4/6/2008 - Bond Expert: Wednesday Outlook

Prices of Treasury coupon securities have registered slim gains in overnight trading as they retain most of the losses which occurred yesterday when markets reversed course and proclaimed that risk of every variety was a beautiful thing. The yield on the benchmark 2 year note has slipped 3 basis points to 1.76 percent while the yield on the 5 year note has dropped 2 basis points to 2.62 percent.The yield on the benchmark 10 year note has declined 1 basis point to 3.55 percent and the yield on the 30 year bond has also dropped 1 basis point and rests at 4.39 percent. The 2 year/10 year spread is 179 basis points.

Equity markets are posting mixed results. The Hang Seng and the Nikkei had not participated in the prior day’s giddiness and glee and each of them rose sharply posting gains of better than 3 percent and 4 percent, respectively. European equity markets have registered mixed results overnight but both the gains and losses are quite modest. Equity futures markets point to a modestly lower opening when trading begins in the States.

The primary focus of the day will be the Congressional testimony of one Ben Bernanke who will ruminate about the economic outlook. I do not intend to replicate the rant with which began the day yesterday but it does seem to me that if he presents a sober and reasoned estimate of the current state of the economy it will temper some of the enthusiasm which ran wild yesterday.

I would briefly note two points which highlight the fragile state of the consumer (whose sometimes profligate spending is responsible for about 2/3 of GDP). Monthly car sales data released yesterday show slowing car sales.Light vehicle sales dropped to an annual rate of 15.0 million in March following 15.3 million in February. The Q4 2007 average was just north of 16 million units.

Separately, there are some weekly surveys of retail spending at department stores and they show signs of weakness also. Economists at UBS note the the Redbook index has slowed to 1.0 percent for the week ending March 29 YoY from 1.4 percent in the prior week. The UBS economists note that the YoY pace had been running at less than 1 percent in January and February and that the early Easter had pumped up results. They expect the index to continue to soften as the early Easter effect unwinds. The index had posted YoY gains of 1.9 percent in Q4 and 2.4 percent in Q3.

Today’s economic data include factory orders and the ADP jobs report.