Interest Rate Update – Friday August 21, 2009:
Markets opened generally flat this morning in the interest rate area; the stock market futures trading was pointing again to another better open. At 8:30 the 10 yr note was +3/32 as were mortgage prices; at 9:00 the 10 yr -1/32 and mortgages also -1/32, the DJIA up 50 points. At 9:30 the DJIA opened +53, 10 yr note unchanged and mortgage prices +2/32. (se below for 10:10 levels)

Nothing on the wires early on but at 10:00 we got July existing home sales; expected to be +2.2%, sales were up 7.2% to 5.24 mil units. Single family sales up 6.5%, condos +12.5%. The sales the highest since Aug 2007. The median sales price $178,400, down 15.1% yr/yr; there is a 9 month supply based on present sales. The inventory level increased 7.3%. The initial reaction to the strong sales sent the 10 yr note and mortgage prices down hard (see below).

As this goes out Fed chief Bernanke is about to make his opening remarks at the annual Jackson Hole conference of financial leaders and economists. What we are hearing is that much of the talk at the conference will be centered on continuing global cooperation among leading economic countries. Recently there is a fear the global cooperation may erode as each country moves to focus directly on their own economy. The dollar is a center of concern; still hearing key economists sounding warnings that the dollar’s position of the world’s reserve currency may need to change. China and Russia continue to call for a reserve currency tied to a basket of currencies managed by the IMF. In Bangkok this morning Nobel Prize-winning economist Joseph Stiglitz sounded the call for a global reserve currency, saying there isn’t much value in the dollar anymore. Why worry about it? Because if the dollar falls it will increase inflation pressures in the US. Finance ministers and central bankers from the G20 are due to meet in London on Sept. 4-5.

The global financial crisis, which began with the collapse of the U.S. subprime-lending market in 2007, has led to almost $1.6 trillion of writedowns and credit losses at banks and other financial institutions, according to data compiled by Bloomberg.
Running for cover: President Obama has his hands full with the health care issue these days; his political capital being spent rapidly. His administration has jumped head first into meddling in the private sector, directed straight from the Oval Office. Now, with pay packages being cut and government interference into micro-managing businesses, he has stepped back. The White House is taking a hands off on the pay package and executive comps and leaving it to Kenneth Feinberg, our new pay czar. Run Barack Run. The government is way off base with their involvement; let shareholders and the markets deal with it.

Trade volume in stocks, bonds and mortgages remains very thin; today even thinner as most of the key people on the desks are out. Thin volumes can distort the reality of markets at times, so we take much of the recent action with that grain of salt. It won’t get back to norms until after Labor Day, in the meantime, markets are still the only measuring stick we have. Recent action is quite bullish in the rate markets, especially at the long end of the yield curve (10 yr note and 30 yr bond); mortgages also very strong technically as investors see more value in them—-as they should. MBSs are very good investments now, but investors continue to have a bad taste for them after Wall Street and big banks blew up mortgage markets world-wide.

When will the stock market roll over into a major correction? Most every analyst and stock market trader is convinced that the stock market will be higher at the end of the year than where it sits now; equally those same analysts and traders are totally convinced the market is set for a reversal. It isn’t happening though; at the worst the key indexes are sitting generally flat with swing trading. at 10:00 this morning the DJIA is up 80 points on the week, the S&P +10, and NASDAQ +10. Looking for a decline in stocks the bond and mortgage markets have rallied, even in the face of $109B more Treasury borrowing next week; the 10 yr note yield has fallen 13 basis points this week so far, mortgage rates also down about 15 BPs. August markets are always a conundrum.
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