SIV Suffers Mandatory Acceleration Event and Must Sell Assets
From Bloomberg: “Rhinebridge Plc, a structured investment vehicle run by IKB Deutsche Industriebank AG, said it may not be able to pay back debt related to $23 billion in commercial paper programs. Rhinebridge suffered a ``mandatory acceleration event'' after IKB's asset management arm determined the SIV may be unable to repay debt coming due, the Dublin-based fund said in a Regulatory News Service release. A mandatory acceleration event means all of the SIV's debt is now due, according to the company's prospectus. Rhinebridge, which was forced to sell assets after being shut out of the commercial paper market, said it must now appoint a trustee to ensure that the interests of all secured bondholders are protected. ``The manager has been in contact with the security trustee to discuss the occurrence of the enforcement event and the mandatory acceleration event, and further information will be provided to investors in due course,'' the company said. Rhinebridge was set up by IKB in June to sell short-term commercial paper to invest in securities with longer maturities and higher yields, including mortgage-backed debt. SIVs worldwide have been forced to sell about $75 billion of assets in the past two months to repay maturing debt as investors balked at buying securities linked to money-losing subprime mortgages. SIVs have different operating states to protect investors and allow the fund time to recover from a market slump. Enforcement is typically the last state, and is irreversible. Dusseldorf-based IKB had to be bailed out this year by a group led by German state-owned KfW Group because of potential losses related to subprime loans.”
Commercial Real Estate Loans Adding to Pressure on Banks
From Dow Jones: “As if the subprime mess wasn’t enough of a drag on banks’ earnings, now they’re stuck with unwanted leftovers from commercial real estate loans, too. Many have focused on the much larger exposure to the subprime residential mortgage markets and leveraged finance commitments, but banks are also under pressure from more obscure quarters: the less-desirable portions of commercial mortgage loans that fall short of investors’ more stringent standards for collateral. A drying up of demand has forced banks to hold these pieces of loans - many of which have fallen in price sharply since July - on their books to the tune of as much as $1 billion for large financial institutions, according to some Wall Street estimates. The estimate includes scattered other unsold leftovers from securitizations that also remain on banks’ books. The unwanted loan pieces - called whole loan B-notes - used to be sold to issuers of collateralized debt obligations that used the loan pieces to help back their structured financial product…
CDO creation, however, has come to a standstill since July when rising defaults in subprime mortgages roiled financial markets. The leftover by-products of commercial mortgage bond securitizations on bank balance sheets are only a modest contributor to the writedowns financial institutions are facing due to falling values of structured securities such as collateralized debt, said Sean Jones, senior vice president in Moody’s U.S. banking team. Also, banks are facing larger losses with their leveraged loans, Jones said. However, the depreciating value of these loans leaves the banks vulnerable to writedowns, he said. The value of the whole loan pieces has unquestionably been falling as demand has dried up, Advantus’ Schultz said. It’s difficult, however, to know exactly by how much, since there’s been little buying of these loans in recent months. Still, in a recent report, research firm CreditSights cited these on-balance-sheet leftovers from commercial mortgage bond securitizations as a potential additional pressure on such large banks as Wachovia Corp. and Bank of America Corp.”
