September 12, 2007 TIDBITS
From Dow Jones: “If it seemed that things couldn’t get much worse for home builders, think again: Stocks in the sector are setting fresh annual lows this week as the housing market endures even more bad news...The Dow Jones U.S. Home Construction Index, a basket of home-builder stocks, is off nearly 50% so far this year.”
From Morgan Stanley: “…it’s noteworthy that the prime mortgage delinquency rate is at its highest level in least a decade when unemployment is low and the average mortgage rate is at generational lows. This fits with my view that the American household sector has reached the limit of its debt-carrying capacity. It also suggests that if employment starts to weaken then the situation will get far worse. Falling house prices, now evident in some price series, would worsen this situation.”
From Lehman: [Lehman survey of 135 portfolio managers] “Expectations are firmly concentrated around a 25 basis point Fed funds rate cut coupled with a 50 basis point discount window cut.”
From Deutsche Bank: “When one looks around the system, the argument for a dramatic 50 bp cut is ambiguous. Heavy corporate investment grade issuance shows that the credit crunch is not systemwide, but isolated to specific securitized product sectors, as well as the leveraged loan markets.”
From CITI: “Frenectic trading of the curve has been the story of the day;steeper then
flatter then steeper ... all in 2s to 5s, but flatter in the long-end. Stocks
are holding, but commodities very fierce here. It should make folks doubt or at
least worry about the imminent multiple 25 eases.”
From Dow Jones: “Whenever the economy slows and rates seem headed down,
money market funds move to longer maturities to lock in current rates for as long as possible. Not this time around. Interest rate futures markets fully reflect traders’ expectations that the Federal Reserve will ease its key interest rate by one whole percentage point by year end. Two-year Treasury notes, the most sensitive to official rate
changes, are yielding 3.94% - some 1.30 percentage points less than the fed-funds target rate of 5.25%. Yet money market fund managers aren’t budging. Many are keeping their powder dry, holding investments with maturities of 30 days and less, and as a result foregoing higher returns. They look at the financial markets and see a certain measure of calm returning after August’s turmoil. And they have listened to what Fed speakers have been saying – from the chairman to several regional presidents - and concluded that policy makers may not cut rates as drastically as markets are currently priced for despite the weakest payroll report in four years and warnings that the risk of recession has increased sharply. What’s more, by keeping a major portion of their investments in very short-term securities, fund managers are also maintaining liquidity for any contingency, such as renewed market disruptions or redemptions by shareholders….For sure, the situation in money markets at the moment remains far from normal. While overnight and very short-term markets are seeing some activity, helped in part by massive liquidity injections by central banks, there is very little action in the longer-dated markets. Lending rates, such as three-month London interbank offered rates - a key benchmark for all types of floating-rate debt - remain stuck at unusually high levels. Commercial paper volumes outstanding are shrinking, particularly in the asset-backed segment of this market, used by banks and companies to fund short-term financing needs. The commercial paper market has borne the brunt of the recent credit crunch as investors turned risk averse and refused to lend for more than the shortest periods.”
From Market News: “…there are tentative signs in the ABS and loan markets that the gulf between buyers and sellers created by the recent volatility is beginning to narrow. ABS deals are said to be back in the pipeline, looking to be priced at "current market" levels and in the leverage loan market, recent tightening up of deal terms/covenants by banks is said to be also helping improve investor confidence about the pipeline.”
From Morgan Stanley: Courtesy of the shock from abruptly tighter financial conditions, the downside risks to US growth have morphed into reality. Paced by a deeper and longer housing recession, we now expect that US growth will average just 2% over the next six quarters, or 0.6% below our forecast of a month ago. Spillovers from tighter lending standards and higher borrowing costs likely will also hobble consumer and business capital spending. In contrast, still-solid global growth seems likely to help thwart a recession. But, increased slack in the domestic economy likely will hasten a moderation in core inflation to below 2%. Against that backdrop, the Fed will have ample latitude to respond to softening growth, easing monetary policy twice this year and twice early in 2008. However, the market already appears fully priced for such an outcome. Thus, we expect little movement in longer-term Treasury yields.”
