News for March 26th 2009

Mortgage Market Minute: MBS spreads are tighter this morning, as traders watch for the results of the 1pm Treasury auction ($24B in 7-year notes). The FNMA 4.5% is up +.125 to 101.81, the 5.0% up +.03 to 102.78, and the 5.5% is up +.09 to 103.53. The 10-year is flat at 99-20/32, the yield 2.79%. Stocks are up in choppy trading, but are continuing their impressive run. Predictably, relatively low yields on Treasuries are finally encouraging investors to look to the stock market. The earnings yield on stocks, which stands at about 5.6% (measured as the reciprocal of a stock's price-to-earnings ratio), serves as a good guide to stocks' relative attractiveness to bonds – and 5.6% looks great compared to the 2.8% that the benchmark 10-year bond is yielding, even risk-adjusted. On the flip side, low Treasury yields could actually damage the U.S. stock market, since all U.S. assets look weak in the eyes of foreign investors, leading to a decline in the dollar and corporate profits. Either way, all this debt hitting the market looks dangerous. What to do? Lock these great mortgage rates now, people!Oops I did it again! Geithner at the center of another tempest.The U.S. Dollar went into a tailspin on Wednesday when “Turbo Tax” Tim Geithner reportedly said before the Council on Foreign Relations that he was “open” to rethinking the U.S.-dollar-based global reserve currency system. Geithner was responding to Zhou Xiaochuan, the governor of the People's Bank of China, who wrote an essay last week suggesting a shift to a basket of major currencies instead of the U.S. dollar. The shocking comment sent waves through the financial system, and caused the U.S. Dollar to fall more than 1% on key exchanges. Later the dollar recovered when Geithner’s somewhat ambiguous comments were clarified to state that he believed any suggestion from Zhou “deserves consideration.” In the essay, which Geithner admitted to not even having read, Zhou said it might make sense to use the IMF's special drawing rights (SDR), which include the dollar, euro, pound sterling and yen. China holds more U.S. Treasury bonds than any other country, and traders are concerned that mountains of U.S. debt will damage the Dollar. Geithner’s comments contradicted those of President Obama who said on Tuesday that the dollar is “extraordinarily strong” and there is no need for a global currency. "It was clumsy and mishandled," said David Watt, senior currency strategist at RBC Capital Markets. "The initial interpretation was not necessarily correct but on the other hand, Geithner's comment was wholly poorly advised. He should be able to see a minefield and avoid it." Further, Watt said the Treasury Secretary, who is responsible for the dollar, should never have admitted to not reading a widely-discussed essay.
Fourth quarter GDP off -6.3%.The Commerce Department said today that the U.S. GDP contracted at a -6.3% annual rate in the fourth quarter of 2008, the weakest since 1982. Profits dropped -16.5% percent from the prior quarter, the most since 1953. The data matches up with the very high rate of first time jobless claims seen throughout the period. “It’s a pretty dismal result,” said Michael Gregory, a senior economist at BMO Capital Markets in Toronto. “Given the slight improvement we’re seeing in some of the recent indicators, I suspect the first quarter will be a little better than the fourth.” The drop in GDP was larger than the -6.2% percent decline estimated by the Commerce Department last month. The consumer spending component, which accounts for about 70 percent of the economy, fell at a -4.3% pace last quarter, marking the first back-to-back decreases in excess of 3% since record-keeping began in 1947. The final third-quarter GDP figure was also released, showing that the U.S. economy shrank at a -0.5% annual rate from July through September. This means that throughout all of 2008, the economy grew just +1.1%, as exports and Bush-administration tax rebates in the first six months helped offset the slump in consumer spending that followed. Jobless claims surpass 600,000 mark for eighth straight week.The Labor Department reported that initial claims for jobless benefits last week rose +8,000 to 652,000, surpassing the 600,000 level for an eighth straight week. Total benefit rolls jumped by +122,000 in the week ended March 14, jumping from 5.44 million the previous week to 5.56 million this week, as job cuts spread from manufacturers and construction companies to services such as government agencies and health-care providers. “We’ve still got big job losses happening but we don’t think it’s accelerating,” said Ellen Zentner, a senior economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “These continuing claims are rising to record highs because people, once they file claims, are unable to find another job.” The unemployment rate stood at 8.1% in February, and economists think it may rise to as high as 9.4% percent by the end of the year.On today’s date: March 26…1872: A 7.8 earthquake shakes Owens Valley, California 1942: First 700 Jews from Polish Lvov-district reach concentration camp Belzec1945: Generals Eisenhower, Bradley, and Patton attack at Remagen on the Rhine1953: Dr. Jonas Salk announces vaccine to prevent polio1970: Golden Gate Park Conservatory made city landmark1979: Camp David peace treaty between Israel and Egypt1982: Ground-breaking in Washington, D.C. for Vietnam Veterans Memorial
The last word:“Character, in the long run, is the decisive factor in the life of an individual and of nations alike.” --Theodore Roosevelt