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Daily Market Commentary

Yesterday was a lacklustre day in the bond markets.  Markets were mostly flat on day, but a little steeper in Canada.  The US market sold off a little as the market continues to try and decide what the Fed will be doing.  Rumours have crept into the market that the Fed will stand pat tomorrow, an outcome we consider unlikely.  25 bps is the bet, with 50 bps the outside chance (Remember we were wrong calling for 25 last time...).  The Fed needs to decide what specific threats there are to the economy, and target those.  We are talking about housing of course.  The situation is dismal, and getting worse.  As more and more mortgage lenders find themselves unable to pass along the risk of the loans they write, their only answer will be to stop writing them.  Holding those loans on their own books is a possibility only for the safest and best loans - they weren't really driving the market upwards through the first half of this decade - it was the speculative, higher leverage loans pouring into the housing market.


  This is the source of the credit crisis causing so much pain for Merrill, UBS (this morning), among many other financials.  The other parts of the US economy, and the rest of the world's economies are cruising along without many problems.  The Fed needs to decide how much these financial troubles will affect the overall economy, and how much influence their monetary policy has over global inflationary forces, and act accordingly.  No easy task.


  This morning Canada's market is just barely stronger on weaker than expected Industrial and Raw Materials prices.  These numbers are generally secondary to headline and core inflation, however.  In a week where we also expect to see Employment, US PCE and hear from the Fed, the numbers are reduced to tertiary status.


CAD$ are reached new highs yesterday as the weakness in the US continues.    While we are slightly weaker this morning, the pattern of "up a penny, down a third" is continuing to fuel an unbelievably strong Loonie.


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