Rates will start to increase

Wednesday, November 28, 2007

ECONOMIC DATA / NEWS

The Monday after Thanksgiving weekend is know as Cyber Monday.  This is when the online holiday shopping kicks off, once all the in-store sales are over.  This Monday produced similar results to what happened over the weekend.  According to ComScore Inc., sales were 21% higher than a year ago.  But, there were also 38% more shoppers than last year, which means that the average amount spent per person was lower.  We are likely to see larger than normal sales at stores and online, since businesses know that many consumers are reluctant to spend money the way things are.  But nobody can resist a great deal.  If companies are offering exceptional discounts, then it could still be a happy new year for them.

Existing home sales came in at an annualized rate of 4.97 million.  Prices also fell by an average of 5.1 percent from a year ago.  That is the worst decline ever recorded.  This is based on closed purchases, so they would have originated back in August or early September.  August was when credit was getting really tight, rates were higher, and a lot of would-be buyers were on edge because the housing market was looking a little overwhelming.  Guidelines had tightened a lot, also making it difficult for people to get loans in August.  And furthermore, there is usually not much buying going on in August anyway, because families are getting ready to go back to school, or people are taking vacations.  The trend of declining sales will probably continue for the next three to six months easily before we find a bottom.

October’s durable goods orders were also worse than expected.  They dipped .4%, but that is much better than the 1.7% drop in the previous month.  After taking out transportation, orders were .7% lower.  Orders for these long-lasting items are a gauge as to how strong or weak businesses believe the economy will be over the next six months.  Computer orders were down 15.2%.  Just like consumers, businesses are losing confidence in their current and future expectations about the markets.  When consumers and businesses are both withholding spending, the economy is inevitably going to suffer.

TECHNICAL ANALYSIS

The FNMA 30-year 6.0% briefly fell through the 101.12 level, but it ultimately closed at that price.  Prices were threatening to break lower again this morning, but that level seems to be holding as a support level now.  The price has jumped up 15bp to 101.31.  The six-month high is 101.53 as of Monday.  So, there is about 20bp between the current price and support or resistance.  That could make for some volatile trading, which has been the norm lately.  Until prices slow to their normal trading patterns, we will have to keep one finger on the trigger.

Treasuries have taken a much different path.  The yield was up from the start, but it did drop only to find support at 3.95%.  That is approximately where the yield closed yesterday.  However, it has also been bumping off resistance around 4.00%.  Most of the morning the yield has traded up around 3.98% to 4.00%, but it looks like it could be on the brink of a big upward breakout.  The stochastics are well into overbought territory and just beginning to cross upward, and we just bounced off a long-term low on Monday.  Between profit taking and rallies in the stock market, there will probably be a lot of money flowing from bonds in the next day or two.

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