In spite of the disappointment after today’s Fed buying that took bids out of the bond market, stocks don’t get positive flow because of auto industry concerns. Last week’s treasury buying by the Fed in effort to lower consumer borrowing rates surprised to the upside at around $7.5B in shorter dated maturities so this week only buying $2.5B was deflating for prices. Coincidentally, as a good mood in stocks tends to take yields higher, this week’s dismal mood in the equity market kind of reassures yields will be held down so not as much buying is necessary. We keep in mind that month end/quarter end has accounts taking profits on the recent rally but although the Fed has a planned amount of buying in the works, it appears the quantitative easing through treasury buying can be circumstantial. 

Theory in point is that this implementation is going to allow some ultimate official control and it’s a good thing. The normal push-pull will be shaken up and so asset flow won’t be so indicative of ‘safety.’ Issuance drags on price but bad news flight to quality supports it. There’s enough bad news buying of treasuries going on with auto makers in the spotlight and jobs numbers expectations this Friday that the Fed doesn’t need to buy as much to hold yields down. Inversely, an equity sell-off like the one we’re seeing today would normally cause the bond market to go bid. Although this is supportive, the bond market has its own news, i.e. the disappointment after less Fed buying than expected, so less of a swing.  I’m sure I’m not the first to realize that or point it out but I’m stating it because I think it shows commitment to reduced volatility on the part of the government which could pull the plug on option premiums in rate space and maybe even pull some liquidity back into the market in outright futures.

So, Wagoner. Now, I know everyone has been saying for a while that the government should not bailout the auto industry because it’s too socialist of a solution and then what other industries could go knocking on the government’s door? And officials listened. There is less of an attack about giving them money because allowing them to go bankrupt is an option on the table.  Again, as with the case of AIG, the government is now a business partner because they chose to step in. It just seems so much simpler of a situation in this case though because of bankruptcy restructuring. Frankly, I don’t see why the market is so concerned about it. The reason it’s easier for the government to let them go bankrupt rather than just throw money at it is because its failure will be easier to absorb.

Fed speak tomorrow could be of more interest than usual with Philly Fed Prez, Plosser, likely to talk about inflation concerns resulting from highly stimulating monetary policy actions. It’s a worrisome topic that’s easy to ignore in the do or die times we’ve been seeing so his speech could have some impact on rate markets (at least here). The ECB rate announcement is Thursday so rate market action over there will have that as a driver.

This bottoming process/foundation building phase we are apparently in with equities is going to be sensitive to data now as well as headlines. There’s been enough stabilization that positive (or not so negative) data can be taken seriously and I like the macro situation returning as a force. For a while, the market just expected bad data and when it was worse than expectations there wasn’t really much of a reaction. It was also numb to better than expected data as it was easily dismissed in the face of headlines.  U.S. employment figures Friday could mean the difference between another bottom and support if the housing market price data, confidence and PMI show signs of possible bottoming tomorrow. Look forward to hearing thoughts about GM.

http://thehill.com/leading-the-news/senator-no-consultation-on-asking-wagoner-to-leave-2009-03-30.html