Rates seek to get better with new data coming out

Tuesday, December 18, 2007

ECONOMIC DATA / NEWS

The biggest news for all of us has to be the Federal Reserve’s proposal for additional limitations for lending practices.  One of the practices they want to combat is misleading or deceptive marketing techniques; particularly those that promote “fixed” rates that are not really fixed.  They are also seeking to limit stated income loans, but we know that most lenders have already begun tightening up guidelines on stated income loans anyway.  Fed Chairman Bernanke was explaining their goals in a speech this morning, and they will make the proposal public before officially enacting it.

Housing starts slowed to an annualized rate of 1.19 million in November.  Many homebuilders and other analysts have been saying for several months now that homebuilding will not pick up again until 2009.  But, if we consider that building activity is only going to improve once home sales increase, we can infer that these people are saying they believe housing sales will turn around for the better sometime in 2008.  We believe sometime between Spring and early Summer is when home sales will see a big jump based on lower rates and sales prices.

Positive earnings reports from Goldman Sachs and Best Buy instilled some confidence in stocks as a whole, but there are technical factors that could prevent any kind of serious rally.  The Dow is up about 80 points, but the 25 and 30-day moving averages are holding back any further gains.  The stochastics are also showing strong downward momentum.  There is always a mob mentality reaction immediately following one or two pieces of good news, but the markets will revert back to their longer term outlook by mid-day trading.  As stocks begin to drop again, the money will move into the bond markets, thereby helping to lower rates.

TECHNICAL ANALYSIS

Things were starting to look bleak for the upward trend line, but traders decided that they were not ready to give it up yet.  The FNMA 30-year 6.0% shot up 18bp to 101.12.  Prices have been halted at the 10-day moving average.  Plus, the 101.12 level was a resistance level prior to the rally from a couple weeks ago.  The gains have come even in the face of increasing stock indices, so we expect the upward momentum to continue as the stock market shifts downward.

The 10-year Treasury yield made a strong downward move late yesterday as stocks slid.  That momentum carried through to this morning, and the yield is currently at 4.14%, down from 4.24% at yesterday’s open.  The next support is the 10-day moving average around 4.10%.  The stochastics are just beginning to turn downward, suggesting that the yield will continue to fall for at least another week or two.

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