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Mortgage interest rates improved slightly on the week on continued uncertainty surrounding the debt ceiling debate.  Economic data of note was mixed.  Data better than expected included the July Consumer Confidence Index, weekly jobless claims, and June Pending Home Sales.  Weekly jobless claims fell by 24k to 398k claims, the first reading below 400k in 16 weeks.  Economic data weaker than expected included June New Home Sales, June Durable Goods Orders, advance Q2 GDP, and the July Chicago Purchasing Managers Index.  Q2 GDP grew at an annual rate of just 1.3% on expectations of 1.9%.  Also, Q1 GDP was revised lower, from +1.9% to just +0.4%.  Also of note, the Treasury Department auctioned $99 billion of 2 year, 5 year, and 7 year notes, which was met by somewhat soft demand by markets.

The Dow Jones Industrial Average is currently at 12,190, down almost 500 points on the week.  Crude oil futures are currently trading at $95.74 per barrel, down about $4 per barrel on the week.  The Dollar weakened versus the Yen and Euro on the week.

Next week look toward Monday’s ISM Manufacturing Index, Tuesday’s Personal Income and Outlays, Thursday’s weekly jobless claims, and Friday’s employment report for July as potential market moving events.

We interrupt this political soap opera for a brief message from reality.

The Treasury bond market is doing fine, the 10-year a new 2011 low, 2.85%. How could this be so, news media and officials chanting, “Default, default, DEFAULT…”?

Treasury bonds are doing fine because the United States will not default on them. The Treasury has quietly assured investors that interest will be paid on time, maturing debt paid by issuing new bonds under the limit. The cash required to do so is relatively trivial, perhaps $25 billion in August versus tax revenue near $170 billion.

However, short-term markets are stressed. If this soap opera falls apart altogether, tax revenue will fall short of other August spending commitments by $130 billion or so, which we otherwise would have maintained by borrowing. In August alone. Furloughing half the government for even a week or two would guarantee a new recession.

The Treasury market is fine for another reason: Europe is falling apart (again), their latest grand fix lasting less than a week. Spanish and Italian long-term bond yields are rising back to pre-crisis levels, both nations too big to save. Italy’s debt is 120% of GDP, and at about 100% any country crosses the black hole threshold.

The Treasury market is fine for a third reason: even before this morning’s weak GDP reports (Q2 growth 1.3%, personal spending only .1%; Q1 GDP revised down to just .4%) markets knew the US economy was is gently sinking. Forecasts for a better 2nd half of 2011… better hurry. June orders for durable goods slid 2.1%.

Treasurys are doing fine despite threats from newly pushy S&P to cut our AAA rating. Hell hath no fury like a rating agency scorned. The rating cut will be embarrassing, but little else. Ratings are useful for bond-issuers difficult to research: Burkina Faso, or new sewer bonds from West Frog Bottom. The entire financial world studies the US open book every day, and reality is what it is, not what S&P says.

Our debt situation is deteriorating, but unless you can find a better-grade issuer off-planet, your choices are limited. We owed $5 trillion in on-the-market debt in 2007, and owe $9.7 trillion now (the $14.5 trillion screeching from every channel includes intra-governmental bookkeeping). At something like a $1.3 trillion deficit each year forward, and a GDP maybe $13.3 trillion, we’re less than three years from Italy.

Europe talks and talks and does nothing. Churchill dismissed them in the 1930s as having “All the collective security of a flock of sheep.” Here, we yell and scream and fiddle and then DO things. It’s not our style to sit while Italy-status draws near. Like climate forcing, structural loading, and straws on camels, the moment that our political system begins to spasm is unpredictable, but we tend to act in time.

The moment came last November, in the biggest switch in House power since 1948. Enough voters became worried about Italy-status to sweep into office a large majority of Republicans, 242 of 435; 87 freshmen, some sensible, many propeller-heads, each sworn a blood oath to balance the budget. That majority is now doing exactly what it was elected to do, a concept eluding the President and his party for nine months.

Now we have a first-class American riot. The new Republicans have arrived like a hatchet-swinging mob of temperance ladies in a saloon full of borrowing-spending addicts. No excuses accepted: “We can stop whenever we want! And — EEK — you can’t cut us off while we have the shakes! We need to taper off. Leave us enough booze for a couple of years — don’t make us argue again soon. Takes the fun out of the hooch.”

