Weekly Preview - Jan. 18, 2010

Last Week; a good week for the bond and mortgage markets. Interest rates declined on short-covering and over-extended selling in Dec that took rates up 40 basis points. Treasury completed another round of borrowing to fund the exploding deficits created by Congress, it is a bi-weekly borrowing binge like we have never experienced before. $84B of 3 yr, 10 yr and 20 yr debt issued. Economic data last week confirmed once again that inflation fears are way overblown; Dec CPI up just 0.1%. Factory use and industrial production improved again as the economy is bottoming, at least based on recent reports. Somewhat disturbing, and adding to last week's bounce in rates; Dec retail sales were lower, down 0.3% in a month we would have expected a better showing. Consumers, the housing industry and the unemployment rate, now at a whopping 17% when discouraged workers are taken into account; not the building blocks for a sustained recovery. The equity markets look weak based on the trading last week.
 
This Week; no Treasury borrowing but on Thursday Treasury will step up again to announce next week's trip back to the well. 2 yr notes, 5 yr notes and 7 yr notes will go off next week for a total of about $120B. Not much in the way of economic measurements this week; Dec housing starts and building permits and the Dec producer price index, prices on wholesale products, are the headliners this week. Direction for the bond and mortgage markets rests a lot this week on how the equity markets do; the stock market looks vulnerable to selling, if stocks decline in a correctional move the bond and mortgage markets will be the beneficiaries and continue to improve. We are not however, expecting a major decline in interest rates and see any improvement more a correctional move after the huge and swift increase in rates in Dec. As long as the outlook for economic recovery remains as solid as it is currently lower rates are highly unlikely. We suggest taking advantage of any further decline in rates. The Fed is on the recovery bandwagon; based on the Fed's Beige Book, its report on the economy, the Fed remains convinced the economy will continue to recover but at a very slow pace. No one yet appears to be fully considering the implications of the lack of consumer spending and lessening use of credit; if there is a reversal in the positive economic outlook it will be driven by the belief consumers are not going to support economic growth with their previous massive spending that accounts for about 65% to 70% of GDP growth.

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