am November Retail Sales were not as strong as expected; sales were up 0.2% both overall and excluding auto sales. Expectations were for both sales to be up 0.6% overall and +0.5% excluding auto sales. The weaker sales didn’t impact either the stock or bond markets; both held where they were prior to 830am. In Europe, Spain sold more securities than expected and a report showed that investor conidence in Germany improved. Nothing has changed from yesterday. Europe’s banks are beginning to sell assets that generate profits to increase capital that is demanded by European regulators to make banks increase core capital to 9% by June 2010 instead of 2019. Euro banks can’t successfully sell stock or get anyone to buy their debt holdings with values so low banks would have to book losses. Selling businesses that generate profits will further slow recovery in the region but with the inability to provide debt relief throught tje E.U., E.C.B. or I.M.F., selling off assest is the only course left. Banks across Euriop have pledged to cut more that 950 billion euros of assets over the next two years about two-thirds of that will come from sales of profitable units and performing loans. At 930am the DJIA opened at +60; the 10-Year Note was +11/32 at 2.06% (+4 bps); mortgage prices were -5/32 (.15 bps). Treausry will sell $21 billion of 10-Year Notes at 100pm. The auction should go well with strong bidding. Recent Treausry Auctions have met with strong demand as was yesterday’s $32 billion of 3-Year Note sale. The FOMC is meeting today in a one-day meeting; the policy statement will be released at 215pm. Most Federal Reserve watchers are expecting a slightly better outlook on the economy from the group. There is little belief the Federal Reserve will launch a QE3, as had been hoped a month ago. Two weeks ago the view among dealers was that the Federal Reserve would likely increase its purchases of mortgage Backed Securities (MBS) to assist in keeping mortgage rates low. There hasn’t been anymore talk about it since then. With the economy looking better based on recent data, the Federal Reserve isn’t likely to see the necesity in more easing of any type. Trade this morning is likely to be quiet ahead of the auction and the FOMC statement at 215pm later today. The Federal Reserve is very unlikely to issue a statement that will surprise. The Federal Reserve is doing everything it can to not roil markets anymore that what Europe is already doing to global markets. Regardless of the constant run of news reports out of Europe, and the lack of any significant near-term progress (the summit last week focused on fiscal union among members that will take months if not years to resolve and didn’t address the debt messes would be dealt with), the U.S. rate markets have not continued to improve. The 10-Year Note has hit a brick wall at 2.00% and another at 2.12%. For over a month and against all the negativity out of Europe’s fumbling its situation, the long end of the yield curve has been essemtially unchanged. The fears of debt defaults in Europe have lessened a little while the U.S. economy has shown improvement albeit small. Europe will continue to keep U.S. rates low but pulling the other direction is what appears to be a better economy. Neither issue is a lock, the end result is current stagnation in the interest rate sector.
For more information please visit www.crestico.com
