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Daily Market Commentary

 Most news this morning and late yesterday has been macro in nature.  We started with the US Federal Reserve's forecast for economic growth, which was released yesterday afternoon.  GDP estimate for 2008 has been reduced to 1.8%-2.5% (from their previous 2.5%-2.75%).  This significant downgrade for growth further cements the market's belief that swift and deep rate cuts will be coming to the Fed Funds rate and consequentially, the Bank of Canada overnight rate.

  Strangely, the markets went opposite to what would be expected from a growth forecast cut.  Equities rallied for the rest of the afternoon, while bonds sold off.
  Ten year Canada AND Treasury bonds, now trading at the same yield level, dipped below 4% this morning on this, and other bearish news.  The two year Treasury is closing on on 3%!  With the lack of inflation in Canada, highlighted by yesterday's light CPI report, gives the BoC room to cut as desired.  We feel the Fed has the same freedom, but they continue to talk about inflation.  Unfortunately, we feel this might be eroding the considerable credibility that Dr. Bernanke has built up in his tenure to date.
  Freddie Mac was the story in the US markets yesterday.  The unprecedented slide for the huge mortgage lender further amplified worries about the US housing market.  It's shares are off 60% year to date, 40% this week alone.  More importantly to their line of business, the bonds, which are considered "US agencies", and AAA rated, are now trading at unprecedented spreads treasuries, making their cost of funding prohibitively high.  Keep in mind, this is what they do.  They provide funds to homebuyers, and get those funds from capital markets investors.  If they are being charged more on one side, you can be sure those costs will be passed through to the other side.
The ability for these lenders, from the most speculative subprime lender  to the safest agency, to raise further funds is becoming tighter and tighter.  If they can't get funding, nor can buyers of homes.  This type of action feeds on itself and ultimately results in much lower property prices in the US - as affordability plummets.

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