From Merrill Lynch: “…two popular myths that continue to make the rounds in the marketplace need to be addressed: The first myth is that the current backdrop is similar to the financial spasms of 1987, 1995 and 1998. The second myth is that recessions require back-to-back quarters of negative real GDP growth. In prior financial market spasms the economy was strong First, as bad as it was in October 1987, the reason why the stock market crash was brief was because the economy was strong; so, there were no second or third round feedback effects. Real GDP growth in the fourth quarter of 1987 was over 7%. Recession was nowhere in sight. In 1995, the manufacturing and export sectors were soft because of the turmoil in Mexico, but consumer spending in the very same quarter that the Fed cut rates was 3-1/2% and again recession was nowhere in sight and market turbulence was contained. Fast forward to the third quarter of 1998, and again there was financial turmoil brought about by Long Term Capital Management and the Russian debt default. This proved to not even be a two-month financial event because the economy had an extremely firm underpinning - GDP growth in the quarter when all the stuff hit the fan was an amazing 4.7% annual rate.”
From Dow Jones: “The U.S. economy will fall perilously close to recession in the next year, but will probably continue to grow at a very slow pace, according to the latest UCLA Anderson Forecast. Strong growth in exports and business investment should be
enough to avoid a “classic recession,” said economists at the UCLA Anderson School of Management. “The decline in housing starts and consumer durables will drive the economy down to near-recession levels of 1% growth for two consecutive quarters,” beginning in the fourth quarter, the quarterly report said. The economy won’t return to stronger growth around 3% until 2009. The UCLA Anderson Forecast was one of the few to predict the 2001 recession.”
From Bloomberg: “Electronic Data Systems Corp., the second-largest computer-services company, plans to offer early retirement to 12,000 employees, a quarter of its U.S. workforce, after orders plunged last quarter…. hiring workers in India to replace more-expensive U.S. employees and revive profit. ``Employees that were at the forefront of IT service provision 20 years ago don't have the same skill sets they need today,'' … ``Increasingly, you can find those around the world.''
From Merrill Lynch: “The CBO estimates that more than $9 billion per month is the current price tag for fighting the war in Iraq - an amount equivalent to almost 20% of the rise in the level of GDP so far this year. Thus the ongoing war in Iraq continues to be a significant contributor to GDP and a large source of stimulus that is funneled into defense-related companies.”
From Bloomberg: “Crude oil rose to a record $80 a barrel in New York …Prices also rose after OPEC said yesterday it would increase production by 500,000 barrels a day, less than is needed to meet a seasonal rise in demand….Crude oil for October delivery rose $1.60, or 2.1 percent…Futures touched the highest price since trading began
in 1983. The previous record of $78.77 was reached on Aug. 1. Prices are up 25 percent from a year ago… The IEA, an adviser to 26 industrialized nations, said global oil demand will rise 1.4 percent to 85.9 million barrels a day this year in a monthly report. Consumption will increase 2.1 million barrels a day to 88 million in 2008.”
From Merrill Lynch: “Clearly the fall in the US dollar is helping commodity prices simply because commodities are denominated in dollars…Commodity prices measured in Euros have been flat to down for more than a year regardless of the index used to measure them. For example, the CRB Index is down more than 20% from its 2006 high when measured in Euros, and the Merrill Lynch Commodity Index is down about 11%.”
From UBS: “Wheat futures touched $9 a bushel this morning as Wheat global stockpiles have fallen to 26yr lows. Drought in Australia, a fall in Canadian output and a switch to Corn have teamed up to send this critical crop to the moon. AT SOME POINT higher headline inflation numbers will pressure the back end of the US curve and we see the combined effects of higher headline inflation and credit & housing stress as leading the curve to a far steeper slope than even the forwards have prices in.”
From Barclays: “On the inflation side, crude and EUR/USD both hit close highs,
and gold has been rising, as well. These all indicate that despite some signs of slower growth, external inflation pressures remain.”
From Dow Jones: “The Senate Finance Committee approved legislation that would increase the U.S. federal debt limit by $850 billion to $9.815 trillion. Under budget plans advanced by Congress and the White House this year, Treasury would not likely have to seek another debt limit increase until 2009, said Committee Chairman Max Baucus, D-Mont. Baucus said that if Congress were to try to consider a debt limit increase next year, in advance of federal elections in November, “it would probably become a political football.” Baucus noted that since 2001 the federal debt limit has been increased by $3 trillion, or about 50%.”
From Merrill Lynch: “Consumer confidence in Japan…fell to a 3-year low.”
From Market News: “China created 8.46 mln new jobs in urban areas in the first eight months, equivalent to 94 pct of the full-year target set at the beginning of the year, the Ministry of Labor and Social Security said. China plans to create at least 9 mln new jobs in urban areas this year while setting an urban jobless target of under 4.6 pct.”
