Rate cute turns out to be a good decision for real estate market

Wednesday, December 12, 2007

ECONOMIC DATA / NEWS

The Fed rate cut was everything the people expected and less.  Although the Federal Reserve chose to cut the Fed funds rate and the discount rate by .25%, which was the most common forecast, the stock markets were extremely disappointed.  So much so in fact that there was massive selling across the board, smacking the Dow 300 points lower.  Investors clearly were looking for a .50% cut, despite what they were indicating in the futures markets.  The statement that accompanied the decision was very similar to the last couple.  They talked about inflation easing, slowing economic growth, and commodities prices (primarily oil) as being a potential threat to inflation.  Overall, it should have been a rather uneventful day.

But everything changed this morning when the Fed announced a plan in conjunction with other central banks to inject a substantial amount of cash into the lending market.  The plan is for $40 billion to be made available to banks as quickly as next week.  They have acquired lines of credit with the European Central Bank, and other central banks in Europe.  The plan basically reassured investors that the Fed is taking aggressive steps to create liquidity in the mortgage markets and offer support to the economy.

Now, it’s hard to say whether the Fed announced their additional measures this morning in response to the markets’ reaction or whether they had it in their back pocket but wanted to see how the markets’ reacted.  Or, perhaps they knew how the markets’ would react to yesterday’s statement and they thought it would pack a bigger punch if it were announced separately.  Knowing the way the Fed works, it’s probably a little bit of each.  It is now believed that they will cut their rate again when they meet in January.  And, if things don’t improve enough over the next six weeks, perhaps we’ll get that more aggressive move that investors were looking for this time.

The economic data was pretty insignificant today, even without the Fed stealing the show.  To recap it quickly though, the trade gap rose a little in October from $57.1 billion to $57.8 billion.  And, import prices only rose .7% in November, which is much less than the 2.0% increase that economists had forecast.  Neither of these are real market movers anyway.  Tomorrow and Friday’s data include consumer inflation, retail sales data, and industrial production results, and they may carry even more weight than normal in light of this week’s developments.

TECHNICAL ANALYSIS

MBS prices have been bouncing all over the place.  They’ve been pinging back and forth between the 25-day and 10-day moving averages, which happens to be a very wide range right now.  The FNMA 30-year 6.0% is down 12bp from yesterday, but that’s not all that much, considering they were up 43bp yesterday.  The stock indexes are high into overbought territory, so there could be money temporarily flowing into bonds.  With prices at 101.22, the only resistance we’re facing is the 10-day moving average at 101.43.  There is a lot of room for improvement, but at the same time there is not much of a floor either.

The 10-year Treasury yield has erased the entire decline from yesterday, and has been propelled up to 4.16%.  There is some resistance around 4.18% at the 38.2% Fibonacci retracement line.  This should be a pretty strong resistance, and since stocks are oversold, there is a good chance that the yield will pull back soon and quickly.

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