China’s Desire to Slow Economy Rapidly Cools Housing Boom
From The Washington Post: “China’s bid to tame economy begins a real estate bust…Surrounding the agents in this [Chinese] upscale neighborhood are vast swaths of empty apartments that just a few months ago were selling at record high prices. The housing market … is among the first casualties of China’s efforts to cool an economy it fears may be overheating. Faced with surging inflation, shaky loans and a stock market bubble that has grown more than 400 percent in just two years, the Chinese government in recent months has been pulling all policy levers at its disposal to control growth. China's central bank has raised interest rates five times this year and upped reserve requirements for commercial lenders eight times. Last month, the central planning agency imposed a price freeze on cooking oil, electricity, water and other household essentials to try to stem inflation that is at an 11-year high. Securities regulators in at least one province have issued new rules banning high school and college students from buying shares to rein in speculative stock market investments.. . . The Chinese government is in fact fumbling for the right path for Chinese economic development…The tightening measures are alarming some economists who worry that if China slams on the brakes too fast by using communist controls on what is increasingly a capitalist economy, there could be devastating consequences extending far beyond the real estate market ...But others contend that to fix imbalances -- such as the growing trade surplus and shrinking private consumption as a percentage of GDP -- that echo the problems in pre-bust Japan in the 1980s, China needs to be doing even more…How China deals with its booming property market is especially critical. A collapse in housing prices could have a harsh effect on the economy, given that 80 percent of urban homes are owned by private citizens. The value of housing loans awarded in China stands at nearly $450 billion so far this year. Yi Xianrong, a finance and banking researcher at the Chinese Academy of Social Sciences, a government-affiliated research institute, worries that China's subprime mortgage problem is worse than that in the United States because banking laws are still being written and a credit rating system doesn't exist. "Both good and bad consumers can get into the real estate market. Many buyers are investors, using forged documents to get money from banks to speculate on the domestic real estate market," Yi said. In China, mortgages are not pooled and securitized as they are in the United States. That's both good and bad. While it means that the risk is isolated to the lending institutions, banks are the sole source of financing for the vast majority of Chinese corporations. If many people begin defaulting on their mortgages, the banks may have to scale back their lending, which could cripple growth, or may have to ask for a government bailout, which may lead to inflation…By January of this year, new home sales reached the dizzying rate of more than 300 per day… a trendy neighborhood next to a bay that overlooks Hong Kong, two-bedroom apartments were being bid up to well over $1 million. Thanks to lax lending policies by state banks, investors had been able to get low-interest mortgages for second or even third homes with zero down. While China officially requires home buyers to pay 20 to 30 percent of the price of a new home up front, real estate agencies said contracts were manipulated to erase any need for the purchaser to put any money down. Investors regularly bought and flipped new properties…In August, the price of newly built houses in Shenzhen had jumped 17.6 percent from the same period a year earlier…The average year-to-year increase nationwide was 9.9 percent in 70 major Chinese cities surveyed by China's National Development and Reform Commission. But at the end of this summer, many of China's state-owned banks, a legacy of a command-and-control economy, abruptly stopped issuing new loans, stating they had surpassed their quotas. For the few banks still offering loans, the government increased interest rates and down-payment requirements for second homes. Police raided a number of black-market banks that had been used to finance speculation in the property market, cutting off a major source of financing. By October, daily sales in Shenzhen had dropped as much as 80 percent, to as few as 60 a day…at many of the new properties in Wan Qu the vacancy rate is 30 to 40 percent…The dramatic effect of the new government policies on the real estate market in Shenzhen and other large cities like Shanghai and Beijing, however, may be the exception to an economy that continues to grow at a blistering pace. In China overall, "tightening measures did not stop the surge of broad money supply in September, which could mean mounting macro risk in the economy," Huang Yiping, an analyst with Citigroup in Hong Kong, wrote in a report last week. "It could add fuel to the already high asset prices in both the property market and equity market."”
Disadvantages of a Weak Dollar
From Forbes: “…economic history indicates that no country has ever achieved greatness nor maintained it by debasing its currency… Here is my case for why a weaker dollar hurts America. First, a weaker dollar translates into a cut in the real spending power of American consumers--in effect, a reduction in real income. Second, a weaker dollar weakens the role of the U.S. dollar as the world's reserve currency. Why should investors and central banks around the world invest in US assets when their value is steadily declining? Third, the chances of a weaker dollar leading to a sharp reduction in America's trade deficit is highly unlikely since 40% of the current balance is due to oil imports that are denominated in U.S. dollars. An additional 20% is due to trade with China, which is, of course, controlling the value of its own currency. Fourth, a weaker dollar is inflationary since it increases the cost of imports… What a weaker dollar really does is to encourage American and international investors to invest in non-American markets. The more the dollar drops, the more global equities rise. Many Asian currencies are hitting record highs against the U.S. dollar.”
From Citi: “The USD [US dollar] has continued to trade heavily over the last week with EURUSD [euro] breaking to new highs for the trend and the USD Index breaking below the recent lows. At this point it's difficult to argue that we will not see further ST losses for the USD.”