From JP Morgan: “China continues to report strong August activity data, today in the form of retail sales and money supply and bank lending.”
From Goldman Sachs: “…economic activity in the BRICs and other EM remains strong. We have recently revised up Chinese, Indian and Russian GDP growth.”
End-of-Day Market Update
From Lehman: “Treasuries yields rose for the second straight day, and it was selling of
intermediates that drove the market lower. For a change, the yield curve actually steepened in a selloff, as today's move seemed less about the fed, and more flow-related… Wednesday's yield changes were roughly as follows: 2 years:+1.9 bp 5 years:+4.1 bp 10 years:+4.3 bp 30 years:+3.7 bp”
From Morgan Stanley: “It was an essentially news free day, with no economic data, no Fed speakers, and nothing much else of note going on. So as on Monday and Tuesday, the market largely just tracked stocks again… TIPS had another strong day, with the benchmark 5-year and 10-year inflation breakevens each up 3 bp to 1.98% and 2.24%, both highs in about a month. It’s interesting to note that even as the 5-year and 10-year spreads have collapsed in the recent market rally, the 5-year/5-year forward has hardly moved, holding in narrow range near the 2.51% level it ended Wednesday…. Even though the recently improved tone in the CP market continued, the money markets seemed to be back in a bit of flight to safety mode, as short bills rallied back after Tuesday’s losses, with the 4-week bill’s yield down 12 bp to 4.00% and the 3-month 9 bp to 4.025%. In the Libor market, 1-month and 3-month fixings were unchanged at 5.80% and 5.70%, but overnight was down 12 bp to 5.18%, moving further towards a more normal spread over actual fed funds, which continued to trade near 5% through most of the day as it has all month, and 1-week fell 20 bp to 5.43%. There’s now a rather bizarre 29 bp spread between 2-week Libor at 5.51% and 1-month at 5.80%, so it would appear that banks may have significant concerns about liquidity needs at the looming quarter end that falls between those two terms.”
Equities closed down slightly. The Dow settled down 17 at 13,292. The dollar index weakened again to a new 15 year low of 79.38 (-.32) as the euro made another new record high versus the dollar to finish at 1.39 dollars to the euro. Oil traded to a new record high today of over $80 a barrel, and closed up $1.36 (2.2%) at $79.59.
From Dow Jones: “If it seemed that things couldn’t get much worse for home builders, think again: Stocks in the sector are setting fresh annual lows this week as the housing market endures even more bad news...The Dow Jones U.S. Home Construction Index, a basket of home-builder stocks, is off nearly 50% so far this year.”
From Morgan Stanley: “…it’s noteworthy that the prime mortgage delinquency rate is at its highest level in least a decade when unemployment is low and the average mortgage rate is at generational lows. This fits with my view that the American household sector has reached the limit of its debt-carrying capacity. It also suggests that if employment starts to weaken then the situation will get far worse. Falling house prices, now evident in some price series, would worsen this situation.”
From Lehman: [Lehman survey of 135 portfolio managers] “Expectations are firmly concentrated around a 25 basis point Fed funds rate cut coupled with a 50 basis point discount window cut.”
From Deutsche Bank: “When one looks around the system, the argument for a dramatic 50 bp cut is ambiguous. Heavy corporate investment grade issuance shows that the credit crunch is not systemwide, but isolated to specific securitized product sectors, as well as the leveraged loan markets.”
From CITI: “Frenectic trading of the curve has been the story of the day;steeper then
flatter then steeper ... all in 2s to 5s, but flatter in the long-end. Stocks
are holding, but commodities very fierce here. It should make folks doubt or at
least worry about the imminent multiple 25 eases.”
From Dow Jones: “Whenever the economy slows and rates seem headed down,
money market funds move to longer maturities to lock in current rates for as long as possible. Not this time around. Interest rate futures markets fully reflect traders’ expectations that the Federal Reserve will ease its key interest rate by one whole percentage point by year end. Two-year Treasury notes, the most sensitive to official rate
changes, are yielding 3.94% - some 1.30 percentage points less than the fed-funds target rate of 5.25%. Yet money market fund managers aren’t budging. Many are keeping their powder dry, holding investments with maturities of 30 days and less, and as a result foregoing higher returns. They look at the financial markets and see a certain measure of calm returning after August’s turmoil. And they have listened to what Fed speakers have been saying – from the chairman to several regional presidents - and concluded that policy makers may not cut rates as drastically as markets are currently priced for despite the weakest payroll report in four years and warnings that the risk of recession has increased sharply. What’s more, by keeping a major portion of their investments in very short-term securities, fund managers are also maintaining liquidity for any contingency, such as renewed market disruptions or redemptions by shareholders….For sure, the situation in money markets at the moment remains far from normal. While overnight and very short-term markets are seeing some activity, helped in part by massive liquidity injections by central banks, there is very little action in the longer-dated markets. Lending rates, such as three-month London interbank offered rates - a key benchmark for all types of floating-rate debt - remain stuck at unusually high levels. Commercial paper volumes outstanding are shrinking, particularly in the asset-backed segment of this market, used by banks and companies to fund short-term financing needs. The commercial paper market has borne the brunt of the recent credit crunch as investors turned risk averse and refused to lend for more than the shortest periods.”
