All Things in Moderation

Vital Statistics:

Stocks are lower this morning as banking fears spread to Deutsche Bank. Bonds and MBS are up on the flight to safety trade.

Deutsche Bank was down 12% this morning in Frankfurt trading and its credit default swaps surged. We also saw some pressure on regional banks in the US yesterday, which indicates this banking crisis is not over yet. The net result of this will almost certainly be a restriction of credit as banks become more cautious on risk, which will be recessionary.

The Fed Funds futures have reacted sharply to the news, with the May futures seeing no move and the June futures pricing in a 60% chance for a rate cut.

St. Louis Fed President James Bullard spoke this morning. The presentation is here. He refers to the current situation with the banks as similar to events in the past where rising rates caused financial stress, but didn’t tank the economy. He mentioned the Mexican Peso / Orange County crisis of the mid-90s, Continental Illinois in the mid 80s, and Long Term Capital Management in the late 90s as examples. The labor market remains exceptionally strong, however financial stress is increasing.

Durable Goods orders fell 1% in February. Ex-transportation they were flat. Both numbers were below consensus. Core Capital Goods orders (a proxy for business capital expenditures) were flat.

Homebuilder KB Home reported first quarter numbers. Revenues were flat while gross margins contracted due to seller concessions and rising construction costs. Average selling prices rose 2% to $494,500. “As we entered the Spring selling season during the quarter, we began to see an increase in demand. This reflected in part the targeted sales strategies we deployed, together with a stabilizing mortgage interest rate environment. As a result, we achieved a sequential improvement in our net orders in both January and February, and net orders have remained strong in the early weeks of March. Although there are still considerable interest rate and econ

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