Benazir Bhutto assassination affects markets

Thursday, December 27, 2007

ECONOMIC DATA / NEWS

Global unrest has reared its head again this morning.  Former Pakistani Prime Minister Benazir Bhutto was killed in a suicide attack during a rally at which she was speaking.  Her party is the largest in Pakistan, and they have been projected to fair quite well in the upcoming elections.  She was attempting to become Prime Minister for the third time, after eight years of self-imposed exile.

The employment picture continues to dim.  Weekly jobless claims rose again last week to 349,000.  Continuing claims rose again as well, this time hitting a two-year high.  For weekly claims to be rising like this during what should be the heaviest spending month of the year is a dismal sign for economic growth prospects.  Surrounded by all the other issues, employment would probably be the tipping point to push the country into a recession.

Business owners appear to be bracing for a slower 2008.  Durable goods orders eked out a .1% gain.  That’s compared to economists’ forecasts for a 2.9% jump.  And the underlying result was even worse, because orders excluding volatile transportation goods dipped .7%.

There could be more problems still to come in the banking sector as well.  Goldman Sachs analysts have lowered their expectations on Citigroup and Merrill Lynch, stating that the companies may take much greater losses on subprime defaults.  They say that both companies could have to writedown as much as $8 billion more than each has forecast for themselves.  If these new estimates are accurate, it means that the subprime fallout might hit the overall economy harder than many economists currently believe.  The positive spin is that this would likely lead the Fed to continue cutting their rate, and it would lead to better mortgage rates next year.

TECHNICAL ANALYSIS

The FNMA 30-year 6.0% shot up to the 50-day moving average at 100.96, but those gains didn’t hold for long.  The bond is still up 18bp, but there is no support to make sure it remains higher.  Plus, there are now multiple resistance levels around 101.00.  These include the 50 and 10-day moving averages, as well as the former upward trend line.

The 10-year Treasury yield dove lower after hitting resistance late yesterday at the 50% retracement line.  The yield fell as low as 4.18%, but it has bounced off the 10-day moving average.  It has since been hovering between 4.21 – 4.22%.  The Treasury yield is still well within the long-term downward trend, and we feel it will continue well into 2008.

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