This morning we read;
More improvement early this morning; yesterday 30 yr MBSs increased 13 bp, at 8:45 today up another 17 bp. Late yesterday (4:30) Bernanke spoke at the U. of Michigan; two points from the speech were interesting. First Bernanke chided Congress to increase the debt ceiling; secondly, he commented that the Fed would continue QE as long as unemployment remained weak. He said the employment sector is still sluggish, the take away somewhat softened the FOMC minutes that suggested the Fed will begin to structure an exist plan from $85B of buying treasuries and mortgage-backed securities. His comments pushed MBS prices a little higher than levels prior to his remarks.
President Obama out yesterday calling on Congress to raise the debt ceiling, saying it is “absurd” that Congress would not pay its bills. Meanwhile Republicans are going to push for spending cuts. Like the Cliff it will go down to the wire before the debt ceiling is increased. It will be increased regardless of the debates and slings and arrows that whiz by in the coming weeks. While cutting spending has to be the goal long term, this isn’t the time with the economy still vulnerable. Every forecast from CBO, and other accounting forecasters agree that letting the US default would push the economy back into recession; the rating agencies have indicated failure to increase the ceiling will cause another decline in the US debt rating. According to the latest estimates on spending Treasury, presently operating on emergency funding, will run out of money by mid-February. Between now and then there will be numerous headlines, plenty of angst, but in the end the debt ceiling will be increased; the alternatives being too costly for the economy. The President is starting as he did with the Cliff; showing little interest in spending cuts or compromise. “What I will not do is to have that negotiation with a gun at the head of the American people,” Obama said at a White House news conference yesterday,…. “They will not collect a ransom in exchange for not crashing the American economy,” (referring to Republicans)
At 8:30 three data points; Dec retail sales, expected to be +0.2% increased 0.5%, ex auto sales +0.3% in line with forecasts, ex autos and gasoline +0.6%. Dec PPI overall fell 0.2%, ex food and energy +0.1%. PPI in Nov fell 0.8%, the two months indicate little concern that inflation is about to pick up; yr/yr prices increased just 1.3%, yr/yr core +1.4%. January NY Empire State manufacturing index at -7.8 frm -7.3 in Nov (revised frm -8.1) was weaker than +2.0 expected; new orders -7.2 frm -3.4, prices pd increased to 22.6 frm 16.1, prices received +10.8 frm +1.1, employment increased to -4.3 frm -9.7.
At 9:30 the DJIA opened -49, NASDAQ -16, S&P -5; the 10 yr note yield at 1.82% -3 bp; 30 yr MBSs +.18 bp.
Nov business inventories at 10:00, expected +0.3%, was right on at +0.3%. no reaction to the report as usual.
The bond market has improved lately after the spike higher on the FOMC minutes released on Jan 2nd implied there was increasing debate within the FOMC about withdrawing the QE easing later this year. Yesterday Bernanke cooled that idea somewhat, saying he is still concerned about the slow progress in employment. This morning the 10 yr note, while still technically bearish, is testing its 20 day average at 1.82%. Traders are still controlling the bond market, moving in and out on each piece of news. Concerns on the debt ceiling are making headlines, as it will for the next month but in the final analysis we expect the debt ceiling will be increased. The wider perspective for the bond market is that rates will not likely decline much as investors are turning away from low yield fixed income investments.