Friday, December 05, 2008
Lost 500,000 jobs? Almost 200,000 worse than expected? And yet bonds sell off?
This isn't a case of whisper numbers being worse or any such thing. Its a matter of bonds being massively overbought at the same time we're looking at a 3 and 10-year auction next week. Below is the intra-day chart, the green line is the announcement of NFP.
Notice that about 10AM, with stocks off sharply, the 10-year was about 1/2 point lower. It manages to rally to near flat a couple times but basically is down all day. So despite a horrible NFP, every time 10's rally a little, someone is there to short it. I think that's classic pre-auction behavior. I expect a significant sell-off, maybe into the 2.90% area on 10's before the auction, then a rally after that.
And what of the job losses? We are getting a series of extremely bad economic data points from a tumultuous October. The question is whether this is the first salvo of a self-feeding downward spiral, or is it a matter of taking the big pain now so that we see less pain later. In the later scenario, the economy contracts rapidly at the beginning of the recession, then levels out for a while before rebounding.
I don't think its a self-feeding downward spiral, but it could become one. The best policy now is for the Fed to target mortgage rates through open market purchases. Note that just a few days ago, 30-year fixed-rate mortgages were 6%. If they could get down to 4.5%, which isn't out of the question given how low Treasury rates are, that would make a massive difference in affordability. 1.5% interest savings is $625 per month on a $500,000 mortgage. That could start to make a real difference in the housing market.
Until housing turns, the economy keeps getting worse.