Treasuries are rallying this morning on a host of news showing more indications of a slowdown and lack of inflation. The 10 year Treasury is yielding 3.45% currently.
The economic news is driving things this morning. You’ll see from this morning’s release calendar that everything economic indicator came in lower than the survey expected. Consumer Prices fell by a full 1.00% last month. That is the largest single drop since record keeping began in 1947. The large drop in oil prices is largely responsible for this decrease. Over the course of about six months the headlines have moved from screaming about inflation to talk of disinflation to speculation about deflation.
Housing starts and Building Permits were both lower than expected and Mortgage Applications were down 6.2%.
Fed Funds futures are now pricing in a 100% chance of at least a 50 basis point cut at the Dec 16 FOMC meeting. 90% of the probability is placed on a 50 bps cut, the remaining 10% is placed on a 75 bps cut. The 75 bps cut scenario being assigned any probability at all just happened this week.
Below is a quick review of oil prices and the more broadly based Goldman Sachs Commodities Index to give you an idea of how far these prices have dropped. Over the summer the headlines were all printing that oil was going up to $200 a barrel…what a difference a global recession makes. OPEC has been frustrated by the decline as cuts in production (market manipulation) have failed to support the price of crude. One thing is for sure, oil under $50 a barrel is going to put the squeeze on Christmas budgets for terrorists everywhere. In fact it’s gotten so bad that this week those pirates had to choose between doing the normal plunder and pillage for cash and gold, or supporting the price of crude by taking supply off the market…ultimately they went with the oil thing and hijacked a Saudi tanker.
Below is the CPI data going back to 1947.
That’s all for now. MBS spreads remain attractively wide, short maturity corporate in the financial sector continue to see strong demand as many have so much government backing that they couldn’t fail in the next 6 months if they tried. We continue to see a longer line of players line up for free tax-payer money. GM, Ford, and Chrysler will be the immediate names you here…behind them is a growing list of states and municipalities that are screaming that they want some of your money too…beyond that look for headlines about more hedge funds collapsing (I love it when that happens because we see lots of cheap bonds as they struggle to save themselves)…and somewhere in the middle of all of that we’ll get a really good look at consumer spending as the day after Thanksgiving is traditionally a very busy shopping day…if the consumer doesn’t show up we could start seeing a lot more stress at small businesses around the country.
If you have any questions on this material just let me know.
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