Higher unemployment could mean lower rates to come

Thursday, December 20, 2007

ECONOMIC DATA / NEWS

Bear Stearns, which has been spotlighted throughout the second half of this year due to their high exposure to subprime mortgages, announced an $854 million dollar loss in the 4^th quarter.  Not to be outdone by Morgan Stanley, this is also Bear Stearns’ first quarterly loss in the company’s history.  And also similar to Morgan Stanley, the company’s stock has risen following the news.  Investors seem to want to believe that this marks the worst of the mortgage defaults’ impact, but that is obviously yet to be seen.  Morgan Stanley is down in early trading today as perhaps reality about their current financial position is starting to set in.

This morning’s data gave us final confirmation that GDP in the 3^rd quarter rose by 4.9%.  However, that hasn’t changed most economists’ opinion that 4^th quarter GDP will grow at just 1.0%.  The early forecasts for the 1^st quarter of 2008 are roughly 1.0% as well.  If GDP comes in even lower, then we could be flirting with a recession (two consecutive quarters of negative GDP).

Seasonal hiring is not helping employment figures as it normally does.  Weekly jobless claims rose last month from 333,000 to 346,000.  It appears likely that weekly jobless claims will be topping 350,000 by mid-January.  Job growth number probably won’t be very strong this month if layoffs are rising with just two weeks to go before Christmas.

Leading economic indicators surprised the markets by falling .4% last month, following a .5% decline in October.  Economists were estimating it would only drop .1%.  Soaring weekly jobless claims and a slumping stock market were two of the biggest causes for the dip.

The Philadelphia Fed survey comes out at 12:00 PM ET.  Considering how much the New York region disappointed by, there is a very likely possibility that manufacturing activity in the Philadelphia area fell as well.  During normal trading situations this would be beneficial to bonds, but the markets have been backwards lately.  So, we’ll just have to wait and see how traders decide to react to the news, whichever way it turns out.

TECHNICAL ANALYSIS

The FNMA 30-year 6.0% is up 6bp to 101.53 today, and the rally looks like it is going to continue.  The stochastics have crossed upward, although they were not in oversold territory, making the turn slightly less significant.  Nonetheless, it does highlight the sharp turnaround in bond prices.  Prices could easily rise to the 2-year high of 101.78, reached just three weeks ago.

Treasuries have jumped around this morning, but the 10-year yield is now flirting with breaking below 4.00% for the second time in the last month.  Looking at the stochastics there is strong downward momentum, which might send the yield down to the 3.80% range by Monday, similar to what happened around Thanksgiving.

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