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Thursday, November 01, 2007
ECONOMIC DATA / NEWS
The Fed decided to go with an unimpressive .25% rate cut yesterday. The reason bonds had improved so much over the past couple of weeks was because traders were banking on a .50% cut. When they didn’t get it, they sold out quickly. The stock markets were pretty happy with the decision though, and the Dow rallied 130 points after the announcement. It was also their least hawkish statement in months. They said, “the upside risks to inflation roughly balance with the downside risks to growth.” Interesting that they would say such a thing on the same day that GDP in the 3rd quarter was the strongest it has been since the 1st quarter of 2006. But they’ve said they believe there is more weakness ahead. We happen to agree with them on that point.
As perfect evidence that all is not well in the financial markets (which roughly translates to the overall state of the economy), the Dow has tumbled by about 225 points. The economic data from this morning, which we’ll get into in a moment, was completely contradictory to yesterday’s strong economic reports. Plus, oil prices have experienced very little resistance, reaching $96 per barrel in overnight trading. It is trading between $92 and $93 right now, but there are no signs of slowing in the short term.
We talked about how the GDP measurement for the 3rd quarter did not include consumer spending from September. Spending came in at a .3% gain in September, as expected. That’s half as strong as August, and that could show up in the form of a revision lower to GDP next month.
The ISM manufacturing index was close to the Chicago estimate. It was only down about a point. But, at 50.9 it is barely above 50.0, which is the separation between expansion and contraction.
There was disappointing employment news as well. Weekly jobless claims were on the higher side for the third week in a row. They improved a bit from 331K to 327K, but it is well above the average for the year. And Chrysler was the latest company to announce a major layoff, saying that they will cut up to 12,000 jobs over the next year. Although the job cuts won’t be reflected in tomorrow’s payrolls numbers, the weekly jobless claims should be noticeable. ADP’s estimate seems very high, especially since it would suggest growth of over 120,000 jobs once government positions are added. Based on the data we’re seeing, we believe payrolls could actually come in under 100,000.
Finally, the core PCE price index increased by .2% last month. It’s a little higher than the previous month, but right in line with forecasts. The Fed has shifted their focus toward economic growth, so inflation is off the grid for now as far as traders are concerned.
TECHNICAL ANALYSIS
The FNMA 30-year 6.0% has made back 21 of the 28 basis points it lost late yesterday. At the moment, prices are back above the 10-day moving average by 3bp, but this MA could still act as sort of an elastic resistance level that could still fling bond prices lower. Just as yesterday’s move was somewhat of an overreaction, this move may not be able to hold either. The stochastics are still indicating downward momentum, and they are just beginning to get out of overbought territory. Any rebound in the stock markets will probably cause prices to retreat.
The 10-year Treasury yield has improved so quickly that it is better than it opened at yesterday. Prior to the data coming out the yield broke above 4.50%, but it has nose-dived (a good thing for the yield) to 4.37%. There is not much support before the long-term low of 4.30%, but a stock market rally would pull some money out of Treasuries as well.
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