Midday Update
The S&P/CS Composite-20 showed a 3.5% decrease in home prices as inventories continue to build. Yesterday, Existing Home sales posted its fifth straight monthly decline painting a bleak picture of the housing market; what’s worse is the fact this data does not take into account recent credit market turmoil. August Consumer Confidence, which does factor in recent credit issues, fell to a one-year low at 105.
Boston-based State Street Capital is reportedly exposed to $22 billion in ABCP conduits accounting for nearly 17% of its total assets. British Bank Barclays is denying a report saying it’s exposure to failed debt deals is hundreds of millions of dollars. Merrill Lynch cut profit estimates for Citigroup, Lehman and Bear Stearns due to credit market woes. CIT Group announced it has closed its mortgage lending operations, saying that loan collection and customer service activities would be unaffected.
The FED injected $2 billion into the banking system with 2-day REPOS consisting of MBS. FED Funds are currently trading at 5 3/8 which is above the FED’s 5.25% target. The ECB set tender for €50 billion in long-term variable rate REFIS. The ECB said yesterday they would provide liquidity as needed; however they want to reduce its reserve surplus.
The VIX volatility index is up 9.5% on the day with the re-emergence of credit/subprime fears. T-bill yields are down with the 4-week dropping 21 BPS to 4.55 and the 6-month falling 19 BPS to 4.47. Bond yields are also lower with the 30yr yielding 4.839; the 10yr yield at 4.533 and the 2yr yield at 4.145. The 5 and 10 year futures are well bid gaining about 1/2 a full handle vs the 30 year which is up on 10 ticks on the day; the two year is up about 7 ticks.
Later month FED Funds Futures gained strength; the Sept contract shows an implied rate of 5.01% nearly factoring in a full rate cut. The Nov contract shows an implied rate of 4.71% which factors in two rate cuts.
JPY is rallying again today, gaining 116 pips vs. USD. GBP/JPY is lower by nearly 300 pips at 230.16 and EUR/JPY is down 183 pips to 156.28 as JPY continues to benefit from carry trade unwind.
Crude is down 26 cents to 71.73; Unleaded is down 1.66 cents to 202.27 and Natural Gas is up 9.5 cents to 5.475. Gold is down 1.70 to 674.40; Silver is up 6.6 cents to 11.99 and Copper is down 4.85 cents to 330.75.
The FOMC minutes from the Aug 7th meeting will provide more insight as to the downside risks addressed in the previous statement. The minutes may also provide some analysis regarding financial market volatility and tightening credit conditions. If the FED ratchets up the downside rhetoric, expect equity markets to take a pounding post 2pm with bonds rallying on flight to quality. Knock-on secondary effects could include a strong bid to metals and a mixed performance on the dollar.