The debt ceiling debate continues again today, and will likely continue right up to Aug 2nd. The gap between Democrats and Republicans is as wide as the Grand Canyon, or at least that is what it seems. Yesterday House leader John Boehner said he had a two step plan that could get passed by both houses; this morning that is out. Even if it passed Obama said he would veto it. The Boehner plan had been designed to raise the debt ceiling $900 billion while cutting $1.2 trillion in spending over a decade, then tie a subsequent, $1.6 trillion borrowing increase early next year to enactment of a package slicing $1.8 trillion from the long-term debt. Yet the Congressional Budget Office reported that the measure would only cut $850 billion in spending, violating Boehner’s oft-stated promise that any debt-limit boost be smaller than the cuts accompanying it. The CBO didn’t count the $1.8 trillion in debt savings, saying it couldn’t predict whether the joint congressional committee the measure establishes would be able to produce them.
The President wants a debt ceiling increase large enough to cover all of 2012 while Republicans want an increase that is less and go at it again in the next few months. Obama has said he doesn't want to deal with it in 2012 while he campaigns for his re-election; having to deal with it would keep him from focusing on his career.
The current odds that rating agencies will down grade US credit rating is 60% against 40% they won't. Will it matter? A down grade is kind of a slap in the face but as Rick Santelli pointed out this morning on CNBC, if the US debt is down graded debt ratings in France, Germany and other AAA countries would have to be down graded also; the US is still the strongest and safest country in the world so in relative terms if we go down so too should other countries slide.
It is another day of wrangling in Washington while the bond and mortgage markets sit very still with no real change in rates for the past week and still holding a slight bullish technical bias. Every other day the 10 yr and mortgages see some price improvements, the intervening days see prices decline; yesterday the 10 improved in price and mortgages gained, this morning prices a little weaker.
June durable goods orders were out at 8:30 but with all focus on the debt ceiling increase it and other data are taking a back seat for the moment. Durables fell 2.1% in June, ex the volatile transportation orders up 0.1%, no reaction to the report. Although it is not the headline, orders were very weak and won't be completely dismissed by investors.
At 9:30 the DJIA opened -46, the 10 yr note -7/32 at 2.98% +2 bp and mortgages being hit -8/32 (.25 bp). By 10:00 the 10 yr note has improved to unchanged on the session.
The weekly MBA mortgage applications last week declined from the strong week prior. The index of home loan demand dipped 5.0% in the week ended July 22 after spiking the week before. Meanwhile, MBA's index of refinancing applications was off 5.5% following a 23.1% surge the week before; and requests for purchase loans slipped 3.8%. The declines came as fixed 30-year mortgage rates climbed to 4.57% from 4.54%.
At 1:00 this afternoon Treasury will auction $35B of 5 yr notes, the second of three auctions this week. Yesterday's 2 yr auction was OK, not stellar but under the current circumstances it went well.
At 2:00 the Fed will release its economic data for the 12 Fed districts, known as the Beige Book. It will get attention but not as much as it does in normal situations; the only thing moving markets now is the political drama in Washington.
Treasuries, mortgages and the stock market are all softer this morning as the debt ceiling debate is yielding no progress. Markets are getting increasingly more nervous with the inability of our elected officials to get something worked out. Taking the punch bowl away from politicians (spending) is anathema to them. Technically the bond and mortgage markets are still holding thin bullish readings, but the longer this is dragged on the weaker markets will become. This is not a market that warrants taking on much risk on either side of the outcome, whether bullish or bearish in ones outlook.
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