Oct 8. Default concerns continue to trickle into markets
–The eurodollar curve flattened yesterday with reds -1.5 and golds +2.125. An early rally in interest rate futures faded toward the end of the day, as some pointed to a Forbes piece that said Obama is likely to choose Donald Kohn as the next Fed chief. The market’s view is that anyone besides Yellen is going to be less dovish, and Kohn is seen as unenthusiastic about QE results. The problem of course, is that if next year’s Fed tries to tackle the vortex of endless liquidity, stocks are going to be the asset of choice to sell, and this economy has been nudged forward by the shaky catalyst of asset reflation.
–The front end of the market is coming under a bit of pressure due to uncertainty regarding the debt ceiling, with near bills leading the charge to higher rates and repo rates also edging higher due to default concerns.
–While the trade data and JOLTS are being delayed, the NFIB small business optimism number will be released, expected 93.5 for September. I think 3 yr auction will also go forward and Fed minutes supposedly released tomorrow.
–China and Japan are both warning the US about nearing default, but current trends in US spending suggest that it’s a choice between crisis now and crisis later. 60 Minutes show on Sunday featured exponential growth in the US disability payment program (thanks MO), which now “has a budget of $135 billion — more than the government spent last year on the Department of Homeland Security, the Justice Department, and the Labor Department combined.”
–One last note that perhaps bears mention is the deteriorating condition of Puerto Rico, and the risk that rating agencies will downgrade its debt to junk. Not only does it risk contagion in the muni market, but also puts the administration in a delicate spot about trying to intervene…it’s one thing to inject federal resources into Detroit, but setting a more expansive precedent risks being forced to shoulder problems of, let’s say…Illinois.
