Some Opening Comments October 1 2008

Prices of Treasury coupon securities have posted solid gains in overnight trading as financial markets remain very volatile. The yield on the benchmark 2 year note has declined 6 basis points to 1.90 percent. The yield on the 5 year note has tumbled 9 basis points to 2.89 percent. The yield on the 10 year note dropped 8 basis points to 3.74 percent. The yield on the 30 year bond fell 7 basis points to 4.24 percent.

There is no ostensible reason for the decline in yields, at least nothing which jumps off the screen and grabs you. As I noted in the previous paragraph, some of the movement results from the very high level of volatility. That will remain with us until investors make sense of the credit crunch and the rescue package associated with it.

In Japan the Tankan survey turned negative for the first time in 5 years as large companies expressed pessimistic sentiment on the economy.

In Europe manufacturing PMI fell to its lowest level in nearly 7 years as the index fell to 45.

In the UK the manufacturing PMI fell to a record low of 41 as levels of new orders, output and employment slumped in September.

There is quite a spate of data in the US today with the ADP employment report, the Purchasing Managers Survey, and construction spending set for release. Participants also will have an opportunity to gauge the condition of the consumer with the release of September car sales.

Actually, as I reflect on the topic I suspect that once the bailout bill has  wended its way through the Congressional thicket, the focus of financial market participants should shift back to the real economy. The picture will be very gloomy.

Financial headwinds have increased and the turmoil in the credit markets is akin to the Federal Reserve raising rates. Credit is scarce and increasingly difficult to obtain.

Housing led us to this place and some stability in that sector would be comforting. The Case Shiller report released yesterday is a cold shower for anyone looking for a quick resolution of the problems in that sector.

The export sector has been the main reason that the US has not slipped into recession. The economies of our principal trading partners are slipping and it is unlikely that exports can provide the same boost in upcoming quarters.

The Durable Goods report manifested some signs that business spending had slowed noticeably.

Initial jobless claims remain elevated . The labor market is weak and as the consolidation of the financial business proceeds businesses will shed more workers. There is certainly no impulse to add staff.

Against that background and the completion of the tax rebate program consumption is slowing markedly and some pundits expect the first outright contraction in consumption since the recession of 1991.

So the economic backdrop is weak and even if the bailout bill passes I do not think that it can overcome the combined forces already at play in the economy.

Originally published at Across the Curve and reproduced here with the author’s permission.