Mr. Obama might still break up the temperance mob this weekend by dropping his condescending how-dare-you and explain what a shut-down government would look like. That’s what Willy did to Newt. Instead, this accusation that the temperance mob refuses to compromise just eggs them on. They think they have compromised: no demand for a balanced budget right now, they accept new revenue via tax reform, and they know that “$4 trillion over ten years” cuts the deficit by only one-third. They are using the debt limit to force cold turkey because they have no other means.

Their best service: to wake up the nation, and force it to learn and to participate.

The debt-to-the-penny ticker, with excellent historical tables and explanations: www.treasurydirect.gov/NP/BPDLogin?application=np

www.CalculatedRiskBlog.com‘s splendid graph of today’s GDP revisions. We have had some growth from bottom, but no recovery, and the growth we have had is flattening.

Mortgage interest rates increased slightly on the week on continued uncertainty surrounding European sovereign debt and US negotiations regarding the debt ceiling.  Economic data of note included June Housing Starts and Building Permits, both of which were better than expected.  June Existing Home Sales, though, fell 0.8% on expectations that they would increase by 2.5%.  Weekly jobless claims increased by 10k, up more than expected.  The July Philadelphia Fed Business index increased to a level of 3.2, indicating slight expansion after a couple of months of contraction within the sector.  Bank of America reported its largest quarterly loss in its history, a loss of $8.83 billion in the second quarter.  Also, China’s factory sector contracted for the first time in a year.

The Dow Jones Industrial Average is currently at 12,672, up almost 200 points on the week.  Crude oil futures are currently trading at over $99 per barrel, up almost $2 per barrel on the week.  The Dollar weakened versus both the Yen and Euro on the week.

Next week look toward Tuesday’s Consumer Confidence Index and New Home Sales, Wednesday’s Durable Goods Orders, Thursday’s weekly jobless claims and Pending Home Sales Index, and Friday’s first look at Q2 GDP as potential market moving events.

Markets lurched from nowhere to nowhere this week, waiting for deals. Or no deals, or to see what kind.

The deal watch deflected attention from the economy, which after all is the whole point of the show. New data said a lot by saying nothing. The Philly Fed index, new unemployment, sales of existing homes, starts of new homes, home prices, mortgage applications — all flat. Neither sinking back into recession nor going anywhere.

Goldman announced lousy earnings, having retreated from trading risk. If they don’t feel like taking risk, who should? And after its IPO, silly Zillow is worth a billion bucks — no profit, no recognizable business plan, but if it’s tech, fruitcakes will buy the stock.

The markets told us what to think about pending deals. On Tuesday, when it looked as though a big US budget deal was back on, deep spending cuts and some revenue raised, stocks jumped 200 Dow points, and interest rates fell, the 10-year T-note almost breaking two months’ resistance at 2.88%. These two markets typically trade against each other, stocks-better/rates-worse. Stocks-better/rates-better… that’s big. Reflects not just market pleasure at a deal, but the right kind: curtail Treasury borrowing immediately, take the heat off rates, inflation, and the Fed.

The arguments in favor of more spending stimulus, jobs programs, infrastructure, whatever, appear to markets as creative procrastination. Time to bite the bullet.

Then, market reaction exposed this new Euro-deal. Briefly on Thursday it looked as though Europe was throwing in together, making authentic progress toward financial union, and cash came out of bond-market safety and poured into stocks.

Optimism did not survive the day. The new “plan” is hyper-complex gobbledeygook, through it all just more of the same. Cut Greek-Irish-Portugese interest rates enough to let them gasp for air every few minutes, but otherwise hold ‘em under water. Add a dangerous demand for private-sector losses, and pile on more debt. This newest can-kick may defer chaotic breakdown for a month or a year, but bet on sooner than later.

Here in the US, we have a tremendous wrestling-match under the blankets. Taking a page from the NFL book, the parties have largely shut up — a great benefit to negotiations, but frustrating to those awaiting sacrifice in the arena. Which of us will be called, sent to lions?

