Wall St. Worried?

Thursday, December 13, 2007

ECONOMIC DATA / NEWS

Word on the street is that traders are not fully convinced that the Fed’s plan that they announced yesterday can solve the problems in the credit or equity markets.  That’s probably why the stock markets pulled back so much by the end of the day.  Stocks are down a little more this morning, but it’s not just lack of confidence in the Fed’s cash injection to increase liquidity.  What should be causing a buying frenzy in the stock markets is creating a gloomy atmosphere instead.  There is now a shadow of doubt that the Fed may not cut their rate again (or by as much), because retail sales were twice what economists were forecasting for November.  They came in at a blistering 1.2% pace, and they were up an even more impressive 1.8% when excluding volatile auto sales. 

It is very clear that investors are just looking for the Fed to save them, but ignoring the fact that maybe the economy is not as bad off as they apparently would like it to be.  There is growing sentiment that the economy may be able to avoid a recession, but it is difficult to gauge that based on a month when retail sales normally spike anyway.  If December disappoints, then it still doesn’t bode well for the economy in the new year.

Inflation might be another factor that has people thinking fewer rate cuts.  The PPI in November showed producer inflation rising 3.2%.  Oil prices obviously had a lot to do with that.  But, even when excluding food and energy prices, there was a .4% increase.  Consumer prices are what the Fed looks at though, so tomorrow’s CPI will be much more important when considering how inflation will affect future rate decisions.

Weekly jobless claims remain at elevated levels, but they did come down a bit from the previous week.  Last week’s new claims totaled 333,000, which means the four-week moving average remained above 330,000.  Layoffs will normally drop during the holidays due to seasonal hiring.  The fact that they have stayed at a relatively constant level suggests that hiring has not been strong in December.

TECHNICAL ANALYSIS

The FNMA 30-year 6.0% has only given 3bp this morning.  It was down by more earlier, but bounced up when it approached the 25-day moving average.  Prices are starting to condense into a sideways trading range between the 25-day and 10-day moving averages.  Whichever way prices break out could determine the trading direction for the next month.  With support from the upward trend line and the 50-day moving average, on top of the 25-day moving average, there is a good likelihood that the upward trend will continue as we head toward January.

Treasuries have jumped around a bit.  The 10-year yield has bounced between 4.13% and 4.16% most of the morning.  The 38.2% Fibonacci retracement line has acted as a strong resistance to this point, and the yield may decline quickly once traders give up on trying to break that resistance.  We still have a long-term target (3 – 6 months) of 3.50% for the 10-year Treasury yield.

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