From Bloomberg: “The dollar may ``plunge'' in 2008, prompting the U.S., the European Union and Japan to intervene in foreign exchange markets, said Eisuke Sakakibara, Japan's former top currency official. U.S. economic growth may slow to less than 1 percent next year as losses on loans to homeowners with poor credit erode consumer spending and bank earnings, he said in an interview today…The dollar's 7.3 percent decline against the euro this year and a global credit market slump will be the focus of discussion when Treasury Secretary Henry Paulson hosts policy makers from Group of Seven countries tomorrow in Washington…Sakakibara said falling U.S. interest rates will put off foreign investors.”
MISC
From Dow Jones: “Washington Mutual Inc.’s third-quarter net income plummeted
72% as the company took a bruising hit to cover homeloan losses…“We’re building reserves in anticipation of continued increases in nonperforming assets and chargeoffs,” Chairman and Chief Executive Kerry Killinger told Dow Jones Newswires. “It simply takes a while to work through the challenges in the housing market.”
From Bloomberg: “Bank of America Corp., the second-largest U.S. bank, plans to cut back investment banking after about $4 billion in trading losses, defaults and writedowns caused third-quarter profit to drop 32 percent, more than analysts estimated. “
From The Wall Street Journal: “A growing number of investors … are making the drastic decision to walk away from their properties and ultimately send their homes into foreclosure, lenders and real-estate agents say. Many investors who were hoping to quickly flip their investments are now left with homes that can no longer be sold for more than the mortgage debt. In many cases, these investors can't even find tenants willing to pay enough rent to cover hefty mortgages. Certain data point to the trend. According to an August study by the Mortgage Bankers Association, defaults on mortgages where the owner doesn't live in the house are a major driver of the defaults in Florida, Nevada, California and Arizona -- four of the states with the fastest rising rates of seriously delinquent loans. Defaulted mortgages are defined as those 90 days or more past due or in foreclosure, according to the study.”
From the LA Times: “While homeowners were being stung by shrinking property values, renters across the state found themselves having to dig deeper into their pocketbooks in the third quarter, according to a report to be released today. The average rent at larger apartment complexes in California increased 5.6% to $1,413 compared with a year earlier, according to a survey by Novato, Calif.-based research firm RealFacts. Los Angeles and Orange counties remained the state's most expensive market for rentals, while the San Francisco Bay Area posted the highest rent increases -- as high as 12.2% in Santa Clara County. In the Inland Empire, which has suffered the worst of the housing market meltdown, renters caught a relative break as landlords raised rents at half the pace found in neighboring counties.”
From Dow Jones: “In a week when a special fund was created to ease the clogging
up of the short-term paper market, the asset-backed commercial paper outstanding fell by $11 billion.”
From Bank of America: “The regional Business Outlook Survey of the Federal Reserve Bank of Philadelphia softened in October, following a robust 3Q 2007. While regional survey results are frequently volatile, orders and shipments momentum weakened considerably this month. Labor market conditions remained solid, while input prices once again accelerated.”
From Wachovia: “The Index of Leading Economic Indicators (LEI) rebounded 0.3 percent in September, in line with expectations. Seven of the ten indicators comprising the index climbed in September, suggesting a less negative picture for economic growth than initially feared a month ago. We continue to expect strong GDP growth in the third quarter. “
From Morgan Stanley: “Based on our preferred model, the latest financial data (end-September) imply a 36% risk of US recession in the coming 12 months – an increase from 24% from our last calculation.”
From Reuters: “Leading Wall Street chief executives predicted a 37% chance of a U.S. economic recession in the next 12 months, according to a survey released Wednesday. In April, when the previous Financial Services Forum semiannual survey was conducted, the executives saw only a 24% chance of a recession in the coming 12 months. The forum is a policy group made up of the chief executives of 20 of the world's largest financial institutions, including Citigroup Inc., Morgan Stanley, Goldman Sachs Group and MetLife Inc. The executives said they expected slower U.S. economic growth over the next year because of the housing slowdown, credit market turmoil and higher energy prices.”
