Today's Tidbits

Gross Domestic Income Weakness Suggests Recession

From Merrill Lynch: “GDI is an alternative measure of economic activity calculated using income rather than production. Nominal GDI grew by 3.3% QoQ, annualized in the second quarter versus nominal GDP growth of 4.6%. Adjusting the income series to a real measure brings the series down to 1.9% and also shows that, in contrast to GDP, the series has already posted two consecutive quarters of negative growth - the lay man's definition of a recession - since the fourth quarter of 2007….In 2007, the Fed published a paper … the author noted that "the growth rate of gross domestic income (GDI), deflated by the GDP deflator, has done a better job recognizing the start of recessions than has the growth rate of real GDP. This result suggests that placing an increased focus on GDI may be useful in assessing the current state of the economy." …The GDI data suggest a much weaker pattern of growth over the last four quarters than does the GDP measure (and indeed since 2007). With history showing that the Fed watches both GDI and GDP, when the two diverge, the relative weakness of GDI to GDP suggests the Fed will look past the upward revision to 2Q GDP and focus on the outlook, which in our view, is likely to show two quarters of negative GDP growth beginning in 4Q of this year.”

MISC

From BMO: “…yesterday’s strong durable goods orders report suggests business capex might be turning up, possibly because of the accelerated depreciation allowance contained in the fiscal stimulus package.”

From Bloomberg: “Crude oil fell more than $2 a barrel after the International Energy Agency said it would tap strategic stockpiles, if needed, because of Tropical Storm Gustav.”

From MNI: “China's fiscal revenue in the first seven months to July grew by 30.5 pct year-on-year to 4.088 trln yuan…”

From MNI: “Bank of China Ltd said the carrying value of is US subprime mortgage-related debt securities was 3.64 bln usd at the end of June, or 1.5 pct of the bank's investment securities.”

End-of-Day Market Update

From Suntrust: “Odds were against Treasuries today. Jobless claims fell 10k, the third weekly drop, though continuing claims climbed 64k. First revision to GDP pushed growth in Q2 to 3.3% vs 1.9% originally reported. Skeptics poo-poo the number because 3.1% of the 3.3% growth was due to exports and foreign trade. Still, the US economy muddles along out of recession territory. 2-year notes fell 3 ticks, 10-yr notes swooned 10 ticks before hitting a bottom. Then the $22 bln 5-yr Treasury auction was sloppy. The yield tailed back to 3.129 vs an expected stop of 3.11. Indirect bidders took 29.8%, below 33% in July, but slightly above average for the last 6 months. No worries, because like recent days, sneaky buying returned in the afternoon on any price dips. Again, chalk it up to month-end needs. The 30-yr has erased all losses and is higher on the day by 6 ticks. The mortgage market is outperforming Treasuries, also benefitting from month-end. The 5-yr note auctioned at 3.129 turned out to be a "dutch treat", trading now at a 5 bp profit. Relief is apparent now that supply is over and done with.”

From UBS: “The Treasury today auctioned $22B in new 5-year notes at a 3.129% yield, tailing the 1pm level by 1.6bps. Indirect bidders accounted for an above-average 29.8% of the auction, and the bid-to-cover ratio was 2.14x, roughly in line with the recent average. The market had spent most of the day selling off prior to the auction on the back of last night's MBIA and Fannie headlines (which helped stocks higher), but bull-flattened immediately after the auction results were announced. This development suggests that some traders were already doing tomorrow's month-end index extension trades today, thus converting a good 3-day weekend into an even better 4-day one. Besides extension trades, we saw 2-way flow in intermediates, central bank selling of 1-year paper, and fast money selling of 2's. The 2s30s curve had 5bps bear-flattened by 3pm. Crude tumbled as much as $4+/barrel intraday after the IEA said that they'd release crude oil if Gustav disrupts production. Today's Treasury volume was another solid day at 112% of the 30-day average…Bloomberg News reported today that we do have one growth industry - the FDIC is adding 5 floors of new office space in Dallas to prepare for more bank failures. Oh joy…Swaps saw receiving in the belly, and spreads continued to narrow. Agencies had a sleepy Thursday, cheapening to Libor in the back end and richening in front. The best performer of the day was the cheap 3-year sector. Mortgages saw early overseas selling, followed by afternoon buying from servicers and month-end extenders wishing to take tomorrow off. Mortgages went out at their tights of the day-- 11 ticks better to Treasuries and 9 to swaps.”

From Bloomberg: “The S&P 500 gained 15.58 points, or 1.2 percent, to 1,297.24 at 3:27 p.m. in New York. The Dow Jones Industrial Average increased 184.42, or 1.6 percent, to 11,686.93. The Nasdaq Composite Index added 24.82 to 2,407.28. More than four stocks rose for each that fell on the New York Stock Exchange. The S&P 500 extended its August gain to 2.4 percent and wiped out losses from earlier in the week… The Dow average's 2.8 percent gain in August makes it the third-best-performing stock measure in the world this month, in dollar terms, and the S&P 500's advance is No. 4., according to data compiled by Bloomberg. Three of the biggest gains in the S&P 500 today were MBIA Inc., Fannie Mae and Freddie Mac, which have all lost at least 22
percent this year.”

Three month T-Bill yield rose 6 bp at 1.73%
Two year T-Note yield rose 3 bp to 2.36%
Ten year T-Note yield rose 2 bp to 3.78%
30-year FNMA current coupon fell 4 bp to 5.75%
Dow rose 213 points to 11,715
S&P rose 19 points to 1301
Dollar indexrose .16 points to 77.21
Yen at 109.6
Euro at 1.469
Gold rose $7 to $833
Oil fell $2.70 to $115.5