MarketView for June 10

 

 

Summary 

 

Stock prices fell on Wednesday on worries that rising interest rates could put a damper on consumer and business spending, but stocks pared losses late in the session to finish off the day's lows.

 

The market had extended losses after a 10-year Treasury note auction sparked a sell-off in bonds, pushing yields briefly above 4 percent for the first time since October. Stocks recovered from the sell-off after the bond market rebounded, with the yield at 3.9455 percent.

 

The concern is that higher yields, which act as a benchmark for many lending rates, could handcuff an economic recovery.

 

Domestic sweet crude oil futures rose to their highest level in seven months at over $71 a barrel, lifting energy companies. ExxonMobil rose 1 percent to $73.84 and was the top supporter of the Dow Jones industrial average.

 

While gains in oil and other commodities had earlier supported stocks globally on hopes economic activity was quickening, U.S. investors worried that higher prices would fuel inflation and dent an economic recovery.

 

Treasury Raises Note Rate to Attract Buyers

 

The Treasury Department was forced to sweeten its $19 billion sale of 10-year notes to attract investors who have grown wary of its burgeoning debt load. These notes originally sold in May cleared at 3.99 percent, the highest rate since August 2008.

 

This is the first auction of long-dated federal debt since questions over the U.S. government's credit-worthiness arose in the wake of a credit outlook downgrade of Britain by Standard & Poor's last month.

 

The United States and Britain are conducting similar policies to revive growth, but their tactic of borrowing heavily to finance massive stimulus and financial bailouts have raised doubts about their ability to repay their debt.

 

The auction's "tail," or higher-than-expected yield the Treasury paid, deepened Wednesday's sell-off in the Treasuries market. Ten-year yield briefly touched 4 percent, a key trading support and a level not seen since October.

 

The rise in Treasury yields since May has rippled across other markets and increased mortgage rates and other consumer borrowing costs. This has also fanned worries an emerging economic recovery might stall, putting more pressure on the Federal Reserve and Obama Administration to do more to end the worst recession in decades.

 

Investors extracted 80 basis points of additional yield at this 10-year reopening than when the note was sold originally at the record quarterly refunding a month ago. The added yield incentive pulled reluctant participants from the sidelines, resulting in the strongest bid 10-year auction since September 2007.

 

The bid-to-cover ratio, or amount of total bids to amount offered, came in at 2.62, while the share of indirect bids, which include those from foreign central banks and institutional investors, reached 34.2 percent, the highest for at a 10-year reopening in five years. To be sure, that 10-year reopening in June 2004 was much smaller at $10 billion.

 

Disappointment over the 10-year sale cast a shadow over the Thursday's $11 billion reopening of a prior 30-year issue and subsequent Treasury offerings, analysts said.

 

Crude At 7-Month High

 

The price of sweet domestic crude oil futures reached a seven-month high of near $72 per barrel on Wednesday after a government report indicated a slowdown in crude imports eating away at current inventories. Crude for July delivery settled up $1.32 per barrel at $71.33, after hitting a peak of $71.79 earlier in the session, its highest level since October 22. London Brent settled up $1.58 per barrel at $70.80. The increase came after the Energy Information Administration reported nationwide stockpiles fell by a larger-than-expected 4.4 million barrels last week as imports dropped by 676,000 barrels per day.

 

The report also showed a decline in gasoline inventories as refiners slowed production and demand notched higher.

 

Domestic oil imports have been running below normal in recent weeks, reducing swollen storage levels and reinforcing the perception that OPEC production cuts are starting to make their mark on consumer nation supplies. OPEC agreed to cut some 4.2 million barrels per day of output since last autumn in an effort to counter slumping world oil prices and shrinking demand triggered by the economic recession.

 

Kuwait's oil minister said Wednesday the group, responsible for more than a third of the world's crude output, could raise production if prices near $100 per barrel.

 

Wednesday's gains were capped by a rebound in the dollar against the euro, which tends to put downward pressure on dollar-denominated commodities, and losses in equities markets. Oil prices were higher in the previous session, lifted by a separate report from the EIA in which the top government energy forecaster revised its global oil demand outlook higher for the first time since September.

 

Recession Still Here but Easing Says Beige Book

 

The Fed's "Beige Book" of reports gathered from the 12 Fed districts showed widespread economic weakness with a few glimmers of hope. According to the recently released Beige Book, economic conditions were weak or even worsened through May, but some areas of the country saw signs the contraction was moderating.

 

Fed contacts in several regions said their expectations for the economy have improved, but they still don't expect much of an increase in economic activity in 2009.

 

The Fed has cut interest rates to near zero and pumped more than $1 trillion into the financial system to revive devastated financial markets and pull the economy out of a deep recession. Yet, despite aggressive Fed actions, labor markets remained weak with wages generally flat or falling and housing markets were still soft, the report said.

 

The Fed also said prices at all stages of production were flat or falling, with the "notable" exception of oil prices. However contacts reported some modest signs the pace of economic decline was easing. "Some districts saw signs that job losses may be moderating," the report said.

 

Contacts in eight of the Fed's districts reported an uptick in home sales, citing the traditionally strong spring selling season, low interest rates and shrunken house prices.

 

Rising Mortgage Rates Torpedoes Mortgage Demand

 

Rising mortgage rates reduced mortgage applications last week as demand for refinancing shriveled to the lowest level since November, the Mortgage Bankers Association reported on Wednesday. The increase not only reduces affordability, but also reduces offer prices on home sales and prolongs the length of time that will be required for a housing turnaround.

 

Borrowing costs have kept pace  with the increase in bond yields, even as the Federal Reserve has sopped up hundreds of billions of dollars in bonds to keep rates low and stimulate the housing market.

 

The average 30-year fixed mortgage rate jumped 0.32 percentage point in the June 5 week to 5.57 percent. That was nearly a full point, about 100 basis points, above the record low rate of 4.61 percent in March, the Mortgage Bankers Association said.

 

The vast majority of mortgage activity this year has been from homeowners cutting costs with new loans at rock-bottom rates. The Mortgage Bankers Association's seasonally adjusted index of total applications dropped 7.2 percent to a four-month low of 611.0 in the latest week.

 

The refinancing index slumped 11.8 percent to a nearly seven-month low of 2,605.7 last week, and refinancing accounted for about 59 percent of all applications, the lowest share since November. As recently as April, refinancing accounted for almost 80 percent of all home loan applications.

 

Purchasers have been slower to act in the current housing market, with some waiting in hopes that prices will fall further and others paralyzed by unemployment or wage cuts.

 

Demand for loans to buy homes was little changed last week, rising 1.1 percent to 270.7, having basically been stuck in neutral throughout the important spring sales season. First-time buyers taking advantage of new tax credits and investors snapping up foreclosed properties at distressed levels have in recent months buttressed the hardest-hit housing market since the Great Depression.

 

However, it is likely that borrowers will face foreclose in record numbers at least for another year.  Those homes will add to the already large supply of unsold properties and will keep pressuring prices. Home prices on a national level have tumbled more than 32 percent from the peak three years ago, according to Standard & Poor's/Case-Shiller indexes.