News overnight was out about China’s July imports dropping, widening their trade surplus to 28.7 billion.  This should put more pressure on China to appreciate their currency but overall, shows a slowing of their economy.  Productivity and Costs were the first to report (stateside), falling .9% Productivity and up .2% Costs.  This is the first decline in Productivity in six quarters and follows a 3.9% gain in Q1.  The combination of lower productivity and longer working hours is a bit of a surprise.  The trend, if there is one, looks as if we have rung as much out of “doing more with less” that we can.  The consequence could be a huge drag on corporate profits.  The .2% increase in costs is solely associated with labor and as we see it, a non-factor.  Reason being is that unemployment is so high that the increase is a drop in the bucket.

Wholesale Trade was the last of today’s data points, up .1% with Sales down .7%.  The .1% print was below expectations of plus .4%.  Sales falling .7% is the evil twin in this report.  It’s the second decline in a row following 13 months of gains.  Bottom line is more inventory, less sales, and a drag on GDP.  Post data, market reaction has not been what one would expect.  Stocks are off 84 on the big board, 10 year note off 3/32’s, and mortgage backs off 5/32’s.  Stocks make sense as the data stunk.  Notes and MBS are lower in sympathy with hedging for the 84 billion in auction paper due over the next three days.

Today’s FOMC will be the story of the day.  Many are looking for the Fed to take a baby step towards a second round of stimulus, etc.  We see this as being premature.  Prior to today’s policy statement, the Fed has done nothing to set up the market for this kind of a change.  In fact, Ben Bernanke has been cheerleading the market about slower growth with a stabilizing economy.  Why would he/they do a 180 and now talk about doom and gloom?  This would panic the market.  We see the policy stating that growth and the consumer are soft but not dead.  They could slip in an announcement about using proceeds of their MBS purchases to reinvest in additional purchases.  We shall see.

What we do know is that the bond market is anticipating additional accommodation via treasury/MBS purchases or others forms of stimulus.  We may, in fact, have gotten a little ahead of ourselves (Austin interest rates too good) so be careful.  Details will be out at 1:15 pm cst.