Opening Thoughts December 17 2008

December 17th, 2008 8:44 am | by John Jansen |

Prices of Treasury coupon securities posted mixed results in overnight trading as investors around the globe absorbed the news of the FOMC’s momentous decision yesterday and reacted accordingly. With time to think and reflect investors chose to purchase more long paper and to shun shorter dated paper.Against that background the yield on the 2 year note increased 2 basis points to 0.67 percent. The yield on the 3 year note climbed 4 basis points to 0.93 basis points. The yield on the 5 year note is unchanged at 1.29 percent. The yield on the 10 year notes continues to plummet as it fell another 5 basis points to 2.21 percent. The yield on the 30 year bond has dropped 4 basis points to 2.70 percent.

The 2 year/10 year spread is now 154 basis points. To place that in some perspective, the spread was 169 basis points moments before the FOMC announced the new policy.

The US stock market experienced a giddy surge yesterday, climbing more than 4 percent in response to zero percent rates and the FOMC notice that it would pay any price and bear any burden to revive the US economy. Foreign markets have been much more muted in their response. Japanese stocks climbed a meager 0.5 percent as investors their grapple with the impact of the surging yen. Honda slashed its full year profit forecast by 62 percent and one of the reasons cited was the strength of the yen.

Bloomberg reports that Japanese Finance Minister Nakagawa has stated that the government is not considering intervening to stem the yen’s rise.

The Hong Kong stock market advanced 2.2 percent and the Australian markets climbed 0.4 percent.

European markets are registering mixed results with most exchanges declining between 0.5 and 1.0 percent.

Unemployment in the UK (employing something known as International Labor Organization standards) rose by 137K in the quarter ending October to 6.0 percent from 5.5 percent in the prior period.

In a sign that the European credit markets remain fragile, Deutsche Bank has declined to refinance Euro 1 billion of subordinated bet claiming that the refinance would result in greater expense for the company

There is no meaningful economic data to chew on in the US today.

The month of December is more than half complete and the holiday season looms. Trading should become thinner and thinner and the markets more illiquid as risk aversion becomes more pronounced. The Treasury will announce 2 year note and 5 year note auctions tomorrow for sale next week. I think that the street will sadistically torture the taxpayers for their profligate ways by demanding a huge concession in each issue. One can see that already in the response of the yield curve to the FOMC action.

I see two other areas which might spark some volatility. Equity guys were wearing rosier glasses than normal yesterday and were seeing the glass as more than half full. If one exams the FOMC statement, they are telling the world that the economy is in a heap of trouble. They were unequivocal and un Fed like in their bluntness. If one thinks about the realistic prospects facing the economy, it is hard to imagine that there will be meaningful profit growth any time in the foreseeable future. I know the stock market anticipates and is forward looking. I just think that right now it is seeing about as far in advance as it can and additional gains should be limited.

Finally, there is always the nightmare scenario of a collapsing dollar. It has moved nearly 3 cents against the Euro from levels which prevailed moments before the FOMC statement. Foreign investors are voting with their wallets as they flee the greenback. When that market develops a trend, it can become a powerful wave. Witness the recent dollar move from its lows.

We are a debtor nation and the ruling class is plotting massive increases in the deficit to stimulate the economy. We need foreign buyers to buy that debt. I hope that the recent dollar declines do not mark the beginning of some epiphany in which foreign investors react as Roberto Duran did in a fight against Sugar Ray Leonard and cry, “no mas”. In that case, woe to the US taxpayer.

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  1. 9 Responses to “Opening Thoughts December 17 2008”

  2. By Danny on Dec 17, 2008 | Reply

    Thank you John!

    BTW you just brought memories of the 80s; sitting in front of a black-and-white TV in my home town (somewhere in Latin America) watching at Roberto “Manos de Piedra” Duran – Roberto “Hands of Stone” Duran.

  3. By John Jansen on Dec 17, 2008 | Reply


    And now you probably live on the fashionable upper east side and get on the subway at 86th street with all of the beautiful people!

    Life id good.


  4. By BL on Dec 17, 2008 | Reply

    Will we really rely on foreigners to finance the debt? Isn’t this where quantitative easing and Fed purchase of Treasuries comes into play? That is, the Fed essentially prints the money to lend to the government.

    Ordinarily, that would be hyperinflationary, but as it is, trillions of dollars have disappeared, so it won’t be, if not overdone.

    If the dollar does plunge, and the Euro goes back to say $1.50+, isn’t that what we need to get US exports up and imports down, so we can produce more, consume less, and fix the balance of payments? If seems like the Euro at $1.50 was the good old days.

    Print, baby, print…

  5. By Kevin Mackey on Dec 17, 2008 | Reply

    You exactly captured the fine line with which we find ourselves by saying, “if not overdone”. We are being desensitized to what overdone means anymore.

  6. By Danny on Dec 17, 2008 | Reply

    Ha Ha! life is good 🙂

    I now watch European Soccer on color TV, not yet on a LCD/Plasma; but one day

    10 year trasuries at 2.07!!! Giddy Up!

  7. By Dave in SV on Dec 17, 2008 | Reply

    I believe that the equity market wants to believe that while the 4Q will be (is) ugly, and seasonality will make for an ugly 1Q, the bottom in the economy will be in the 1Q and the 2H 2009 will see a recovery, hence the trading range we are in right now.

  8. By jomiku on Dec 17, 2008 | Reply

    IG11’s halt and widening spread reflects the underlying hope from the Fed’s announcement and then the reality of what it means.

    My reading is that the Christian world will all spend a few days at the end of this year talking to family and friends and those conversations together with the few days away will shape a collective mood on return. I don’t know if it will be good or bad. If the mood is hopeful, then Obama’s inauguration will carry more psychological weight.

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  2. Dec 17, 2008: Brad Setser: Follow the Money » Blog Archive » Today’s Fed statement speaks for itself
  3. Dec 18, 2008: Setser May Be Too Optimistic | But Then What

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