Mel's Blog

Mortgage Bonds are in rally mode this morning after a string of weak economic reports.  Retail Sales, NY State Manufacturing Index, along with worse than expected earnings from Citigroup, are all hurting Stocks and helping Bonds.  Additionally, the Producer Price Index (PPI), which measures wholesale inflation, gave a modest reading on inflation in this area.  It should be noted that this is a very volatile report and tomorrow's CPI will carry a lot more weight.

The weak economic picture painted from this morning’s news should give the Fed reason to cut rates by .50%, and in fact, there are rumors swirling that the Fed may hold an emergency meeting and cut in advance of the scheduled January 30th Meeting.   Although we don't see that as likely.

Retail Sales in December fell by 0.4%, which was well below expectations of a 0.1% gain and represented the first drop in six months. After subtracting the effect of auto sales, Retail Sales also fell by 0.4%.  For the entire year, Retail Sales showed their weakest growth in five years with an overall annual growth rate of 4.2%. 

As mentioned above, the Producer Price Index (PPI) was reported -0.1% during December, which was lower than expectations of 0.2%.  When excluding volatile energy and food prices, the Core PPI only rose by 0.2%, matching the consensus forecast.   It will be interesting to see if the moderation in wholesale inflation is transferred to tomorrow's more closely watched Consumer Price Index (CPI).

The New York Empire State Manufacturing Index was reported at 9.0, which was just slightly below expectations of 10.0.  Readings over zero indicate growth in manufacturing while those below zero indicate contraction.  The percentage of firms surveyed that are expecting manufacturing conditions to worsen rose from 16% to 24%.  

Also in the news, the earnings report from Citigroup is adding selling pressure to the stock market after the company announced a $9.8 billion loss for the fourth quarter along with slashing their dividend by a whopping 41%.   Losses stemming from faulty sub-prime mortgage investments forced Citigroup to write-down $18.1 billion in these assets.  The company is also setting aside another $4.1 billion to cover anticipated losses in their consumer loan portfolio.  In an effort to improve its deteriorating balance sheet and capitalization, Citigroup also announced it raised $12.5 billion from a private placement and public offering of preferred shares.  As a result of this bad news, money is coming out of the Stock market and is being parked into Bonds.  

Bond prices continue to march higher and are now at the highest levels since June 2005.  I will continue to float, but be ready to lock, as prices are technically overdue for some sort of correction lower.