End-of-Day Market Update
From Dow Jones: “Treasurys remained firmly higher in price …as worries spread about housing, the economy and weak earnings on Wall Street. A flight to quality that began the prior session on weak housing data and concerns about the continued global fallout from the troubles in U.S. subprime mortgage credit was exacerbated by higher jobless claims early Thursday. “The market had gotten quite complacent on some positive data. Now we’re seeing a strong reversal of that on weaker data and increasing concerns there could be another leg to the credit crunch,”… The euro hit a fresh all-time high of $1.4311 against the greenback … Risk aversion also increased Thursday, pushing the dollar and the euro lower against the yen… Wall Street struggled to retain gains[with the Dow closing down 3.5 points and the S&P closing down 5.5 points at 1547]… Crude oil futures rose [to a new all time high of $89.50, rising over $2].”
From RBSGC: “The market continued its march higher today -- with 10-year yields near 4.50% and the 2s/10s curve at 59 bps -- an impressive uptrade early in the session tired, though we still ended the day stronger. The initial surge followed the Bank of America's earnings miss and was extended by the Jobless Claims print -- and with Phil Fed and Leaders largely as expected, the weakness in equities provided modest support. With the October FOMC meeting quickly approaching, this week saw a decisive shift in monetary policy expectations -- which we partially credit for the uptrade. This week started with the Fed Funds market pricing in about a 35% chance that the Fed cuts -- this has since firmed to 70% -- reflecting a combination of the Chairman's comments and the data. The RBSGC Econ Team is calling for a 25 bps cut -- in line with the consensus.”
From UBS: “Treasuries rose early in the morning and held onto their gains after weak economic data provided more hope for a rate cut later this month. The 2s30s curve steepened another 2.5bps, and 1mo. bills rallied over 60bps after yesterday's 40bps richening. For the second day in a row, 3M bills rallied about 25bps… Front end swap spreads were relatively unchanged, while back end spreads widened marginally. Agencies saw light flows and cheapened 0.5-1bp to swaps in front, while trading in line in the long end. Mortgages saw the lower coupons outperform the most, as FNMA 5's tightened 5 ticks to Treasuries. The rest of the stack was only better by 1-2 ticks.”
1month T-Bill Yields
From Bloomberg: “Rhinebridge Plc, a structured investment vehicle run by IKB Deutsche Industriebank AG, said it may not be able to pay back debt related to $23 billion in commercial paper programs. Rhinebridge suffered a ``mandatory acceleration event'' after IKB's asset management arm determined the SIV may be unable to repay debt coming due, the Dublin-based fund said in a Regulatory News Service release. A mandatory acceleration event means all of the SIV's debt is now due, according to the company's prospectus. Rhinebridge, which was forced to sell assets after being shut out of the commercial paper market, said it must now appoint a trustee to ensure that the interests of all secured bondholders are protected. ``The manager has been in contact with the security trustee to discuss the occurrence of the enforcement event and the mandatory acceleration event, and further information will be provided to investors in due course,'' the company said. Rhinebridge was set up by IKB in June to sell short-term commercial paper to invest in securities with longer maturities and higher yields, including mortgage-backed debt. SIVs worldwide have been forced to sell about $75 billion of assets in the past two months to repay maturing debt as investors balked at buying securities linked to money-losing subprime mortgages. SIVs have different operating states to protect investors and allow the fund time to recover from a market slump. Enforcement is typically the last state, and is irreversible. Dusseldorf-based IKB had to be bailed out this year by a group led by German state-owned KfW Group because of potential losses related to subprime loans.”
