Rates continue to increase. Waiting on the Fed

Monday, December 10, 2007

ECONOMIC DATA / NEWS

No more than a few days after measures aimed at helping both borrowers and lenders were announced, UBS AG says they will be forced to writedown another $10 billion in loans.  They will apparently be selling off a stake in the company in order to maintain liquidity, which is what many other lenders have had to do.

This has been of no concern to traders though, as they’re still firmly focused on tomorrow’s Fed rate decision.  The question seems to be not whether or not they will cut their rate, but by how much.  But, regardless of the percentage, stock traders seem very fond of the benefits that lower rates could bring for businesses.  The Fed usually lowers rates to spark economic growth through business investment and increased consumer spending.  This mentality has done wonders for the stock market over the last week, but bonds haven’t faired quite as well.  We’ll talk more about that in the Technical Analysis section.

So, obviously the Fed rate decision is the main focus of the week.  But, there are some other hot topics as well.  Retail sales might be the second biggest item on deck.  Investors are going to want to see a big increase, because the early holiday shopping is supposed to cause a big boost for retailers.  Forecasts are pretty modest, and if sales are in line with or below expectations, they could steal some of the thunder from a Fed rate cut.  Inflation data is also on tap, but this hasn’t concerned investors since the summer, so it is likely to be virtually ignored.  The week finishes up with industrial production, which also has the potential to be a market mover.  With the economic data well spread throughout the week and the Fed meeting, this could be an action packed week.

TECHNICAL ANALYSIS

The FNMA 30-year 6.0% has pushed its way through support at the 25-day moving average now.  Prices have fallen another 9bp to 100.97, which is 81bp lower than it was a week ago.  Considering the strong downward momentum, as can be seen by the big red candlesticks and the sharp crossover in stochastics, the long-term upward trend line is in serious jeopardy.  This trend has lasted for exactly six months and has already withstood four price pullbacks.  It certainly has become a solid support, and it did hold up against a similar sharp decline back in July.  The test is coming with less than 20bp between the current price and the trend line.

The 10-year Treasury yield has started off the week in the same direction it was moving last week.  The yield found support from the 25-day moving average, and traders quickly pushed the yield up to 4.17%.  There is around this level though.  It marks the 38.2% Fibonacci retracement level from the mid-October to early December decline.  There will probably be a brief pullback, but an upward trend does seem to be taking shape.  If the yield breaks above 4.18, we could be looking at the 50-day moving average as our next resistance.

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