Some Opening Comments October 2 2008

Prices of Treasury coupon securities have, on balance, posted modest gains in overnight trading. The yield curve continues to steepen and the 2 year /10 year spread has reached a local high water mark at 195 basis points. The yield on the 2 year note has declined 4 basis points to 1.78 percent. The yield on the 5 year notes also dropped 4 basis points to 2.82 percent. The yield on the 10 year note is unchanged at 3.73 percent and the yield on the Long Bond has edged lower by a basis point to 4.20.

The Senate passed the bailout legislation last night and markets await action by the House of Representatives. Press reports tend to suggest that the bill will pass the House on its second attempt but given the shocking and unexpected defeat of the bill the first time, it is difficult to hold that position with any confidence.

European policymakers are discussing methods to soothe their markets, too. France has proposed a bailout fund while policymakers in Germany have rejected that idea.

In the meantime, most economic data shows a pretty dramatic weakening of the global economy.

I want to revisit the monthly car sales data for the US which was released yesterday. Car sales in September were at an annualized pace of 12.5 million units in September. To place that number in some perspective sales in August were at a 13.7 million pace. When compared to recent quarterly averages the fall off in purchases is rather stark. In Q2 2008 sales averaged 14.1 million, in Q1 2008 15.2 million and in Q4 2007 16.0 million.

In the UK home prices declined again, falling 1.7 percent from the prior month. Year over year home prices have dropped 12.4 percent.

Eurozone PPI dropped 0.5 percent in August as cheaper energy reduced costs. On a year over year basis the index is still up a chunky 8.5 percent, though that is down from 9.2 percent in July.

In the UK a survey by the Bank of England demonstrated that banks intend to continue tightening credit. Mortgage lending declined more than expected and banks expect defaults to rise.

In Spain the jobless rate hit an 11 year high and unemployment stands at 11.3 percent.

European stocks are mostly higher on the good feeling generated by the US Senate action on the bailout. Japanese stocks declined in reaction to the weakness in US auto sales and trading in futures markets indicates that US stocks will open with modest declines.

In the US the markets I expect a respite from the volatile trading of recent days. Participants should busy themselves squaring positions and reducing risk in advance of the monthly labor data tomorrow.

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