Wisconsin Commerial Real Estate markets in good shape in reference to Fed adjustments, and Wall Street (edit/delete)
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A few updates to the news from late last night. Lehman Brothers announced it would declare bankruptcy; AIG announced it would seek a $40 billion loan from the Federal Reserve; and Bank of America said it would acquire Merrill Lynch in a $50 billion stock deal.
The Federal Reserve also announced several changes to its liquidity facilities despite its weekend script that it would not directly support the purchase of any failing institutions. The Federal Reserve will:
Broaden the collateral accepted at the Primary Dealer Credit Facility (PDCF) by allowing the pledging of corporate equities,
Broaden the collateral accepted at the Term Securities Lending Facility (TSLF) to all investment grade securities and increase
the size of the TSLF to $150 billion from $125 billion,
Ease the rules associated with section 23A of the Federal Reserve Act, which sets limits on transactions between banks and their
affiliated broker-dealer arms to allow banks to provide funding to the broker dealer affiliates for any asset typically funded in the tri-party repo market.
Summary: The bond market has continued its steady push higher since late July, pushing yields mostly downward. The 2-year Treasury was down 0.10% and the 5-year Treasury was down 0.04%. The 10-year Treasury sold off a bit, leaving yields up 0.02%. While there is certainly plenty of negative news allowing the on-going rally in government bonds considering on-going concerns in the financial sector, GSEs and housing, not to mention the stories of dollar strength, oil weakness and inflation. Nonetheless, the Treasury market seems to be trading on the current market news, not underlying risks. No doubt the week's drama regarding Lehman Brothers and the volatility of the equity market was far more relevant to bond traders than the economic news.
Tuesday brings the next meeting of the Federal Reserve's Open Market Committee. While the futures market continues to project no change in the target rate, the likelihood of an increase has been replaced by the bias for a cut in rates by the end of the year. Now, 14% of the market expects a cut in rates on Tuesday, compared to an 18% chance for an increase a month ago. For the December meeting the futures market is currently split between no-change and a 0.25% cut in rates.
In terms of economic news, retail sales ended up being the biggest report of last week. The market had expected a 0.2% positive reading, but had to contend with a negative read of 0.3% as the end of summer tax incentives faded. Excluding autos, retails sales were negative 0.7% month over month. The only news that offset the decrease in the retail sales reading was the fact that oil continues to fall. For the first time since April, oil futures traded as low as $99.99 a barrel, almost a third less than their intraday record of $147.27 on July 11. Overall the marked seemed to shrug off forecasts regarding Hurricane Ike's potential effect on the Texas coast.
Washington Mutual also remained under pressure this week, having lost a third of its market value. The firm is reported to be considering branch sales in various states, including New York and Illinois to improve its capital position.
Last week's biggest event was clearly the Treasury's announcement on Sunday regarding Fannie Mae and Freddie Mac. Both entities are now under conservatorship and control of the Federal Housing Finance Agency, the Treasury has committed to purchase $100 billion in senior preferred stock of each company in return for 79.9% ownership, periodic planned purchases of agency mortgage securities are expected to begin soon, and each company can now draw on a new credit facility at the New York Fed priced at Libor + 0.50%. The result was a staggering tightening in mortgage spreads on Monday where they decreased as much as 0.50%. Consumer mortgage rates have dropped significantly as well, dropping below 6% for the first time in months.
This week is a busy one. Today we'll get the second major inflation report. After Friday's on expectation core producer price index, the August consumer price index is expected to provide some evidence of easing inflationary pressures, particularly in the energy sector. Tuesday, the FOMC is widely expected to leave interest rates unchanged at 2.0%. There may be some minor changes in the statement as well, perhaps even a change in the bias.
The week also provides several reports on housing, which includes the weekly mortgage applications where the market might seem some evidence of the impact the drop in mortgage rates after the conservatorship of Fannie Mae and Freddie Mac. We'll also see July housing starts and the September NAHB survey. There is a bunch of manufacturing sector data, including industrial product, the New York Empire Survey and the Philadelphia Fed Survey. Expectations are that there has been a minor contraction in activity.
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