Mr. Obama is terrible at this. He was a disinterested Senator who disliked the process and the players. No deal of this magnitude ever gets done without the President putting his future on the line, yet Mr. Obama seems to think a deal will come from Congress, like feathers from a turkey. Mercifully, Joe Biden knows the process cold, and revels in it. John Boehner has shown more character and care than anyone knew, maybe enough to overcome the deficits among his compatriots.

A foreceful change during the week: the threat by S&P and Moody’s to cut the United States’ AAA rating even if there is a deal. If it’s not big enough, nor serious and enforceable, we go to AA and havoc. I don’t think either the President or the Congressional Tea Party want that on their resumes. There are limits to blaming the other’s intransigence, and this one helps.

The worst-possible outcome is a raised debt ceiling, no budget deal, and deferral of a disastrous deficit to an election duel next year, shotguns at ten paces, the American people in the middle. If we will not limit our borrowing, the markets will — a certain road to higher rates and a choked-off economy.

Last… passing yesterday unremarked by any major media was the 150th anniversary of the bloody collision of 60,000 Americans near Manassas Junction and Bull Run creek, the first real battle of the Civil War. As defeated Union soldiers streamed back into Washington, the reality of a long, hard war arrived with them.

Those demoralized by our temporary difficulty with self-governance, struggling with mere money, might mark yesterday’s occasion by remembering our strength in serious trial, and ability to join together and to heal.

Chart thanks as always to www.calculatedriskblog.com:

Year-to-year comparisons for the 2nd quarter. Source: BARA.

Mortgage interest rates were mostly flat on the week as uncertainty regarding the US debt ceiling and European debt crisis continue.  The minutes from the recent FOMC meeting were released.  The Fed indicated unusual uncertainty regarding the outlook for employment and inflation.  The Treasury auctioned $66 billion in 3-Year Notes, 10-Year Notes, and 30 Year Bonds, which were met with strong demand by the markets.  Economic data of note included the May Trade Balance.  The trade deficit increased to $50.23 billion, the largest trade deficit since October of 2008.  The July University of Michigan Consumer Sentiment Index fell to 63.8, its lowest level since March of 2009.  The July New York Empire State Index indicated contraction at a reading of -3.76 on expectations that the index would increase to 1.0.  June Retail Sales increased 0.1% on expectations that sales would be unchanged.

The Dow Jones Industrial Average is currently at 12,452, down about 200 points on the week.  Crude oil futures are currently trading at just over $97 per barrel, up slightly on the week.  The Dollar strengthened versus the Euro and weakened versus the Yen on the week.

Next week look toward Tuesday’s Housing Starts, Wednesday’s Existing Home Sales, and Thursday’s weekly jobless claims and Philadelphia Fed Index as potential market moving events.

Mid-July is normally the center of the Silly Season news-drought, in which media give front-page treatment to “Man Bites Dog.”

This year, that dog is plumb-near bit to death.

Newsies this week over-read Perfesser Bernanke’s testimony and Fed minutes, finding all sorts of hints that were not there. The Fed is “open to stimulus if necessary,” but so it is, always. At this moment, the Fed is confused, sticking to “better in second half,” its members divided (scattered), and both CPI and PPI core inflation popped to .3% in June. The Fed Chairman must be prepared to fill hours of air time with no content, and the Perfesser rose to the occasion.

The economic data are just above stall speed. The NFIB small-business survey in June was the same as May, at recession threshold, and June retail sales had no gain.

The Treasury borrowed a wad of long-term money for the first time in six months without Fed QE buys, and had no trouble — perhaps in largest part because Europe’s slow suicide is proceeding. A European bank-on-bank run is spreading, the cost of Euribor loans jumping from 0.6% to 1.47% in one week (post-Lehman: 4%). Banks are the circulatory system for any economy, and shutdown is the cardinal symptom of Bad Stuff. Today’s results of Eurozone bank stress-tests are the blackest of black comedy.

The European economy is far more vulnerable to its banks than we are. The top five banks in France have assets (loans, sovereign bonds…) equal to 3.25 times French GDP, Germany about the same; in Belgium, double; Italy 1.4 times; and Banco Santander by itself is 1.14 times the size of Spain’s GDP. In the US, the top five banks are barely 60% of GDP (source: NYT today). Too big to fail? Too big to save.

