Market Wrapup 10/30

Our benchmark FNMA 6.0% mortgage bond showed less volatility today but ended 3bp lower at $99.78.

 

Better than forecast economic news and surging global stock markets pressed bond prices lower.

 

Central banks around the globe celebrated yesterday’s Fed rate cut with one of their own.

 

Hong Kong’s central bank cut its key lending rate by 50bp while Taiwan cut by 25bp.

 

There is also a rumor circulating that the Bank of Japan will cut its already low rate of 0.5%.

 

The European Central Bank and the Bank of England are widely expected to cut their key lending rates next week.

 

The three-month dollar LIBOR fell to 3.1925% today from Wednesday’s rate of 3.42% following the Fed’s actions.

 

However, the three-month dollar LIBOR still remains well above its pre-credit crunch average of 50bp above the Fed funds rate.

 

In economic news, the Advanced GDP for the 3rd Qtr. fell by a less than expected -0.3% vs. the consensus forecast of -0.5%.

 

Consumers slashed their spending by 3.1%, the fastest spending drop in 28 years and first drop in spending in 17 years.

 

Disposable income for consumers plunged at an annual rate of 8.7%, the largest quarterly drop since records began to be kept in 1947.

 

Business spending fell by 1%.

 

The inflation measuring Chain Deflator jumped to 4.2% from the second quarter’s level of 1.1%, largely stoked by record high fuel costs when oil reached a peak of $147/barrel in the third quarter.

 

Initial Weekly Jobless Claims held steady at 479,000 vs. expectations for 473,000 new claims.

 

The prior week claims number was revised higher by 16,000.

 

The more widely watched four-week moving average for new claims fell by 5,000 to 475,500 while the four-week moving average of continuing claims increased by 28,000 to 3.71 million, the highest level in five years.

 

An auction of $24 billion in 5-year Treasury notes hit the bond market with mediocre results.

 

Foreign participation was only 28.3% and bond prices edged lower on the news.

 

San Francisco Fed President Janet Yellen said in a speech this afternoon that the economic data is ‘deeply worrisome’ and the economy ‘is likely to contract significantly in the 4th quarter.

 

‘ Comments of this nature would ordinarily be bond-friendly but traders shrugged off the news. Meanwhile, the stock market basked in the glory of yesterday’s rate cut and in today’s better than expected economic news.

 

The Dow rose by 189 points to close at 9,180.

 

The broader S&P 500 Index added 24 points to end at 954 and the NASDAQ Composite Index gained 41 points to finish at 1,698.

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