Lowest rates in 2 yrs

Monday, December 03, 2007

ECONOMIC DATA / NEWS

Oil prices have been prone to large swings, just like most other securities lately.  Since hitting close to $100 per barrel less than two weeks ago, light sweet crude is down to $87.70 this morning.  OPEC has been talking about increasing production in order to support the higher demand generally associated with the winter months.

The ISM from October to November was virtually unchanged.  The index suggests that the manufacturing sector is teetering on the brink of contraction.  When the index falls below 50, it represents contraction, and this month’s result was 50.8.  The employment index was one of the biggest decliners, slipping from 52.0 to 47.8.  That’s the worst reading in four years, and it comes as a precursor to what is already expected to be a low number of jobs created in November.  Monthly employment data comes out this Friday.

The next Fed rate decision is only eight days away, so the economic data will receive even more attention that normal as analysts try to determine how it will affect the Fed’s decision.  Based on recent comments by Bernanke and Fed Governor Donald Kohn, it sounds like the Fed is ready to make another cut.  How deep that cut will be is still up fro debate though.  We think that they will go with a more conservative .25% cut, because there are other members of the Fed who are not in favor of the rate cuts at all.

TECHNICAL ANALYSIS

MBS prices made a very late surge last Friday, but we felt they would pull back early this morning.  The improvement in Treasuries and initial losses in stocks prevented that from happening.  But, after a brief spike in early trading, the FNMA 30-year 6.0% is now flat on the day at 101.69.  There is virtually no major resistance, but the stochastics have jumped back into overbought territory.  Plus, prices are likely to get sucked back toward the 10-day moving average, which is currently at 101.21.  However, we still expect significant gains in the long run.

The 10-year Treasury yield is testing 3.90% again this morning.  It has been as low as 3.87%, but it has spent most of the morning bouncing between 3.89% and 3.91%.  The 10-day moving average has remained a strong resistance for most of the last month and a half, which is a very long time for such a short-term moving average to hold prices down.  It highlights just how strong the downward trend really is, and it supports our forecast that the 10-year yield will eventually reach the mid-3.0% range and possibly lower.

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