Ready for wild ride this week?

Monday, October 29, 2007

ECONOMIC DATA / NEWStec

Not only have oil prices been reaching new highs every few days, but they are now getting close to the inflation adjusted all-time highs of the early 80’s, which would be approximately $100 per barrel in today’s dollar.  Light, sweet crude charge upward by $1.34 to $93.20 per barrel during Asian trading.  It is back under $93.00 right now.  Gas prices certainly have not yet caught up with oil price increases.  Plus, it is a major concern for any company relying on oil for production or transportation of its products.  This is one of those factors that could have the Fed considering holding off on another rate move this week.

The stock markets are edging higher this morning, but investors will act with caution up until the Fed rate decision on Wednesday afternoon.  After that, look for significant volatility in stocks and bonds.  Most likely they will trade in the same direction after the announcement.  Although, if one market were to win out, it would most likely be the stock market.  There are three possible rate cut options as far as most people are concerned:  no cut, a .25% cut, or a .50% cut.  If we take the two extremes first, no cut would probably lead to losses in both markets, while a .50% cut should prompt hefty gains (with the bias leaning toward stocks).  A .25% cut would be a little trickier.  It would receive mixed sentiment, and that could either lead to extreme volatility, or simply to almost no reaction whatsoever.  There is a lot riding on this particular meeting, so we’re going to have to be even more on our toes than with previous meetings.

Making an already important week even heavier, there are some colossal reports coming out as well.  Starting with Wednesday, there is third quarter GDP.  That is followed by consumer spending and consumer inflation on Thursday.  Finally, the week wraps up with perhaps the most important piece of data; the employment report.  We’re in for a wild ride, so stay alert.

TECHNICAL ANALYSIS

Bond traders are going to be on hold until the Fed announcement.  The FNMA 30-year 6.0% is up 3bp at 100.88, but it did open lower.  Prices will probably fluctuate around this level within a 9bp range for the next two days.  There is support at the 10-day moving average and at one of the gaps higher (100.62).

The 10-year Treasury yield has formed a double bottom close to 4.30%, so this is becoming a tougher level to break.  The yield is basically flat on the day at 4.40%.  The 10-day moving average is our first resistance at 4.45%.  Just like all the other securities we’ve been talking about, there should be limited movement until Wednesday afternoon.

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