Here at home… oh, my. This debt-limit lockup is so yesterday. The entire leadership of China wakes every day to work on competing. Our leadership spends all day in an argument 50 years old: Democrats enacting underestimated future social spending not supported by revenue, Republicans fighting every step of the way, even the spending to which their own constituents feel entitled, plus their military adventures.

Our economy grew fast enough to support continuous growth in revenue all through Reagan-Bush ‘41-Clinton, also supported by the inspired 1986 tax reform; and in combination with Bush ‘41-Clinton spending restraint we did what we are supposed to do: we ran an immense budget surplus in good times. All through those years, and Dubya, debt-limit brinkmanship was silly theater with certain outcome.

The best of that burlesque: in the fall of 1995, Newt Gingrich thought the country would back his plan to balance the budget via shutdown shock therapy. Bill Clinton exposed him (permanently) as Captain Underpants.

Until this week, I thought Mr. Obama could do the same to Eric Cantor, the essence of amoral ambition standing in skivvies. Obama still thinks so. Not so. Not now. In the 16 years post-Newt, these words have been spoken at too many kitchen tables: “Whatever we do, whatever happens to us, we are not going to borrow any more.”

And in those 16 years, the “haves” in this country have had it with the Democrats’ limitless grasping to fund their promises. The top 1% of income earners pay 27% of all Federal revenue, more than ever. The top 20% (inclusive) pay 70%. No sensible person opposes sufficient revenue, but not to be wasted, and not if the demand is open-ended.

Since last November, Democrats in denail, there may be enough votes in the House to enforce a stay-put debt limit. We will not default on Treasury obligations. Federal revenue runs $200 billion per month. Interest costs barely $25 billion, and we can roll over all existing debt within limit. The remainder will just about cover one month’s Social Security, Medicare, Medicaid, and Defense. Maybe air traffic controllers and the FBI, maybe not. If the limit stays put, in another couple of weeks we’re going to find out what we’ve been getting for the $130 billion we’re borrowing each month.

Today, the University of Michigan released the lowest reading for consumer confidence since March 2009, to 63.8 in July from June’s 71.5. Can’t imagine why.

The aggregate $14 trillion in US indebtedness includes many offsetting accounts and intergovernmental bookkeeping entries. This chart includes only Treasurys in the market, which we must roll over upon maturity, and on current deadly trend to which we would add $1.2-$1.5 trillion per year ahead.

This morning’s payroll data are so much worse than any forecast that markets can’t digest the news. The 10-year T-note is falling toward 3.00% today, down from 3.14% before the announcement; but the Dow is off only 110, and mortgages little changed.

“Non-farm payrolls,” the count from the Bureau of Labor Statistics’ “establishment survey” of large companies and government, found only 18,000 new jobs in June versus expectations for 150,000+. April and May were revised down 45,000 jobs, and hourly earnings actually declined .1%. The “household survey” was worse, the “employed” diving by 445,000 people. Those who insisted that the Fed’s  QE “money-printing” would result in inflation hav been mistaken: prices may rise on some items, but “inflation” is impossible without sustained growth in incomes.

These employment reports are notorious for large revision, and part of the modest reaction in markets is simple disbelief. Other data was not so bad, but soggy: the service-sector ISM slipped to 53.3 in June from 54.6, but is still in positive ground.

Looking ahead: next week we’ll have the first auction of long-term Treasury notes without the Fed as a QE buyer. A big test. Then, although a matter of soft opinion, Europe is very close to a currency breakup, now an “any week” affair. At least at the outset of that event, helpful to rates here.

The most important economic news each month, by far, is the early-month count of jobs created or lost in the prior month. All markets were poised for better figures in this morning’s report for June, but the actual was jaw-dropping: only 18,000 jobs gained, April-May revised down 44,000, and hourly earnings fell .1%. The one surprising reaction: the Dow is off only 110 points. Stunned, drunk, or both.

Enough of that. Find some entertainment in deals cooking all over the place.

We’re going to get an NFL deal, maybe this weekend. Which is a great thing for those of us stuck with the Colorado Rockies. Even if the Broncos are just as bad, we won’t have to face it until September. Sorta like the stock market.

We’re going to get a budget deal before the August 2 deadline — messy, half-baked, but a deal and real progress toward repaired US finances.

