· Market Update – another excruciatingly slow and quiet session in equities. Prices pull back small after setting record highs on Tues (for this rally), but the dip was shallow and didn’t have a lot of force/conviction behind it. Reasons being cited for the equity weakness: the Portugal downgrade (futures were off only a couple points before the Portugal news hit at 6amET this morning) and then later in the session the poor 5yr auction. There remains a reservoir of buy demand on pullbacks and stocks continue to have a tough time making any progress on the downside. Buyers aren’t chasing (esp. today) and are very price sensitive. Shorts continue to look to cover and aren’t putting on fresh exposures; longs are sticking w/their existing positions. Really not a lot of volume behind the selling pressure today (more the buyers stepping off to the sidelines). Most interesting activity occurring outside stocks as TSYs see a steep decline (see broader TSY update below) and the dollar sees a strong rally (its actually pretty remarkable that stocks were as quiet as they were given the huge moves occurring in these other asset classes). Bottom Line – bears/sellers had plenty of fodder today (TSYs, Portugal, etc), just as they did on Mon (HC and Greece), but couldn’t produce a meaningful down day. Despite the neg. close, the activity today being viewed as a victory for the bulls.
· Equity Sectors – the one group that saw meaningful buy interest for most of the session were the large banks (BAC ends up close to 3% and makes meaningful technical progress on the upside). Regional banks also see buyers (the banks are up 22% YTD and remain the market’s best performing group). Most other major groups ends lower – tech, health care, industrials, discretionary, staples, energy, utilities all end off ~0.5-0.7%. Big story in techs was the pullback in comm. ICs (esp. the PLDs) on inventory worries (JBL) and neg. China telco capex results (SOX ends off 2% and is one of the market’s weakest groups). SP500 telecom end dwn ~1% (VZ/T both weak while S ticks up ~3%). Media stocks outperform (TWX up ~2% on the day while VIA, DIS, and NWS all see buyers). The transport stocks end off >1% as the rails come for sale (airlines outperform within transports). The builders acted well today on back of LEN’s earnings.
TSYs - some of the items behind the back-up in yields:
· couple poor auctions - yesterday it was the 2s and today was the 5s….
· expectations of a more hawkish Fed (impacting more 2s) - despite recent relatively dovish comments from likes of Yellen, Evans, and others, growing sense that Fed may have to raise sooner rather than later….there was spec last week that they could raise the discount rate last week. expectations on the rise ahead of next week's 4/2 BLS report (note the jobs report will be out Fri when US stock markets are closed for Good Friday). The UCLA Anderson forecast out today said the Fed would be forced to move away from its present 0% rate policy soon.
· growth optimism (impacting more longer yields vs. 2s) - rising optimism re the back half of the year weighing on 10s and 30s
· duration shedding as investors don’t want to be locked in @ these rates for as long
· concerns that MBS convexity selling about to hit…..combo of rates and loan mods…
· Fed ending its mortgage buying program next week – it’s been a long time since the Fed hasn’t dominated the mortgage market. Part of the selling in TSYs could be an allocation trade as investors are going to start moving back into the MBS market
· anticipation that a stronger yuan (should China move back towards a policy of allowing slight appreciation) will cut back on Chinese demand for TSYs (less need to buy TSYs/dollars to keep its yuan down).
· budget worries - the HC bill passage this weekend, along w/improvement in Dems standings in the polls ahead of the Nov, raising budget worries. This was in Bill Gross' latest market commentary - " In the U.S. in addition to the 10% of GDP deficits and a growing stock of outstanding debt, an investor must be concerned with future unfunded entitlement commitments which portfolio managers almost always neglect, viewing them as so far off in the future that they don’t matter. Yet should it concern an investor in 30-year Treasuries that the Congressional Budget Office estimates that the present value of unfunded future social insurance expenditures (Social Security and Medicare primarily) was $46 trillion as of 2009, a sum four times its current outstanding debt? Of course it should, and that may be a primary reason why 30-year bonds yield 4.6% whereas 2-year debt with the same guarantee yields less than 1%. The trend promises to get worse, not better. The imminent passage of health care reform represents a continuing litany of entitlement legislation that will add, not subtract, to future deficits and unfunded liabilities"
· investors continuing to seek out risky assets (this was mentioned by E Beinstein this morning) - trends following talks conversations/data: First, investors report clients shifting some assets out of HG and other conservative fixed income products into equity markets, HY and EM. There are still net inflows into HG accounts but they are slower. This trend is supported by the fund flow data as well. Second, we have been seeing more interest in structured credit as investors search for assets. So far there have been more discussion than transactions, but there have been new risk transactions as well. This is logical given the lack of credit products available across asset classes.
· inflation? Its not clear that the back-up in yields are due to inflation…..2 of the best market guages for inflation, gold and the TIPS spread, have both trended flat-to-down. Meanwhile, the dollar has broken out to fresh highs of late. Bottom Line - indicators are signaling that the TSY weakness isn't due to inflation.
Economics Headlines
· US Durable goods orders increased 0.5% in February and ex-transportation orders rose 0.9% after declining 0.6% in January. The key category for tracking capital spending -- non-defense capital goods excluding aircraft -- saw orders increase 1.1% and shipments rise 0.8%; both figures partly reverse the declines witnessed in January, but the increases were not enough to lift the February levels above where they stood in December. M Feroli.
· US New home sales in February were the worst of all time, down another 2.2% from an upward-revised January figure of 315,000 to a new low of 308,000. M Feroli
· US tax season update – from M Feroli - while its early in the tax season, tax refunds are up and tax payments are down: good for consumers, bad for the government (to the extent that the government is concerned about the deficit).
· US Architectural Billings Index improved in February. Duignan.
· Euro area PMI and IFO: large gains, new cycle highs and better news about domestic demand - The huge increases in this morning’s business surveys exceeded even our above-consensus forecasts. The outcomes are encouraging on a number of levels. First, the recovery in industry accelerated further in March; at 59.7, the output index of the Euro area manufacturing PMI is over 5pts above its pre-recession average. Second, the services PMI fully recovered the worrying declines over the past two months. There was a huge 4.6pt increase of the current conditions index in the German IFO. Greg Fuzesi
· EU Summit – final thoughts ahead of the Thurs/Fri summit - There is some uncertainty about whether we will get anything at all from the EU summit tomorrow. At best there will be a statement which effectively outlines the German position. The Greek threat of going to the IMF in order to gain concessions from the rest of the region appears not to have worked. Given developments this week, the Greek government is unlikely to go to the IMF unilaterally. Instead, it will focus on the consolidation effort and hope that spreads will narrow accordingly. D Mackie.
· UK budget - Expectations going into this budget were that policy changes of macroeconomic significance were unlikely. Relative to those already limited expectations, this budget under-delivered. The sum total of 45 specific new measures listed in the Budget document generate a net loosening in the coming fiscal year of just 0.1% of GDP. Chancellor Darling has used less of the limited wriggle room afforded by recent fiscal outturns to indulge in pre-election giveaways than we had thought, although the projections for the budget deficit and growth looking forward are very close to where we had thought they would be. M Barr.
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