What will the Holidays bring?

Wednesday, November 21, 2007

ECONOMIC DATA / NEWS

The Fed meeting minutes take a long time to say a little bit.  The reason that they are able to release a very brief three or four paragraph statement with their rate decision is that they can basically sum up everything they discussed in a very small amount of text.  Most of the information was nothing that we haven’t already heard from Fed members’ individual statements or seen from the economic data itself.  The main points were consumer spending has remained solid, inflation has moderated, job growth has slowed, and the credit markets are not helping matters much.  However, they were still making the point that the credit markets have yet to have an affect on the rest of the economy, which is at least debatable. 

They also discussed projections for the next three years, and they also agreed to revise the projections more often, and to make that information more readily available to the public.  Their forecasts consisted of lower expectations for economic growth in 2008, with inflation declining.  They also raised their expected unemployment rate.

Their “conclusion” was that they would adjust the overnight lending rate as necessary to promote strong economic growth while protecting consumers from inflation.  Although this doesn’t give us any specific details about their future rate decisions, it is a subtle hint that they will cut their rate if the economy slows.  And based on their forecasts, it will.

Employment has already been showing signs of weakening.  Job growth has slowed this year, and now weekly jobless claims are climbing into a higher range.  They had consistently been ranging between 300 – 320K for the first eight months of this year.  However, over the last two months we’ve seen that range jump to 325 – 340K.  Last weeks claims totaled 330,000.  It is not just an opinion anymore.  There is evidence that unemployment is on the rise as we head toward 2008.

Meanwhile, oil prices are attempting to sink the Fed’s forecast for tamer inflation.  Light, sweet crude surged to $99.29 per barrel in overnight trading.  A big part of the problem is the weak dollar, which was also reaching record lows during the Asian and European markets.  This is why there has been talk of switching oil to euro denominated trading.  U.S. inventories will be announced later today.  Analysts expect them to show decent increases, which might help prices ease in late trading.

And, as we’ve said before, when job security is in question and oil prices are rising, consumers are going to become much more uneasy.  The revision to November’s University of Michigan sentiment survey may have ticked higher to 76.1, but that is a much weaker reading than earlier this year when the index was up in the 90’s.  Lower consumer confidence generally results in lower consumer spending.  This theory will really be put to the test as we enter the biggest shopping weekend of the year.  There is guaranteed to be a spike in spending, but analysts will be comparing it to the same weekend in previous years to get a true measure of strength or weakness.

Investors were spooked by the spike in oil and stock sell offs overseas.  The Dow burst out of the gates, dropping 100 points in the first five minutes of trading.  It was down 140 points within fifteen minutes before traders tightened the reigns.  Since then it has been ranging between -80 and -120 points.

Remember that the markets close at 2:00 PM ET today, and they will be closed all day Thursday for Thanksgiving.  The markets do reopen on Friday at the normal time, but there will be another 2:00 PM ET close.  It kind of makes you wonder why they don’t just keep the markets closed on Friday too, doesn’t it.  At least one reason is that even though we celebrate Thanksgiving, the rest of the world does not.  Therefore, their markets are still open without a break all week, so we can’t afford to fall that far behind.

TECHNICAL ANALYSIS

Under normal circumstances a 21bp pop shortly after the markets open would be something to write about.  But after the previous four days, it gets little more than a yawn.  The FNMA 30-year 6.0% jumped without a parachute yesterday, and it splatted 34bp lower by closing.  It took out the 10-day and 25-day moving averages in one clean sweep.  So at the moment, neither of them can be classified as support or resistance.  The price came within just a few basis points of the upward trend line, so there remains support at this line.

There was some indecisiveness in Treasury trading yesterday, as indicated by the spinning top formation.  However, the 10-year yield dropped like a rock this morning, touching just a hair under 4.00%.  It has been trading between 4.00 – 4.02% since then.  It has stretched far away from the 10-day moving average and is due to pull back to it.  The 4.00% support level is holding firm, but the yield has not actually bounced higher yet.  This will depend on where the stock market ends up today, and more importantly, what stocks do next Monday.

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