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| Daily Jurojin - Thursday, June 11, 2009 |
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Thursday, June 11, 2009 Risk-on, risk-off - another day in the dealing room.Less than a week after investors priced in a certain interest rate rise from the Federal Reserve two pieces of evidence emerged indicating that the Fed's policies were either not working or starting to backfire. We're referring initially to the employment report of last Friday in which far less workers lost jobs, sending glee through analysts' veins, but fear up the backbone of interest rate markets, which came crashing down in the expectation that the Fed would imminently reverse its practically zero rate stance.The Mortgage Bankers Association midweek revealed a sizeable decline in mortgage applications. Mortgage applications from home buyers rose a smidge, but the highest fixed rate lending rates in eight months dissuaded existing homeowners from refinancing their mortgages. That indicates to us that lower fixed rates have run their course through the economy and there is little left to help free up further dollars in household pocketbooks. In addition fewer applications to refinance reduced the overall gauge of activity in that category to less than 60%. The latest compilation of economic conditions embodied in the 12 regional Federal Reserve districts painted a very murky picture of the U.S. economy. Ahead of FOMC meetings the regional office survey local businesses and report their findings to help Reserve Board members get a sense of how well or otherwise the economy is doing not only in their own region, but also outside. Weakness and deterioration in conditions prevailed, which is far from ideal given the green shoots investors are banking on taking root. Notably the prime areas of concern according to the beige book are commercial real estate and employment. Given that commercial dealing tends to be more stable than household realty, the current price weakness and rise of activity solely related to foreclosures is an unwelcome signpost for the commercial sector. Wednesday's MBA report underscores that the smoldering embers across the real estate market are rapidly in danger of becoming extinguished. The beige book confirms this theme when it notes that despite the costly federal efforts to jump-start lending, consumers are finding it increasingly difficult to obtain credit. And while the Fed's regional officers report an abatement of the recession in line with the thawing widely reported by businesses across the economy, none see a significant economic boost for the remainder of 2009. The data will form the backbone of discussions at the June FOMC meeting. Broad economic activity remains muted with auto activity in particular hamstrung by tight credit conditions, while consumers steer clear of luxury items and new cars. The regional skew on housing welcomed some stabilization in house prices and welcomed activity albeit at lower price levels, but as many have said before, commercial real estate - a potential next shoe to drop - remains weak. The Boston Fed for example reported that commercial real estate activity was becoming scarce. The report noted rising vacancy rates for commercial properties in many parts of the nation while developers were struggling to find financing for new projects. Overall lending, while stable across most regions was mixed across the various categories the Fed observes. As we already know, but perhaps need reinforcing, labor market conditions remain weak. In addition credit markets had tightened during the survey period and were likely to get worse rather than better in the period ahead. It was quite a rollercoaster day for fixed income with the bear market for bonds continuing to dominate investor sentiment across all classes. An auction of 10-year government notes provided investors with yet another bout of indigestion sending yields within an inch or two of 4%. Such pressure on borrowing costs is weighing heavily on the equity market where investors are increasingly concerned about liquidity and financing for corporate debt. In the currency market the dollar rose as fears grew over the prospects for broad slowdown ahead. The risk-on, risk-off seesaw keeps rocking day after day. The Supreme Council of the Secret Order of Jurojin |
