Yesterday there was a passing thought that Italy’s debt problems would deal a serious blow to the country with its interest rates at record highs since the EU began. Yesterday another passing thought that the EU would eventually be restructured based on comments from French Pres Sarkozy that a two tier EU may be the best thing eventually. Yesterday the stock market dropped 389 points, the 10-Year Note yield fell 12 basis points to close under 2.00% at 1.96%. That was yesterday; like it has been the last few weeks, one day its doom and gloom, the next not as bad. No one actually knows what will happen tomorrow; therein lies the difficulty in attempting to assess the situation on a day to day basis.
Yesterday there were comments from supposed knowledgeable people that the ECB was precluded from buying bonds from individual EU countries; obviously that isn’t the case. We reported it as fact and one reason that the debt problems in the region were unlikely to be resolved for years and that there would be defaults in a number of countries. Overnight reports from the wires saying the ECB was in buying Italian bonds, so far no confirmation from the central bank. Italy did sell bills today, the demand was strong and for the moment markets are less concerned that Italy can not fund itself. The country sold 5 billion euros ($6.8B) of one-year bills at an average yield of 6.087% after yields yesterday on 10-Year Notes surged past the 7 percent level.
In Greece there is apparently a new leader that will form an interim government; former vice- president of the European Central Bank Lucas Papademos will head a national unity government for Greece, according to the country’s presidency.
At 8:30 this morning weekly jobless claims along with the every other day optimism about Europe driving stock indexes higher and interest rate prices lower. Weekly claims fell 10K to 390K the lowest claims in 7 months, expectations were for unchanged at 400K; continuing claims also fell, from 3.707 million to 3.615 million.
September U.S. trade balance declined to -$43.11B, if here is any consensus in the markets these days the forecast was for the balance to -$46.3B. October import prices fell 0.6% against estimates of -0.2%; export prices fell 2.1%.
At 1:00 this afternoon Treasury will complete borrowing $72B this week with $16B of 30-Year Bonds. The 10-Year Note auction yesterday was weaker than traders were expecting, sending rates higher on the reaction before regaining strength into the close with the 10-Year Note at 1.96%. This morning the 10-Year Note is hovering at 2.05%.
At 9:30 the DJIA opened +126, NASDAQ +30, and the S&P +13; the 10-Year Note 2.05% +9 bp and mortgage prices down 8/32 (.25 bp).
Attempting to trade on fundamentals these days is almost impossible with the constant changes happening in Europe. Looking solely at the technicals, the 10-Year Note presently is sitting right on its 40 day average at 2.05% with its 20 day average at 2.09%. 30-Year FNMA MBS today is trading below its 40 day and at the moment holding at its 20 day, similar to the 10-Year Note. The relative strength in both markets is hanging at neutral. The overall technical picture slightly positive but not by much. That the 10-Year Note this morning is back over 2.00% somewhat negates its close yesterday below 2.00%. With U.S. markets being completely dominated by what happens in Europe the outlook for U.S. interest rates in the end is impossible to anticipate. Bottom line; markets are adrift in a sea of uncertainty over Europe and the impact on the U.S. economy.
Yesterday in Italy, Prime Minister Berlusconi’s offer to resign boosted optimism Italy would appoint a new leader who can tame the debt crisis. Europe and U.S. stock markets rallied and interest rates increased on the idea that progress was being made. That all lasted about 20 hours; this morning Europe’s equity markets are lower and in the U.S. the DJIA (Dow Jones Industrial Average) opened down 200 points, the 10-Year Note at 9.30, +32/32 at 1.97%, -11 bps and mortgage prices +11/32 (.34 bps).
French banks taking huge hits this morning on deposit factor for Italian bonds due in 7-to-10 years will be raised to 11.65%, the French unit of LCH Clearnet said. That compares with a charge of 6.65% announced last month. Clearing houses guarantee that investors’ trades are completed by standing in the middle of two counterparties and raise margin requirements to protect themselves against losses should one side of the trade fail. French banks face collateral damage from the political turmoil that sent Italy’s bond yields to euro-ear records. Austerity measures to balance Italy’s budget are also threatening growth in an economy that has lagged behind the European average for more that a decade and may hurt the French banks’ consumer businesses.
Italy’s $2.6 trillion of debt is the world’s forth largest, behind the U.S., Japan and Germany and more that that of Greece, Spain, Portugal and Ireland combined. Relative to gross domestic product, it is the highest in Europe after Greece, standing at about 120%.
Events in Europe continue to drive U.S. markets, everyday analysts try to assess each event that occurs. Yesterday markets were motivated by Berlusconi’s offer to resign after he failed to get necessary votes of confidence; U.S. stocks rallied, U.S. interest rates increased. This morning the U.S. 10-Year Note yield is trading once again just below 2.00% and U.S. stock indexes are being hit hard in early trading. Yesterday markets believed the Italian crisis was on the path of being dealt with, today with margins increasing and Italy’s 10-Year Note at the highest ever since the EU was formed in 1999 another round of panic. Focus now will likely be on the ECB, whether it will step up and buy Italy’s debt and take the pressure off…for the moment.
Investors moving out of equities ths morning and into treasuries on worsening outlook in Italy and the inability of all of Europe’s various entities cannot agree on what to do. Over 2 years and the problems continue to worsen. G-20 leaders last week balked on having the IMF taking a larger roll; politicians running for cover and everyone looking out for number one. Europe is going to fall back into recession, as it does U.S. equities will be drawn down; safely into treasuries is the likely outcome with possibly much lower rates. Talk is cheap as it is said, the 10-Year Note, pacesetter for mortgage rates, while under 2.00% this morning has yet to sustain a close below 2.00% since late September when Operation Twist was announced and then it didn’t hold long. Since then though the debt crisis in Europe has increased; improving the view that U.S. rates could decline.
In the “it doesn’t matter” column this morning September wholesale inventories expected up 0.6%, were down 0.1% with inventory/sales ratio unchanged from August at 1. 15 months
At 0100pm this afternoon the Treasury will auction $24 billion of 10-Year Notes; yesterday the 3-Year Note auction went well. Today with rates lower the demand for the 10-Year Note will be interesting’ a solid auction would add to the increasing bullishness.
The day is just getting underway; all focus will be on what if anything comes from the ECB and what the central bank will do to curb the explosion in Italian interest rates. Greece is still not making any quick headway in forming a new government but the attention is all on Italy at the moment.