From Market News: “…there are tentative signs in the ABS and loan markets that the gulf between buyers and sellers created by the recent volatility is beginning to narrow. ABS deals are said to be back in the pipeline, looking to be priced at "current market" levels and in the leverage loan market, recent tightening up of deal terms/covenants by banks is said to be also helping improve investor confidence about the pipeline.”
From Morgan Stanley: Courtesy of the shock from abruptly tighter financial conditions, the downside risks to US growth have morphed into reality. Paced by a deeper and longer housing recession, we now expect that US growth will average just 2% over the next six quarters, or 0.6% below our forecast of a month ago. Spillovers from tighter lending standards and higher borrowing costs likely will also hobble consumer and business capital spending. In contrast, still-solid global growth seems likely to help thwart a recession. But, increased slack in the domestic economy likely will hasten a moderation in core inflation to below 2%. Against that backdrop, the Fed will have ample latitude to respond to softening growth, easing monetary policy twice this year and twice early in 2008. However, the market already appears fully priced for such an outcome. Thus, we expect little movement in longer-term Treasury yields.”
From Merrill Lynch: “…two popular myths that continue to make the rounds in the marketplace need to be addressed: The first myth is that the current backdrop is similar to the financial spasms of 1987, 1995 and 1998. The second myth is that recessions require back-to-back quarters of negative real GDP growth. In prior financial market spasms the economy was strong First, as bad as it was in October 1987, the reason why the stock market crash was brief was because the economy was strong; so, there were no second or third round feedback effects. Real GDP growth in the fourth quarter of 1987 was over 7%. Recession was nowhere in sight. In 1995, the manufacturing and export sectors were soft because of the turmoil in Mexico, but consumer spending in the very same quarter that the Fed cut rates was 3-1/2% and again recession was nowhere in sight and market turbulence was contained. Fast forward to the third quarter of 1998, and again there was financial turmoil brought about by Long Term Capital Management and the Russian debt default. This proved to not even be a two-month financial event because the economy had an extremely firm underpinning - GDP growth in the quarter when all the stuff hit the fan was an amazing 4.7% annual rate.”
From Dow Jones: “The U.S. economy will fall perilously close to recession in the next year, but will probably continue to grow at a very slow pace, according to the latest UCLA Anderson Forecast. Strong growth in exports and business investment should be
enough to avoid a “classic recession,” said economists at the UCLA Anderson School of Management. “The decline in housing starts and consumer durables will drive the economy down to near-recession levels of 1% growth for two consecutive quarters,” beginning in the fourth quarter, the quarterly report said. The economy won’t return to stronger growth around 3% until 2009. The UCLA Anderson Forecast was one of the few to predict the 2001 recession.”
From Bloomberg: “Electronic Data Systems Corp., the second-largest computer-services company, plans to offer early retirement to 12,000 employees, a quarter of its U.S. workforce, after orders plunged last quarter…. hiring workers in India to replace more-expensive U.S. employees and revive profit. ``Employees that were at the forefront of IT service provision 20 years ago don't have the same skill sets they need today,'' … ``Increasingly, you can find those around the world.''
From Merrill Lynch: “The CBO estimates that more than $9 billion per month is the current price tag for fighting the war in Iraq - an amount equivalent to almost 20% of the rise in the level of GDP so far this year. Thus the ongoing war in Iraq continues to be a significant contributor to GDP and a large source of stimulus that is funneled into defense-related companies.”
