Weaker economic growth to come

Thursday, November 29, 2007

ECONOMIC DATA / NEWS

The forecasts were accurate.  GDP was adjusted a full percent higher to a growth rate of 4.9% in the third quarter.  A smoking hot four-year high like this should be considered a welcome surprise for the stock markets.  However, traders are viewing this as old data that has no bearing on what the economy will do in the future.  Based on early bond trading, it looks like investor sentiment remains that economic growth is going to be weaker in the next few quarters.

The employment outlook may be legitimizing that mindset.  Weekly jobless claims kept with the upward trend as they skyrocketed to 352,000.  That’s almost a two-year high.  The unemployment rate is very likely to tick up another tenth of a percent, and payroll growth was probably very tepid this month.  This has been of the primary drags on consumer confidence.  It is also a big reason why many experts believe that the overall holiday shopping season is going to be the weakest in years, despite the surge over the weekend.

New home sales rose in October, but only because September’s sales were revised significantly lower.  They had been reported at 770K last month, but they have now been revised down to 716K.  So, a technical month-over-month gain is really a net loss for the year.

Oil prices spike over $94 per barrel after a fire at a pipeline carrying oil from Canada to the U.S.  As of right now, it is not expected to affect supplies.

Stock markets were slightly lower at opening on news that Sears’ profits were drastically worse than expected in the third quarter.  Other retailers’ stocks are down modestly.  However, E*Trade finally found some financial support, and that has the online bank/lender trading higher.  Other banking stocks are mixed.  The Dow is only down 20 points, which means that it is still holding onto the majority of its 330 point gains from yesterday.  We would have expected stocks to be on another solid rally following the GDP data, but worries that the consumer spending is not going to be there to sustain that growth is dragging stocks lower.  But if we look at the longer term, traders do believe the Fed will cut rates again, which should provide confidence in stocks over the next month.

TECHNICAL ANALYSIS

MBS prices are defying gravity, and the FNMA 30-year 6.0% is up 15bp to 101.38.  We can see from the sporadic and jerky moves in the stochastics, that these are not rational times.  Obviously, 101.12 remains a support.  The gains make sense this morning based on mild stock market declines and a massive rally in Treasuries.  But, it is the extent of the Treasury rally that is out of step with the data and the other markets.

The 10-year Treasury yield was knocked down by the 10-day moving average, and the yield was pounded lower to 3.93%.  Given the other technical factors, including the stochastics crossing out of overbought territory and the two consecutive wide-ranging upward candlesticks, we would have expected another big jump in the yield this morning.  The drop is also extreme given the mild losses in stocks.

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