Rough winter could equal lower rates

Wednesday, November 14, 2007

ECONOMIC DATA / NEWS

Another clue that retailers may be in for a rough winter was this morning’s retail sales data for October.  They may have been in line with expectations, but then again, expectations weren’t very high.  Sales rose just .2%, both including and excluding automobiles.  Warmer weather is being blamed for the lack of department store sales, because fewer people are buying winter clothes.  Weather affects the economy in a number of ways, and it usually gets more blame than credit.  If the weather were colder, then heating oil prices would probably be rising, and it would be accused of causing higher inflation.  We’re not into the winter season yet though, so there is still time for winter clothing to be purchased, as well as oil prices to rise.

Fortunately, if we can phrase it that way, oil prices have already climbed so high, that they are more likely to fall.  And in fact, they are already down around $92 per barrel (scary that we’re saying down), from their record highs over $98.

Overall PPI in October grew at .2%, which seems rather low considering where oil prices stand.  However, the main incline was in September, and the most recent spike to $98 has occurred just over the last couple weeks.  That’s why PPI for November will probably be similar to the 1.1% increase in September.  Core PPI didn’t move at all last month, which is one step toward more Fed rate cuts.  The slow retail sales growth will be another factor.  Consumer inflation, which comes out tomorrow, could be the final piece of the puzzle.  As long as inflation is low, the Fed can focus on jump starting the economy by cutting rates to try to free up money for lending.

Bear Stearns says it will writedown $1.2 billion more this quarter.  They have been one of the hardest hit by increasing defaults due to the high volume of risky subprime mortgages they originated.  Their CFO assured investors that the worst is in the past, but they do expect an overall loss for the fourth quarter.  Most banking stocks are modestly lower this morning, but the stock and bond markets are not moving much on the whole.

TECHNICAL ANALYSIS

MBS are showing almost no movement today.  The 10 and 25-day moving averages are pinching today’s candlestick.  The FNMA 30-year 6.0% has not moved more than 3bp in either direction.  Whichever way they break out could be critical to which direction rates are going to move over the next month or longer.  Prices are very close to the upward trend line, which is a support right now.  However, prices didn’t bounce as high off the trend line in October as it did in August.  A third bounce may not be in the cards, and if the upward trend line is broken, the 50-day moving average and support from a previous gap higher would both be taken out as support at the same time.

The 10-year Treasury yield briefly touched the 10-day moving average at 4.31%, but it was smacked back down to 4.28%.  The yield has traded under this MA for most of the last month.  So, on the one hand, we can say that this is a strong resistance level.  But, at the same time, it is more than overdue to be broken.  This is the key level for the yield in the short-term.  If the yield bounces off it again, then it could drop significantly.  If the yield finally crosses over the 10-day MA, then the yield could easily jump above 4.40%.

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