From Bloomberg: “Crude oil rose to a record $80 a barrel in New York …Prices also rose after OPEC said yesterday it would increase production by 500,000 barrels a day, less than is needed to meet a seasonal rise in demand….Crude oil for October delivery rose $1.60, or 2.1 percent…Futures touched the highest price since trading began
in 1983. The previous record of $78.77 was reached on Aug. 1. Prices are up 25 percent from a year ago… The IEA, an adviser to 26 industrialized nations, said global oil demand will rise 1.4 percent to 85.9 million barrels a day this year in a monthly report. Consumption will increase 2.1 million barrels a day to 88 million in 2008.”
From Merrill Lynch: “Clearly the fall in the US dollar is helping commodity prices simply because commodities are denominated in dollars…Commodity prices measured in Euros have been flat to down for more than a year regardless of the index used to measure them. For example, the CRB Index is down more than 20% from its 2006 high when measured in Euros, and the Merrill Lynch Commodity Index is down about 11%.”
From UBS: “Wheat futures touched $9 a bushel this morning as Wheat global stockpiles have fallen to 26yr lows. Drought in Australia, a fall in Canadian output and a switch to Corn have teamed up to send this critical crop to the moon. AT SOME POINT higher headline inflation numbers will pressure the back end of the US curve and we see the combined effects of higher headline inflation and credit & housing stress as leading the curve to a far steeper slope than even the forwards have prices in.”
From Barclays: “On the inflation side, crude and EUR/USD both hit close highs,
and gold has been rising, as well. These all indicate that despite some signs of slower growth, external inflation pressures remain.”
From Dow Jones: “The Senate Finance Committee approved legislation that would increase the U.S. federal debt limit by $850 billion to $9.815 trillion. Under budget plans advanced by Congress and the White House this year, Treasury would not likely have to seek another debt limit increase until 2009, said Committee Chairman Max Baucus, D-Mont. Baucus said that if Congress were to try to consider a debt limit increase next year, in advance of federal elections in November, “it would probably become a political football.” Baucus noted that since 2001 the federal debt limit has been increased by $3 trillion, or about 50%.”
From Merrill Lynch: “Consumer confidence in Japan…fell to a 3-year low.”
From Market News: “China created 8.46 mln new jobs in urban areas in the first eight months, equivalent to 94 pct of the full-year target set at the beginning of the year, the Ministry of Labor and Social Security said. China plans to create at least 9 mln new jobs in urban areas this year while setting an urban jobless target of under 4.6 pct.”
From JP Morgan: “China continues to report strong August activity data, today in the form of retail sales and money supply and bank lending.”
From Goldman Sachs: “…economic activity in the BRICs and other EM remains strong. We have recently revised up Chinese, Indian and Russian GDP growth.”
End-of-Day Market Update
From Lehman: “Treasuries yields rose for the second straight day, and it was selling of
intermediates that drove the market lower. For a change, the yield curve actually steepened in a selloff, as today's move seemed less about the fed, and more flow-related… Wednesday's yield changes were roughly as follows: 2 years:+1.9 bp 5 years:+4.1 bp 10 years:+4.3 bp 30 years:+3.7 bp”
From Morgan Stanley: “It was an essentially news free day, with no economic data, no Fed speakers, and nothing much else of note going on. So as on Monday and Tuesday, the market largely just tracked stocks again… TIPS had another strong day, with the benchmark 5-year and 10-year inflation breakevens each up 3 bp to 1.98% and 2.24%, both highs in about a month. It’s interesting to note that even as the 5-year and 10-year spreads have collapsed in the recent market rally, the 5-year/5-year forward has hardly moved, holding in narrow range near the 2.51% level it ended Wednesday…. Even though the recently improved tone in the CP market continued, the money markets seemed to be back in a bit of flight to safety mode, as short bills rallied back after Tuesday’s losses, with the 4-week bill’s yield down 12 bp to 4.00% and the 3-month 9 bp to 4.025%. In the Libor market, 1-month and 3-month fixings were unchanged at 5.80% and 5.70%, but overnight was down 12 bp to 5.18%, moving further towards a more normal spread over actual fed funds, which continued to trade near 5% through most of the day as it has all month, and 1-week fell 20 bp to 5.43%. There’s now a rather bizarre 29 bp spread between 2-week Libor at 5.51% and 1-month at 5.80%, so it would appear that banks may have significant concerns about liquidity needs at the looming quarter end that falls between those two terms.”
Equities closed down slightly. The Dow settled down 17 at 13,292. The dollar index weakened again to a new 15 year low of 79.38 (-.32) as the euro made another new record high versus the dollar to finish at 1.39 dollars to the euro. Oil traded to a new record high today of over $80 a barrel, and closed up $1.36 (2.2%) at $79.59.
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