The Day Ahead: $21 Billion 10s Followed by Beige Book

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A downbeat speech from Fed Chairman Ben Bernanke had the effect of erasing gains in the stock market and reversing losses in Treasuries yesterday. The flight to safety continues this morning.

The benchmark 10-year Treasury yield is three basis points lower at 2.962%, the two-year yield is a tad firmer at 0.397%, and the 30-year yield is three basis points lower at 4.221%. Mortgages are better bid as well with the Fannie Mae 30-year 4.0 MBS coupon +7/32 at 101-12 and the Fannie Mae 4.5 +5/32 at 104-18. Rate sheets should improve on these MBS price appreciations.

The stock market isn’t looking good. SP 500 futures are 6 points lower at 1,278.75 and Dow futures are 59 points off at 12,013 – its lowest since March 18.

“With five sessions gone so far in the month, none of the Dow, SP 500 or the TSX have managed a daily gain in June,” noted economists at BMO Capital Markets. They said markets are soft again on fears that “the global soft patch may linger and/or deepen.” 

Light crude oil remains under the $100 mark at $98.16 per barrel, 0.94% down from Tuesday. Gold prices are 0.60% lower at $1,534.60.

New data didn’t from Europe only compounded Bernanke’s concerns. In Germany, Industrial production fell 0.6% in April, versus forecasts for a modest gain, and in another report German exports dived 5.5%.

“The soft German numbers show that even Europe’s powerhouse didn’t escape the current global economic soft patch unscathed,” BMO said. “That should make the ECB think twice about potentially signalling a July rate hike at Thursday post-policy-meeting press conference.”

Meanwhile, the World Bank cuts its 2011 global GDP forecast to 3.2% from 3.3%. US growth is expected to be 2.5%, revised down from 2.8%. Japan’s forecast was cut to 1.8% from 1.9%.

The day ahead is highlighted by two events: a $21bn 10yr note auction at 1pm and the release of the Beige Book at 2pm eastern.

Key Events Today:

12:20 – Tom Hoenig, president of the Kansas City Fed, attends a business luncheon in Denver, Colorado.

2:00 – The Fed’s Beige Book is an anecdotal look at the American economy compiled by the 12 Federal Reserve Districts. The last report on April 13 showed few major developments as most districts posted modest gains in consumer spending, higher auto sales, a rebound in tourism, and a pick-up in manufacturing.

But much has changed since. Stock markets have declined the last five weeks, the May employment report was a disaster, consumer confidence fell to its lowest level in a year, and manufacturing slowed down pretty dramatically. 

“It now seems likely that second-quarter GDP growth (we expect 2.0%) will be little different from the first (1.8%),” said IHS Global Insight, predicting “a prolonged and subdued recovery.”

Analysts at Nomura Global Economics said the Beige Book should give insight on how much of the recent slowdown is attributable directly to Japan’s March 11 earthquake and tsunami.

“Districts that are heavily laden with manufacturing are likely to make note of that sector’s drag on the local economy,” they said. “We are bound to hear about the continuing decline of housing prices in most regions, as well as the lingering effects of higher energy prices on both business and household spending decisions, despite falling prices in recent weeks.”

Treasury Auctions:
1:00 – $21 billion 10-Year Notes

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