We have a world class secondary market department and they are kind enough to send out weely updates to us sales monkeys. I like posting it as it is both a great source of technical and anecdotal information. Please let me know your thoughts!
The Week Ahead in the Capital Markets - July 2, 2007
To death and taxes, you can add this to your list of inevitabilities: the sub-prime mortgage crisis is not an isolated event. – Bill Gross
One week he scares us with thoughts of global growth and super-high interest rates; the next he says sub-prime foreclosures are going to create financial contagion and take interest rates lower. Such are the ways of Bill Gross, PIMCO’s bond king, who predicts a Fed rate cut by the end of the year. Gross’ theory is that upcoming re-sets of sub-prime loans will add to escalating delinquencies and escalating defaults, and will cause financial chaos and lower rates. He is as sure of his theory as he “is sure the sun sets in the west.” Sub-prime defaults will hurt the weaker tranches of CDOs, credit spreads will gap wider, and investors will stop buying weaker credits in mortgage, corporate, and private markets.
Meanwhile the Fed continues to follow the Taylor Rule. That’s John Taylor’s rule that recommends high interest rates when inflation is above target, and low interest rates when inflation is below target. It seems the former is currently true – inflation is above 2% and unemployment rates are low – and the Fed is not talking about any rate cut any time soon. Said one analyst, “If the Fed is concerned about inflation, so am I.” All of this despite a glimmer of hope on Friday: the personal consumption index rose only 1.9% last month, a tiny notch below the Fed’s 2.0% target.
You can forget all of that nonsense about a steep yield curve. As you can see below, the market flattened the curve (no difference between two-year and ten-year yields) in one fell swoop last week. The forecast remains somewhat the same: the ten-year Treasury yield is expected to trade between 4.75% and 5.50% as the economic data streams in, and almost everyone expects the Fed to cut rates before they raise them. The severity of the housing slump and its reverberations through the economy remain the wild cards.
The stock market, in its struggle with uncertainty and high P/E ratios, ended June with its second monthly loss in the past 13 months. Most of the selling has been in the “junk” sectors because investors are scared that the Bear Stearns hedge fund mess may be the canary in the coal mine.
The strong employment picture supports the Fed’s position. The Fed surely will not cut rates if businesses are creating jobs, and the unemployment rate is low. So this Friday’s employment report is all the more important, and expectations are for more of the same: strong job growth and low unemployment.
Earlier this week President Bush took part in the taping of the Ford's Theatre gala that will air this December on ABC. It's a Christmas show and they tape it in June. It's always awkward taping six months in advance. For example, right now President Bush is still without a clear cut strategy for Iraq. But come December ... no, I guess we'll be okay. (Jay Leno)