Commercial Real Estate Loans Adding to Pressure on Banks
From Dow Jones: “As if the subprime mess wasn’t enough of a drag on banks’ earnings, now they’re stuck with unwanted leftovers from commercial real estate loans, too. Many have focused on the much larger exposure to the subprime residential mortgage markets and leveraged finance commitments, but banks are also under pressure from more obscure quarters: the less-desirable portions of commercial mortgage loans that fall short of investors’ more stringent standards for collateral. A drying up of demand has forced banks to hold these pieces of loans - many of which have fallen in price sharply since July - on their books to the tune of as much as $1 billion for large financial institutions, according to some Wall Street estimates. The estimate includes scattered other unsold leftovers from securitizations that also remain on banks’ books. The unwanted loan pieces - called whole loan B-notes - used to be sold to issuers of collateralized debt obligations that used the loan pieces to help back their structured financial product…
CDO creation, however, has come to a standstill since July when rising defaults in subprime mortgages roiled financial markets. The leftover by-products of commercial mortgage bond securitizations on bank balance sheets are only a modest contributor to the writedowns financial institutions are facing due to falling values of structured securities such as collateralized debt, said Sean Jones, senior vice president in Moody’s U.S. banking team. Also, banks are facing larger losses with their leveraged loans, Jones said. However, the depreciating value of these loans leaves the banks vulnerable to writedowns, he said. The value of the whole loan pieces has unquestionably been falling as demand has dried up, Advantus’ Schultz said. It’s difficult, however, to know exactly by how much, since there’s been little buying of these loans in recent months. Still, in a recent report, research firm CreditSights cited these on-balance-sheet leftovers from commercial mortgage bond securitizations as a potential additional pressure on such large banks as Wachovia Corp. and Bank of America Corp.”
China’s Desire to Slow Economy Rapidly Cools Housing Boom
From The Washington Post: “China’s bid to tame economy begins a real estate bust…Surrounding the agents in this [Chinese] upscale neighborhood are vast swaths of empty apartments that just a few months ago were selling at record high prices. The housing market … is among the first casualties of China’s efforts to cool an economy it fears may be overheating. Faced with surging inflation, shaky loans and a stock market bubble that has grown more than 400 percent in just two years, the Chinese government in recent months has been pulling all policy levers at its disposal to control growth. China's central bank has raised interest rates five times this year and upped reserve requirements for commercial lenders eight times. Last month, the central planning agency imposed a price freeze on cooking oil, electricity, water and other household essentials to try to stem inflation that is at an 11-year high. Securities regulators in at least one province have issued new rules banning high school and college students from buying shares to rein in speculative stock market investments.. . . The Chinese government is in fact fumbling for the right path for Chinese economic development…The tightening measures are alarming some economists who worry that if China slams on the brakes too fast by using communist controls on what is increasingly a capitalist economy, there could be devastating consequences extending far beyond the real estate market ...But others contend that to fix imbalances -- such as the growing trade surplus and shrinking private consumption as a percentage of GDP -- that echo the problems in pre-bust Japan in the 1980s, China needs to be doing even more…How China deals with its booming property market is especially critical. A collapse in housing prices could have a harsh effect on the economy, given that 80 percent of urban homes are owned by private citizens. The value of housing loans awarded in China stands at nearly $450 billion so far this year. Yi Xianrong, a finance and banking researcher at the Chinese Academy of Social Sciences, a government-affiliated research institute, worries that China's subprime mortgage problem is worse than that in the United States because banking laws are still being written and a credit rating system doesn't exist. "Both good and bad consumers can get into the real estate market. Many buyers are investors, using forged documents to get money from banks to speculate on the domestic real estate market," Yi said. In China, mortgages are not pooled and securitized as they are in the United States. That's both good and bad. While it means that the risk is isolated to the lending institutions, banks are the sole source of financing for the vast majority of Chinese corporations. If many people begin defaulting on their mortgages, the banks may have to scale back their lending, which could cripple growth, or may have to ask for a government bailout, which may lead to inflation…By January of this year, new home sales reached the dizzying rate of more than 300 per day… a trendy neighborhood next to a bay that overlooks Hong Kong, two-bedroom apartments were being bid up to well over $1 million. Thanks to lax lending policies by state banks, investors had been able to get low-interest mortgages for second or even third homes with zero down. While China officially requires home buyers to pay 20 to 30 percent of the price of a new home up front, real estate agencies said contracts were manipulated to erase any need for the purchaser to put any money down. Investors regularly bought and flipped new properties…In August, the price of newly built houses in Shenzhen had jumped 17.6 percent from the same period a year earlier…The average year-to-year increase nationwide was 9.9 percent in 70 major Chinese cities surveyed by China's National Development and Reform Commission. But at the end of this summer, many of China's state-owned banks, a legacy of a command-and-control economy, abruptly stopped issuing new loans, stating they had surpassed their quotas. For the few banks still offering loans, the government increased interest rates and down-payment requirements for second homes. Police raided a number of black-market banks that had been used to finance speculation in the property market, cutting off a major source of financing. By October, daily sales in Shenzhen had dropped as much as 80 percent, to as few as 60 a day…at many of the new properties in Wan Qu the vacancy rate is 30 to 40 percent…The dramatic effect of the new government policies on the real estate market in Shenzhen and other large cities like Shanghai and Beijing, however, may be the exception to an economy that continues to grow at a blistering pace. In China overall, "tightening measures did not stop the surge of broad money supply in September, which could mean mounting macro risk in the economy," Huang Yiping, an analyst with Citigroup in Hong Kong, wrote in a report last week. "It could add fuel to the already high asset prices in both the property market and equity market."”
