With all the drama of Europe and China roiling markets, the least eventful event of the week will be the FOMC meeting. Nine of the members will vote to keep policy as is, that is rates at virtually zero for now an 18th month while another, Hoenig, will dissent to the “exceptionally low” for “extended period” wording because he believes it “could lead to the buildup of future financial imbalances and increase the risks to longer run macroeconomic and financial stability.” Even raising rates to 1% “would leave considerable policy accommodation in place.” It’s easy to argue the Fed would be nuts to raise rates with the economy still fragile but I argue its nuts to still have emergency rates with inflation benign but still running at 2% as it’s negative real rates too low for too long that got us into this mess. The current perceived cure was the basis for the disease. Isn’t it ironic, don’t ya think?
Yesterday I mentioned the lack of respect Greece continues to get in their bond market and we can argue that the selling in their debt is mostly from those funds that can’t own non IG paper but the selling is alarming the CDS market as 5 yr CDS today is rising back to the record high of 940 bps, up 85 bps on the day. The 10 yr yield is up 63 bps to 10.4%, the highest since May. Their 2 yr yield, which is fully backed by the Euro bailout package, is up 57 bps to 9.78%. Hopefully when the forced selling is done, things calm down and maybe the action in the bonds are feeding the need for protection in CDS but its something we have to monitor. Portugal sold 5 yr paper at a yield of 4.66%, 96 bps above the one a month ago. Eurobor 3 mo spread to EU 3 month LIBOR rose to a fresh record. The Pound is at a 7 week high as the new UK budget gets its kudos from the market. June Euro mfr’g and services composite index was a touch above expectations.
Even with the average 30 yr mortgage rate falling to 4.75% to the lowest since May ’09, near multi decade lows and vs 4.81% last week, the MBA said purchases fell by 1.2% and refi’s fell by 7.3%. ABC confidence is the bright spot of the day as it rose by 2 pts to -43, matching the highest level since the first reading in Jan.