Prices of Treasury coupon securities are posting modest gains in overnight trading but have retreated from the best levels attained at the opening of the Asian session. At that time the residue of the Fitch downgrade of FGIC remained in the air and equity markets in Asia were sharply lower. Asian equity markets have recovered with the Nikkei actually rising and the Hang Seng posting manageble losses. European markets are lower but panic appears to have taken a back seat for the moment. The futures market at the moment is predicting a loss of about 90 Dow points at the open.
The Treasury yield curve is a little flatter this morning as the 2year note is about unchanged at 2.17 percent and the 10year yield is down about 2 basis points to 3.65 percent. Sister Mary Consolata taught me well and that works out to a spread of 148 basis points.
The market today will be pulled in different directions by opposing forces. Some would perhaps wish to bask in the warm afterglow of the aggressive FOMC. Others view the Fed’s recent actions as unseemly overkill and an abrogation of its inflation fighting mandate.That seemed to be the opinion of Mr Market yesterday as the yield curve steepened about 10 basis points and TIP bonds appreciably outperformed nominals. I would expect those trends to continue in the near term as the weight of supply ($22billion refunding ) makes that an easy trade for dealers,at least through the auction process.
The other undercurrent in the market is the reemergence of credit woes as a major motivator of portfolio adjustment. In my early post of newspaper headlines each of the top stories dealt with some credit issues. It seems that the problems of the monoline insurers is set to become the flavor of the week and if that be so price action will swing from volatile to very volatile.
There is a spate of economic data today.I want to focus on the claims data. It is the most contemporary indicator of business sentiment. If employers feel good,they are not declaring employees redundant. Claims have been moving lower recently and is at odds with other indicators of economic weakness. If the economy is about to head into a recession the four week moving average of claims must move from the current level of about 315K to something north of 350K. Economists expect a rebound today to around 320K and blame the recent decline on warm weather and the ubiquitous scourge of all forecasters,faulty seasonals ( sounds like a good name for a dry humored British sit com).