Disadvantages of a Weak Dollar
From Forbes: “…economic history indicates that no country has ever achieved greatness nor maintained it by debasing its currency… Here is my case for why a weaker dollar hurts America. First, a weaker dollar translates into a cut in the real spending power of American consumers--in effect, a reduction in real income. Second, a weaker dollar weakens the role of the U.S. dollar as the world's reserve currency. Why should investors and central banks around the world invest in US assets when their value is steadily declining? Third, the chances of a weaker dollar leading to a sharp reduction in America's trade deficit is highly unlikely since 40% of the current balance is due to oil imports that are denominated in U.S. dollars. An additional 20% is due to trade with China, which is, of course, controlling the value of its own currency. Fourth, a weaker dollar is inflationary since it increases the cost of imports… What a weaker dollar really does is to encourage American and international investors to invest in non-American markets. The more the dollar drops, the more global equities rise. Many Asian currencies are hitting record highs against the U.S. dollar.”
From Citi: “The USD [US dollar] has continued to trade heavily over the last week with EURUSD [euro] breaking to new highs for the trend and the USD Index breaking below the recent lows. At this point it's difficult to argue that we will not see further ST losses for the USD.”
From Bloomberg: “The dollar may ``plunge'' in 2008, prompting the U.S., the European Union and Japan to intervene in foreign exchange markets, said Eisuke Sakakibara, Japan's former top currency official. U.S. economic growth may slow to less than 1 percent next year as losses on loans to homeowners with poor credit erode consumer spending and bank earnings, he said in an interview today…The dollar's 7.3 percent decline against the euro this year and a global credit market slump will be the focus of discussion when Treasury Secretary Henry Paulson hosts policy makers from Group of Seven countries tomorrow in Washington…Sakakibara said falling U.S. interest rates will put off foreign investors.”
MISC
From Dow Jones: “Washington Mutual Inc.’s third-quarter net income plummeted
72% as the company took a bruising hit to cover homeloan losses…“We’re building reserves in anticipation of continued increases in nonperforming assets and chargeoffs,” Chairman and Chief Executive Kerry Killinger told Dow Jones Newswires. “It simply takes a while to work through the challenges in the housing market.”
From Bloomberg: “Bank of America Corp., the second-largest U.S. bank, plans to cut back investment banking after about $4 billion in trading losses, defaults and writedowns caused third-quarter profit to drop 32 percent, more than analysts estimated. “
From The Wall Street Journal: “A growing number of investors … are making the drastic decision to walk away from their properties and ultimately send their homes into foreclosure, lenders and real-estate agents say. Many investors who were hoping to quickly flip their investments are now left with homes that can no longer be sold for more than the mortgage debt. In many cases, these investors can't even find tenants willing to pay enough rent to cover hefty mortgages. Certain data point to the trend. According to an August study by the Mortgage Bankers Association, defaults on mortgages where the owner doesn't live in the house are a major driver of the defaults in Florida, Nevada, California and Arizona -- four of the states with the fastest rising rates of seriously delinquent loans. Defaulted mortgages are defined as those 90 days or more past due or in foreclosure, according to the study.”
