Daily Commentary by Larry Baer: The Congressional bipartisan committee tasked with producing a $1.2 trillion deficit reduction plan by November 23rd is expected to announce today they have failed to create anything more than partisan political finger-pointing as we come into the heart of the 2012 national election campaign season. Most market participants had already priced in this the likelihood of this outcome -- so on balance - the event itself had little overall impact on the trend trajectory of mortgage interest rates.
The toll being extracted on the stock market today is almost exactly the same toll that a successful budgeting cutting effort would have extracted. Since this sitting Congress can't find the political will to slash spending in the face of declining revenues - automatic cuts of roughly $1.2 trillion over the course of the next thirteen-years will go into effect before the end of the year. The immediate near term impact of a potential reduction in billions of dollars of government spending on everything from major military equipment to cheese subsidies has caused corporate America to shudder at the mere thought of the potential loss of cash flow - a condition almost singularly responsible for today's stock market plunge. But all is certainly not lost.
When the next political body takes office after the November 2012 elections they can (and probably will) vote to stop the automatic spending cuts triggered this week. If my assessment proves accurate, the sell-off in the stock market will likely give way within the next week or two to a pretty strong rally as stock jocks realize there is very little chance politicians will voluntarily choose to reduce government spending until absolutely forced to do so in the face of the immediate threat of sovereign debt default. My hope is that I am completely wrong on this one - my fear is that I'm exactly right. Rising stock prices tend to drag mortgage interest rates higher as well.
The Treasury Department will conduct a $35 billion 2-year note auction today, a $35 billion 5-year note auction on Tuesday followed by a $29 billion 5-year note auction on Wednesday. That is a lot of supply coming into the market at a time when many participants will have likely slipped away from their desks for an early start on the holiday. If any of this week's scheduled Treasury auctions are poorly bid it will tend to put upward pressure on mortgage interest rates.
THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME
