10 yr bond increases

Thursday, December 06, 2007

ECONOMIC DATA / NEWS

The jobs situation got even more interesting this morning.  Weekly jobless claims were a relatively high 338,000 for last week.  Although the reporters may be calling it an improvement, it remains at a much higher level than average claims in the first half of this year.  In fact, the four-week average rose to 340,250.  This is compared to averages ranging closer to 300,000 for the majority of the year.  Continuing claims fell, but it is unclear whether that is due to stronger hiring or long-term unemployment.  After six months, unemployment benefits run out.  Then, those people are no longer counted in the unemployment figures, even if they are still out of work.  Most of the economic data over the last couple weeks has been pointing toward slower hiring numbers for November.  However, the ADP report yesterday threw a curve ball to analysts, many of whom have been revising their estimates upward slightly.  We don’t anticipate payrolls growing as much as ADP estimated, but they may be a little stronger than the 80,000 or so that were originally being forecast.  If they come in between 70,000 and 130,000, it is very difficult to say how any of the markets will react.  The biggest harm to rates would probably be a payrolls figure of 150,000 or above, which would suggest a more resilient economy, thereby potentially decreasing the Fed rate cuts.

Target and Walmart announced decent same-store gains for November, but they are uncertain about December sales.  Items at the bottom of purchases from Target last month included toys, holiday items, and jewelry.  Seeing as how we would expect these items to spike in sales volume during holiday shopping, they certainly have reason to believe that the shoppers may not be out in full force this year.

Perhaps oil prices will ease some minds and allow for a pick up in shopping.  After spiking at an all-time high of $99.29 per barrel, oil prices have tumbled to $86.64 as of this morning.  This is in spite of OPEC recanting their allusions to increasing production and a large drop in U.S. crude oil reserves.  But, the U.S. does have a larger than expected surplus of diesel fuel and gasoline, which has helped stave off potential price jumps.

TECHNICAL ANALYSIS

As we said yesterday, the FNMA 30-year 6.0% has drifted into a sideways trading pattern.  However, that has caused it to break out of the sharp upward trend, despite the fact that prices are only down 3bp at 101.66.  Our primary support is now the 10-day moving average, which is 22bp below the current price.  It is also more vulnerable now that prices have traded above it for the last 15 days, so we could see at least a temporary break of this level.

Treasuries have been interesting this week.  Over the last two weeks, Treasury yields have been range trading, albeit in a very wide range, while MBS prices were climbing.  However, now they have shifted roles, and it is the 10-year Treasury yield that has shot upward while MBS drift sideways.  The yield briefly touched 4.00%, but it was bumped lower.  It has bounced between 3.98% and 3.99% for most of the morning.  There seems to be good psychological resistance from 4.00%, and the downward trend line is providing resistance at about 4.03% as well.  The only problem we’re facing is that the yield opened above the 10-day moving average, which had provided resistance for about the last month and a half.  If the yield can break back under the 10-day MA, then we could see a considerable rally follow.

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