Mortgage backed securities (MBS) prices opened sharply lower amid concern the administration’s record borrowing will overwhelm demand as the recession shows signs of easing. MBS prices rebounded only to fall back after release of today’s economic reports. Investors await Treasury’s announcement later today the amount of 2yr, 5yr & 7yr notes it will auction next week. The administration projects a record $1.85 trillion budget deficit this year and pushed the marketable debt to an unprecedented $6.45 trillion, while relying on foreign central banks to finance the massive debt. Treasury Secretary Geithner is testifying today before the Senate Banking Committee on financial industry regulatory reform. Market participants will be listening intently. Intial jobless claims rose 3K to 608K from a revised higher 605K the prior week, while the 4-week moving average fell 7K to 615,750 and the lowest level since February. The total number receiving unemployment benefits plunged 148K to 6.687 million, ending a long streak of increases. The data indicates the economy is stabilizing, though companies are likely slow to hire new employees. Leading Economic Indicators jumped 1.2% in May, pointing to economic leveling followed by a mild recovery. May’s gains were led by a slowing in delivery times, though tighter delivery conditions may not be from rising demand for goods as much as capacity cutbacks. The second biggest positive for the index is the steepening yield curve, reflecting the risk of Fed rate hikes. The Philadelphia Fed’s business activity index showed improvement from prior levels with a reading of -2.2, from -22.6 and below a consensus of -15.0, pointing to steady conditions in the near future. Contraction in new orders slowed substantially, but the good news is the general business conditions index rose more than 10pts. Employment is certain to lag as manufacturers hold off on new hirings until six months down the road. All in all, this mornings data will increase talk that government stimulus, whether fiscal or monetary, may have to be withdrawn sooner than later.
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