Quick Market Update

Since there was no PUP this morning, and a lot is going on in the markets, wanted to send out a brief update.

Three month T-Bills have fallen from just under 5% yields a little over two weeks ago, to a low of 2.7% yesterday, and are currently at 2.95%. Yesterday's 67bp decline was the largest one day drop in 20 years for the 3m Bills. As investors worry about lending their money long-term, which means even three month commercial paper interest rates have risen dramatically to attract funds, safe government bills and bonds have seen a huge flight to quality bid that has pushed down their interest rates.

This morning there is a rumor circulating that the Fed may ease short-term market rates, not just the discount rate used by banks to borrow funds from the Fed that was lowered last Friday, but the Fed Funds target rate, before the meeting at 10am this morning between Fed Chairman Bernanke, Treasury Sec. Paulson, and Senate Finance Chairman Dodd, in a supposed effort to prove the Fed isn't being swayed by politics to ease. Many economists are becoming increasingly concerned the U.S. may be entering into a recession, the first one in five years.

Equity markets are rallying on the rumor. Stocks still haven't had a 10% correction on closing levels from the record highs reached last month. Only the very broad-based Wilshire 5000 is actually lower on the year.

The dollar is likely to be under pressure if the U.S. lowers interest rates. The dollar index has been fluttering above 12 year lows at 80 recently. Short-term, the dollar has been helped by flight-to-quality buying out of emerging markets, and repatriation by U.S. investors, but long-term lower interest rates will be less attractive to foreign investors, as will a slowing economy for stock demand.

This morning foreclosure data was released. Foreclosures rose 93% MoM in July, and the increases are spreading from the rust belt to California and Florida.