Market Analysis

Mortgage-backed securities issued by Fannie Mae and Freddie Mac are relatively flat today with a slight negative bias. The 10 yr US Treasury note started worse today but has moved toward breakeven. Stocks started up but are also moving toward breakeven. All eyes are on Europe where investors hope that a deal may be taking shape for the European Central Bank to guarantee debt of countries that overspent in exchange for a revision to the Euro-zone treaty so that members would not be able to overspend in the future. Italy is moving forward with austerity measures and changes to their social contracts to combat unsustainable structural deficits. The transitional government in Greece is also moving forward with an austerity budget despite the strikes called by unions who representing approx 1/2 of the Greek workforce. Now that a deal has been struck for private creditors to take a 50% loss on Greek debt, European leaders view the fate of Greece to be in the hands of the Greek government and people. The key focus in Europe now is to protect Italy and Spain. The game changer in Europe may have been the entry of the Federal Reserve into the equation last week with its announcement of a swap program whereby it would provide the European Central Bank (ECB) with US dollars in exchange for collateral the ECB may be holding. Ultimately the ECB and the member countries of the Euro Zone would be responsible for any losses, but it is clear now that speculators will have a difficult time forcing a “run” on European banks. The fire-power available to central banks is not to be under estimated as we are just now learning of the massive amount of short term loans that the Federal Reserve made available during the height of the US financial system crisis. According to documents forced to be released by a Freedom of Information Act lawsuit brought by Bloomberg, the Federal Reserve employed a short term loan program that, at it’s peak on Dec 12, 2008, resulted in $1.2 trillion of outstanding loans.

This week’s economic calendar is very light. Below is a recap of this week’s most important economic releases:

Monday, Dec 5

• October Factory Orders – down .4% which matched expectations
• November Institute of Supply Management (ISM) Services Sector Index – 52.0 vs expected 53.34

Thursday, Dec 8

• Initial Jobless Claims for the Week ended 12/03 – expected 395,000 figure down from 402,000 for last week.

Friday, Dec 9

• Initial Dec Univ of Michigan Consumer Sentiment Index – expected 65.1 reading vs 64.1 in November.