There’s no deal — yet — but the first sensible Fannie-Freddie legislation is in Congress, to preserve and combine them as a public utility like Ginnie, no more “public-private partnership” with stockholders and management running off with the store.

Iceland sold $2 billion in bonds in the open market this week at low interest rates. Back in business less than three years after its banks defaulted on $85 billion in debt, and only three months after telling the UK and Holland to go fish with their claim for $5.8 billion in their citizen’s losses on deposits in failed offshore Icelandic banks.

There is life after default and devaluation!

A good thing, because Europe’s latest deal to kick the can ahead another year has in one week clunked to a standstill, now leaning precariously against the row of dominoes.

Forgive my schadenfreude (the enjoyment of someone else’s misfortune) but it is a German concept. The Greeks saw the inevitable collapse of hubris into nemesis as tragedy. I don’t recommend enjoying the European endgame, but I do confess some eager anticipation: a European run to local currencies would slow the global economy, but the flight to the US for safety would drop rates here, a huge help, and would demolish the notion that the Germans have economics figured out and we don’t.

The newly failed deal there began as a French proposal to conceal Greek default. Bankers holding Greek debt would agree — voluntarily — that instead of being repaid in cash euros, they would accept new 30-year Greek bonds paying 5.6% (10s today yield 17%). It is handy to have banks around that will do what government says, an oubliette into which all sorts of embarrassments can be dropped and forgotten. German banks scurried to agree with their French colleagues.

There is no market for these pretend 30-year Greek bonds, worth perhaps 20 or 30 centimes on the euro, yet French and German banks would carry them at face value. Anything to protect politicians from taxpayer rage, although taxpayers are the depositors and stockholders in these same bag-holding banks.

Then the European Central Bank said no sovereign-debt restructuring of any kind. The ECB holds about $140 billion in Greek debt as collateral for loans to Greek banks, and any loss at the ECB must be borne by Euro-wide taxpayers. If they’ll pay.

This week, in a sequence worthy of Clouseau, S&P and Moody’s said the bond swap would still be a default. Then Moody’s downrated Portugal to junk. The ECB, holding a wad of Portuguese bonds as collateral from those banks, too, then waived its rules against accepting junk. The best part, that could not be made up: the German finance minister, Wolfgang Schauble, for years lecturing lesser Europeans on the merits of discipline, threatened action against the rating agencies for down-rating Portugal.

German 10s pay 2.83%. Too-big-to-save Italy’s 10s blew out of trading range to 5.20%. Irish and Portuguese 10s sold off to a pre-default 13.0% yield.

Before the end of summer, either Europe will join in true union, the taxpayers of the rich picking up at least $600 billion (before Spain and Italy) or the dominoes will go. We’ll have some warning, maybe a week or two, like the run-in to Lehman and a Sunday announcement. And I still maintain, beneficial for us, and ultimately for Europe.

The 10-year T-note has blown from 2.91% to 3.21% in one week. Mercifully, mortgages had not improved as much as the 10-year yield had fallen, nor have been as badly damaged in this run-up, most mortgages still holding nicely in the high 4s. Economic data factored little. Today’s June ISM did surprise, up 1.8 from May to 55.3 versus expected decline. Several measures of the housing market (Case/Shiller, CoreLogic, LPS, FHFA…) showed tentative price bottoms, reduced new delinquency, and possible up-tick in sales, but altogether more a pause in trend than definitive change. The Greek saga rolls on, a new utterly phony resolution for the moment forestalling dramatic default. The agreement of French and German banks to take new 30-year Greek bonds to replace maturing ones is cut from the same wallpaper as the Greek Parliament’s vote for austerity beyond the tolerance of Greek society. Big things ahead: next Friday’s job data for June, and the question everyone in the bond market has… Now that the Fed has stopped QE2 buying of Treasurys, who will come forward? We continue to assume that a debt-limit deal will pass.

The Dow Jones Industrial Average is currently at 12,534.52, up over 500 points on the week.  Crude oil futures are currently trading at $94.39 per barrel, up more than $3 per barrel on the week.  The Dollar weakened slightly versus the Yen, and strengthened slightly versus the Euro week.

Next week look toward Thursday’s Jobless Claims and Friday’s Employment Situation as potential market moving events.