Fed meeting today

Wednesday, October 31, 2007

ECONOMIC DATA / NEWS

For now, the biggest shock of the day is the 3.9% GDP reading in the 3^rd quarter.  Most forecasts were in the low 3.0% range.  Instead, we got the best quarter of economic growth in a year and a half.  It barely topped the 2^nd quarter by .1%.  This is just an initial estimate since certain factors like consumer spending, factory orders, and inventories have not yet been measured for the final month of the quarter.  It does throw a lot more on the load that the Fed is already carrying.  All of a sudden, there is a lot more uncertainty surrounding their rate decision.  The credit markets do still need some assistance, but the rate cut may not be as aggressive now.  But, the reason we say GDP is the shocker of the day “for now” is because the Fed decision could be an even bigger surprise.

Actually, nothing has come in even close to expectations this week.  The ADP employment estimate was well above forecasts.  While most economists were expecting about 60,000 additional jobs for October, the payroll company came up with an estimate of 106,000 new jobs.  This index has been known to be way off in the past, but we’ll find out how accurate it was for this month when Friday’s official payrolls data is released.

While the first two reports were much better than projected, the Chicago PMI dropped considerably in October, from 54.2 to 49.7.  The national manufacturing report comes out tomorrow morning, and it has tended to be very similar to the Chicago measurements in recent months.  When this index falls under 50 it represents contraction in the industry.  Manufacturing data is some of the earliest data we get for the current month.  So, although the 3^rd quarter may have seen a boom, the 4^th quarter is starting off on the wrong foot.

Another surprise was September’s construction spending.  Rather than the predicted decline, spending increased by .3%.  However, a revision to the previous month made it a wash, since it was adjusted from .2% to -.2%.  Overall, it has not had much impact on the markets, especially with the bigger reports coming out before it.

The stock markets were pretty pleased with the economic growth and employment results, but the gains are limited due to the Fed rate decision, which will be made public at 2:15 PM ET.  Meanwhile, bond traders didn’t take the news quite as well.  It limits the amount of rate cuts that traders now expect, at least in the short term.

TECHNICAL ANALYSIS

MBS prices might be a lot worse after this morning’s data were it not for the Fed meeting.  As it stands now, the FNMA 30-year 6.0% is only down 9bp at 100.88.  It is staying above the 10-day moving average, although price did attempt to break below it earlier.  Our range has narrowed to between 100.86 and 101.06, but there is a good likelihood that this will change by the end of the day.

The 10-year Treasury yield popped back over 4.40%.  It is trading around 4.42%, and it will probably hover around this level until after the Fed statement.  Unlike the FNMA, the Treasury yield has crossed over its 10-day moving average, after trading below it for the past 10 days.

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