Treasuries and mortgage markets starting strong this morning astraders seek safety against the potential failure to come to any agreement onthe Cliff discussions. Yesterday Sen. majority leader Harry Reidsaid he didn’t think a deal would get done before the first of the year; thestock market took a huge hit with the DJIA down 150 points, then in theafternoon Republicans announced a special session of the House on Sundayevening. After the announcement the stock market recovered and interest ratescam well off their best levels. This morning the fear factor is back; the 10 yrat 9:00 at 1.70% -3 bp with 30 yr MBSs +14 bp. Pre-opening trade in the stockindexes had the DJIA down 60 points.
President Obama has called a meeting this afternoon at the WhiteHouse to discuss the pending failure to deal with the Cliff. If thereis a deal worked out it won’t be a wide-ranging one that deals with spendingcuts or entitlement reforms. The headline will likely be that taxes won’tincrease next year. If a deal isn’t accomplished there is still no reason tobelieve taxes will increase. Neither party, at the core, wants taxes toincrease except for those high income people. Both parties have to understandthe implications of driving the economy back into recession. In Jan. whenCongress returns those tax increases will be retroactively dismissed. Theissues of entitlements, the debt ceiling, and spending cuts will occupylegislators in Jan. but we don’t believe there will be much progress until thenew Congress is installed, even then it will drag on for months. 2013 isn’tgoing to be easy for investors or markets.
From the bond and mortgage markets’ perspective the next threedays will likely be volatile. Normally on New Year’s eve thereis nothing to grab much attention but this year is going to be different withthe continual negotiations on the Cliff. Monday the stock market will tradedall day while the bond and mortgage markets are set to close early at 2:00.
At 9:30 the DJIA -73, NASDAQ -19, S&P -8. 10 yr note 1.70% -3 bp, 30yr mortgage price +11 bp.
9:45 the Dec Chicago purchasing mgrs. index was expected at 51.0 frm50.4, it increased to 51.6, the best level since last August, but theemployment index at 45.9 was the lowest since Nov 2009. The decline inemployment is due to the storm Sandy that hit the NE in Oct. No reactionto the data; economic reports are less significant at the moment with the Cliffhanging over markets.
At 10:00 Nov pending home sales from NAR, expected+1.8%, was +1.7%; yr/yr +8.9%. Pending home sales are contracts signed but notyet closed.
The potential of high volatility today withtalks and comments coming from Washington. We had it yesterday with Reid andBoehner.
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