Closing Comments
US high-grade corporate bond Issuance up 10% y/y
Thompson Financial reports a 10% y/y increase in high-grade US corporate bond issuance to $772 bln, though high-grade issuance has recently dropped due to credit market turmoil. Junk bond sales grew 17% y/y to $104 bln.
Goldman lowers growth outlook
Economists at Goldman Sachs reduced their ’08 global growth forecast to 4.2% from 4.6% due to the extended US housing slump. Goldman also reduced its US ’08 growth forecast to 1.8% from 2.4%.
FED Speak
Dennis Lockhart mentioned his view of the economy going into the FOMC meeting was one that had “significant risk” of being weakened by recent financial market turbulence. Commenting in his outlook for the U.S. economy, Lockhart identified four risk factors that have the potential to dampen growth. First, he foresees that the housing downturn could last until the second half of 2008 or later; citing “the large inventory of unsold homes in many markets and current restraints on certain types of mortgage financing.” Second, he worries about the extent to which the housing downturn will affect consumer spending. Third, Lockhart is monitoring business investment, though he admits the credit market trouble has yet to spill over into this sector. Finally, Lockhart cites the risk of inflation, saying it is at the “upper bounds of his comfort zone” but notes that “long-term inflation expectations remain anchored.”
William Poole says financial markets appear to be recovering; however the consequences of recent credit turmoil are still unknown. He feels the U.S. economy will see moderate growth and low inflation in the near future. Poole admits he is mindful of not providing misinformation and of not committing to any viewpoint before any FOMC meeting. Finally, Poole speaks to the Fed’s dual mandate of ensuring sustainable economic growth and price stability, while emphasizing that price stability is not in conflict with high employment. Poole addressed “financial fragility” as a concern and the FED must keep a “very open mind” in determining policy. He says it would be a mistake for markets to bet on further rate cuts and that rates are determined on a meeting to meeting basis.
Fred Mishkin expressed his confidence in the FED, mentioning it is its job to limited economic damage from markets as opposed to preventing losses. He says central banks must consult each other on liquidity and that emergency loans should only be used in dire situations.
Economic Releases
Aug. Personal Income: 0.3% vs. 0.4% estimate and 0.5% prior
Personal Spending: 0.6% vs. 0.4% estimate and 0.4% prior
PCE Core m/m: 0.1%, in line with estimate and prior
PCE Core y/y: 1.8% vs. 1.8% estimate and 1.9% prior
PCE Deflator y/y: 1.8% vs. 1.7% estimate and 1.9% prior
Sept. Chicago Purchasing Manager: 44.2 vs. 53 estimate and 53.8 prior
Aug. Construction Spending: 0.2% vs. -0.3 estimate and -0.5% prior
Sept. NAPM Milwaukee: 70 vs. 84 estimate and 63
Sept. U of M Consumer Confidence: 83.4 vs. 84 estimate and 83.8 prior
ECRI US Leading Econ Index: 141.1 vs. 140.7 prior
ECRI US Index Annualized: 1% vs. 0.5% prior
Greenspan 50/50
Former FED Chief Alan Greenspan mentioned the likelihood of a recession has increased, however is less than 50/50. He sees a drop in consumer spending and continued housing weakness. He says the “wealth effect” is likely to contract, though he does not feel this will cause the US economy to shrink.
US Treasury/ Fixed Income
The FED added $4.75 bln in weekend REPOS; FED Funds are above the 4.75% target at 5%.
CBOT Oct. Binary Options at yesterday’s settlement show a 58% chance of a cut to 4.5%, a 15% chance of a cut to 4.25% and a 27% chance that rates will be unchanged. Currently, Oct. FED Fund Futures show an 84% likelihood of a 25 BPS cut in October.
A volatile day in treasuries, as bonds experienced buying and selling pressure before settling near flat on the day.
30-yr. yield: 4.824 %
10-yr. yield: 4.571%
2-yr. yield: 3.951%
6-month yield: 4.06%
3-month yield: 3.81%
4-week yield: 3.37%
Forex
The USD got shelled today
USD Index hits a new record low at 77.666
EUR/USD hits a record high at 1.4278
USD/CAD falls below parity at .9944
USD/JPY down .7% to 114.86
Cable up .9% to 2.0461
USD/CHF down .7% to 1.1637
Commodities
Energies sold off late in the day finishing lower across the board.
Crude down 1.3% to 81.53
Unleaded down 1.22% to 206.83
Heating Oil down .6% to 223.79
Natural Gas down .6% to 6.88
Metals finished the day higher except Copper.
Gold up 1.3% to $749.40
Silver is up 1.65% to 13.87
Platinum is up $26 to 1399
Copper is down .6% to 362.65
Next week’s economic releases
Monday October 1
SM mfg Index 10E
Tuesday October 2
ICSC-UBS Store Sales 7:45E
Redbook 8:55 E
Pending Home Sales 10E
Motor vehicle sales 4E
Wed. Oct. 3
MBA Purchase Applications 7E
Challenger Job-Cut 7:30 E 6
ADP Employment 8:15 E
ISM non manufact.10 E
Petroleum Status report 10:30 E
Thursday Oct. 4
Monster Employment Index 6E
Jobless Claims (at Labor) 8:30 E
Factory Orders (at Commerce) 10E
Friday Oct. 5
Employment Situation (at Labor) 8:30 E
RBC CASH index 9E
Consumer Credit (at Treasury) 3E