Market commentary

The past two weeks have witnessed a significant shift in the expectations for the U.S. economy. Prior to August, many observers and prognosticators were calling into question the pace of recovery. But the past thirteen days has seen an almost universal shift in expectations from not great to downright gloomy. Fixed income investors who had inflation as risk number one have now become focused on the threat of deflation.

This week the markets will see data on manufacturing and the housing market, which data was led off today with the Empire Manufacturing index. The index reflected expansion in the region, although not as much as expected. In addition to the U.S. data, weak economic reports from Japan are also supporting the case of slowing global growth.

Two important items on this week’s calendar are: 1) the Conference on the Future of Housing Finance, in which the future of the GSE’s (FNMA and FHLMC) will be discussed, and 2) the Fed will begin their first round of re-investing cash-flows from their portfolio of mortgage backed securities. The Fed will be buying U.S. treasuries with maturities in 4 – 6 years.

The market reaction to this morning’s data is a significant rally in the long end of the bond market. The price of the 30 year bond is improved by almost 2.00% and the price of the 10 year note is higher by .625%, dropping the yield to 2.60%. Mortgage bonds have improved by .125% to .25%.