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Thursday, July 08, 2010

The correction in the US financial markets continues; this morning the stock indexes in early trade were better, the bond and mortgage markets worsening. The bellwether 10 yr climbed back above 3.00% this morning pushing mortgage prices lower. Not at all unexpected; both bourses have been technically over-extended for the past 7 trading sessions and finally buckled yesterday with a very strong short-covering rally in stocks and some fresh buying from bargain hunters.

At 9:30 the DJIA opened +55, the 10 yr at 9:30 -13/32 at 3.03% +4 bp and mortgage prices -7/32 (.22 bp).

At 8:30 weekly jobless claims were better than forecasts, falling 21K to 454K against estimates of a decline of 12K to 460K. Continuing claims fell 224K to 4.413 mil, continuing claims will continue to decline as many unemployed have run out of benefits. On the report a little additional improvement on the equity market indexes but the bond and mortgage markets didn't experience additional selling on the initial reaction. Unemployment claims better but still in the recent range; the smoother 4 wk average still over 450K at 466K and down 1,250 from last week. The continuing claims figure does not include the number of Americans receiving extended or emergency benefits under federal programs. Those who’ve used up their traditional benefits and are now collecting emergency and extended payments decreased by about 343,197 to 4.58 million in the week ended June 19. The Labor Department estimates about 3.3 million people will fall off extended-benefit rolls by the end of July if Congress doesn’t pass emergency legislation.

Overall chain store sales were a little better in June than what markets were expecting but nothing substantial. With recent sentiment changes for the economic recovery being revised lower by economists many forecasts had become excessively bearish as they were excessively bullish prior to Europe's problems that led the way to re-thinking the recovery strength.

At 1:00 this afternoon Treasury will auction $12B of 10 yr inflation indexed notes. The rate the auction receives will provide additional info on what investors are expecting on the inflation front. No inflation to be concerned with for a long time given the weakening economic outlook compared to the excessive bullish outlook prior to the last month. Prior to the past couple of days markets had become consumed with potential deflation.

Later this morning Treasury will officially announce next weeks auctions 3 yr, 10 yr and 30 yr issues will be auctioned, forecasts are a total of $69B; $35B 3 yrs, $21B 10 yrs and $13B of 30 yr bonds. Supply next week and the technical correction in the stock and bond markets will add additional pressure in the interest rate markets.

Interest rates will continue to remain low but traders will focus on 3.00% for the 10 yr as possibly resistance. Next week's Treasury auctions will reflect sentiment for continuing the safety moves into treasuries and away from equities. The stock market, based on the three key indexes, is not providing a return better than treasuries and with economic uncertainty high interest rate markets will likely hold low yields. The economic outlook in the US hasn't changed; consumers are not spending enough to add strength to the outlook although in July and August back to school buying will improve consumer spending data.

At 3:00 this afternoon May consumer credit is expected to have declined $3.0B.

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