Opening Comments June 23 2008

June 23rd, 2008 5:12 am | by John Jansen |

Prices of Treasury coupon securities have posted modest gains in overseas trading. The yield on the benchmark 2 year note has declined a basis point and rests at 2.88 percent. The yield on the 5 year note has dropped 2 basis points to 3.58 percent. The yield on the actively traded 10 year note has slipped 2 basis points to 4.14 percent. The yield on the Long Bond has dropped 3 basis points and it rests at 4.70 percent.The 2year/10 year spread is 126 basis points. The 2year/5 year/30 year butterfly is 42 basis points.

Economic data available overnight has a soft feel about it. Japanese business confidence fell the most in 4 years on high commodity prices and plans by companies to cut spending. Some Japanese forecasters though that this report presages weakness in the more important Tankan report which is set for release on July 1.

UK home prices slumped the most in a year. The offered side of the market dropped 1.2 percent from May.HBOS, the large and troubled UK mortgage lender had forecast last week that home prices would fall by 9 percent this year.

In Germany the IFO survey of business confidence fell to 101.3 in June from 103.5. That is a greater than expected drop and leaves the Index at its lowest level since December 2005.

Finally, there is a Eurozone purchasing managers index and it dropped to 49.5 in June from 50.5 in May. The manufacturing component declined to 49.1

That is quite a litany of weak data and is a sure sign that the economic malaise born of the credit crunch lingers. I wonder if central bankers will stick to their guns and pursue a collision with economic history by raising rates.

In that regard, the FOMC meets tomorrow and Wednesday and will announce the outcome of its conclave Wednesday afternoon. Fed officials of every ilk have bided their time since the last meeting regaling the markets with thoughts on their inflation concerns. Speakers have been uniformly hawkish in their approach and the Chairman has delivered comments which note his concerns about the weakness in the dollar and the consequences of that for expectations on inflation. This will be a most interesting statement and every word will be parsed. The Fed must pay some homage to the dollar but to raise rates or signal that a rate hike is imminent might send fragile financial markets into a major tailspin.

There is no meaningful economic data today.

There is a chunk of supply from the Treasury this week. They will issue $30billion 2 year notes tomorrow and $20 billion 5 year notes on Thursday.

It is good to be back and once again I thank everyone who sent me condolences and kind words.

JJJ

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  2. Jun 23, 2008: Brad Setser: Follow the Money » Blog Archive » It is 2004 all over again. Central banks haven’t shifted away from safe, liquid assets

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