The Day Ahead: Global Worries Send Yields Lower
Treasury prices are soaring and equity futures are tumbling and as a major equity sell-off in Europe has crossed the Atlantic, triggered by renewed concerns that major players in the global economy could dip back into recession.
Morgan Stanley, for instance, warned the U.S. and Eurozone are "hovering dangerously close to a recession over the next 6-12 months."
According to The Guardian, analysts at the bank called the two economies 'BBB' - or Bumpy, Below-par and Brittle.
"Investors remain skittish, with worries about European and U.S. fiscal issues not going away any time soon," said economists at BMO Capital Markets.
The benchmark 10-year yield is eight basis points firmer at 2.09% and the 30-year yield is eight basis points lower at 3.48%. The two-year yield is just one basis point lower at 0.19%. The Fannie Mae 4.0 MBS coupon is +5/32 at 104-20 and the 3.5 coupon is +8/32 at 101-25.
Equities are preparing to jump off a precipice. S&P 500 futures are 23.00 points lower (-1.93%) at 1,167.00 and Dow futures are 203 points lower (-1.78%) at 11,194
In Asia, Japan's Nikkei 225 lost 1.3%, Hong Kong's Hang Seng fell 1.3%, and China's Shanghai index shed 1.6%.
Europe's ongoing session is worse, with Germany's DAX off 3.5%, France's CAC-40 down 2.7%, while London's FTSE 100 has sold off 2.4%.
Meantime, light crude oil stumbled 1.70% overnight to $86.09 per barrel, while gold prices rose 0.86% to $1,809.10 - just approaching the all-time high of 1,813.79 reached last week.
Key Events Today
8:30 - July's Consumer Price Index isn't expected to produce major headlines. Economists forecast a 0.2% gain in the index, reversing a 0.2% fall the month before. With spending from consumers stagnant, inflation isn't much of a threat except for food and energy prices. Those are also anticipated to be tame this month, as gas prices declined roughly 0.5% in the month.
"Gasoline prices at the pump fell only slightly in July, while the seasonal factors expect a much bigger drop," said economists at IHS Global Insight. "That will translate into a seasonally-adjusted price increase for gasoline of around 5%. Food prices at the store should climb a bit faster, driven by rising prices for meat. Outside of food and energy, price increases should edge down to 0.2% from 0.3% in June, with a possible modest dip in clothing and accommodations after big increases last month."
Economists at Citigroup added: "If energy prices follow the path of current futures, the 12-month inflation rate will drop from the current 3.5% to below 2% by early 2012."
8:30 - This week's Initial Jobless Claims report aligns with the survey week for the monthly study compiled by the Bureau of Labor Statistics. Economists must be praying the result is in line with the recent trend.
The last report showed new claims fall 7k to 395k, the lowest figure since early April. Not just a temporary blip either, as the four-week average fell to 405k, its lowest since mid-April.
"The downward trend in jobless claims and better-than-expected job creation in July is at odds with the Fed's 9 August FOMC statement when it characterized the labor market as deteriorating," said economists at Nomura Global Economics.
8:35 - The generally dovish Federal Reserve Bank of New York President William Dudley speaks on the regional and national economic outlook before local community and business leaders. Audience Q&A expected.
10:00 - The Philadelphia Fed Survey has outperformed New York counterpart recently. In July it came out of an ugly contraction to report a score of 4.7, indicating a much slower rate of growth than earlier in the year while suggesting that, at least, that deterioration was over.
"A data release in line with our expectation would show that industrial activity continues to grow in the region, but remains markedly slower than prior to the 11 March Japan earthquake," said economists at Nomura Global Economics.
10:00 - July's Leading Economic Indicators index, a composite measure designed to track turning points in the economy, is expected to rise 0.2% following a gain of 0.4%. Recent turmoil in the financial markets began on Aug. 1 and so shouldn't show up in this index. That might be comforting, yet it also limits the value of this report.
Economists at Citigroup look for a 0.4% uptick.
"The healthy gain reflects outsized contributions from real money supply growth and the yield curve, as well as strong readings from jobless claims and stock market components," they wrote. "The increase was capped by weakness among consumer and business confidence measures, and a drop in building permits. If our estimate is correct the leading index strengthened on a year-to-year basis."
However, they look for deterioration in August thanks to financial market turmoil, lowered expectations for growth, and deployment of additional policy stimulus measures to stem the tide.
10:00 - The final data point of the week, Existing Home Sales, is expected to have something positive to say about July. The index was plagued by a wave of cancellations in the previous month, which cut the annualized pace of home sales to 4.77 million from a prior 4.81 million.
"Buyers are somehow failing to make it to the settlement table, perhaps stymied by credit problems," said economists at Janney Capital Markets. "While access to mortgage lending is relatively easy for prime credits, the number of foreclosures that have occurred over the last four years have effectively knocked 5% of potential homebuyers out of the markets - and that doesn't even consider the suddenly marginal credits of individuals who may have missed a few credit card payments or who are presently unemployed."
Assuming cancellations return to normal levels, the median forecast for July is 4.85 million, as economists predict improvement based on an uptick in contracts that have signed but not finalized.
"If there is risk to the forecast it would be to the downside in the event contract cancellations run high, as was the case in the June data," said economists at Nomura.
Treasury Auctions:
- 1:00 - 5-Year TIPS