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Daily Market Commentary

Earnings are once again setting the tone of the market.  Treasuries are trading very slightly lower and equities are well bid after the market has chosen to focus on HSBC's good report, rather than MBIA's bad one.  The market is not convinced, however, and we are only seeing mild weakness in the bond markets.

 Canada's New House Price Index rose 0.2% from last month, as expected, and have posted a 6.1% annual increase since this time last year.  House prices are still grinding steadily higher, although the peak of price appreciation seems to have come in early 2006.  Canada has not posted a month of declining New House prices since 1998.

We will see more US housing data later on in the week, after inflation reports in the form of import prices and CPI

 Bloomberg this morning is reporting that many municipalities are paying big fees to get out of their interest rate swaps after the failure of the Auction Rate Securities markets.  The floating rate ARS were "offset" by the swaps, intended to keep the muni's cost of funding relatively stable.  They would pay fixed rates to the banks while receiving floating rates (which they passed along to the ARS holders).  After the failure of the ARS market, they ended up paying inflated floating rates to ARS holders and still receiving the same "normal" floating rates from these agreements. 

Once again, the burden here has fallen on the taxpayer.  The swap dealers (ie the banks) will be receiving the payments to end the swap arrangements prematurely.  This is on top of the cost of changing all their ARS securities into straight bonds to maintain their funding (once again, guess who gets the underwriting fees).

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