From the LA Times: “While homeowners were being stung by shrinking property values, renters across the state found themselves having to dig deeper into their pocketbooks in the third quarter, according to a report to be released today. The average rent at larger apartment complexes in California increased 5.6% to $1,413 compared with a year earlier, according to a survey by Novato, Calif.-based research firm RealFacts. Los Angeles and Orange counties remained the state's most expensive market for rentals, while the San Francisco Bay Area posted the highest rent increases -- as high as 12.2% in Santa Clara County. In the Inland Empire, which has suffered the worst of the housing market meltdown, renters caught a relative break as landlords raised rents at half the pace found in neighboring counties.”
From Dow Jones: “In a week when a special fund was created to ease the clogging
up of the short-term paper market, the asset-backed commercial paper outstanding fell by $11 billion.”
From Bank of America: “The regional Business Outlook Survey of the Federal Reserve Bank of Philadelphia softened in October, following a robust 3Q 2007. While regional survey results are frequently volatile, orders and shipments momentum weakened considerably this month. Labor market conditions remained solid, while input prices once again accelerated.”
From Wachovia: “The Index of Leading Economic Indicators (LEI) rebounded 0.3 percent in September, in line with expectations. Seven of the ten indicators comprising the index climbed in September, suggesting a less negative picture for economic growth than initially feared a month ago. We continue to expect strong GDP growth in the third quarter. “
From Morgan Stanley: “Based on our preferred model, the latest financial data (end-September) imply a 36% risk of US recession in the coming 12 months – an increase from 24% from our last calculation.”
From Reuters: “Leading Wall Street chief executives predicted a 37% chance of a U.S. economic recession in the next 12 months, according to a survey released Wednesday. In April, when the previous Financial Services Forum semiannual survey was conducted, the executives saw only a 24% chance of a recession in the coming 12 months. The forum is a policy group made up of the chief executives of 20 of the world's largest financial institutions, including Citigroup Inc., Morgan Stanley, Goldman Sachs Group and MetLife Inc. The executives said they expected slower U.S. economic growth over the next year because of the housing slowdown, credit market turmoil and higher energy prices.”
End-of-Day Market Update
From Dow Jones: “Treasurys remained firmly higher in price …as worries spread about housing, the economy and weak earnings on Wall Street. A flight to quality that began the prior session on weak housing data and concerns about the continued global fallout from the troubles in U.S. subprime mortgage credit was exacerbated by higher jobless claims early Thursday. “The market had gotten quite complacent on some positive data. Now we’re seeing a strong reversal of that on weaker data and increasing concerns there could be another leg to the credit crunch,”… The euro hit a fresh all-time high of $1.4311 against the greenback … Risk aversion also increased Thursday, pushing the dollar and the euro lower against the yen… Wall Street struggled to retain gains[with the Dow closing down 3.5 points and the S&P closing down 5.5 points at 1547]… Crude oil futures rose [to a new all time high of $89.50, rising over $2].”
From RBSGC: “The market continued its march higher today -- with 10-year yields near 4.50% and the 2s/10s curve at 59 bps -- an impressive uptrade early in the session tired, though we still ended the day stronger. The initial surge followed the Bank of America's earnings miss and was extended by the Jobless Claims print -- and with Phil Fed and Leaders largely as expected, the weakness in equities provided modest support. With the October FOMC meeting quickly approaching, this week saw a decisive shift in monetary policy expectations -- which we partially credit for the uptrade. This week started with the Fed Funds market pricing in about a 35% chance that the Fed cuts -- this has since firmed to 70% -- reflecting a combination of the Chairman's comments and the data. The RBSGC Econ Team is calling for a 25 bps cut -- in line with the consensus.”
From UBS: “Treasuries rose early in the morning and held onto their gains after weak economic data provided more hope for a rate cut later this month. The 2s30s curve steepened another 2.5bps, and 1mo. bills rallied over 60bps after yesterday's 40bps richening. For the second day in a row, 3M bills rallied about 25bps… Front end swap spreads were relatively unchanged, while back end spreads widened marginally. Agencies saw light flows and cheapened 0.5-1bp to swaps in front, while trading in line in the long end. Mortgages saw the lower coupons outperform the most, as FNMA 5's tightened 5 ticks to Treasuries. The rest of the stack was only better by 1-2 ticks.”
1month T-Bill Yields
2y Treasury Note Yields
10 Year Treasury Note Yields
