MBS get better

Friday, December 28, 2007

ECONOMIC DATA / NEWS

Manufacturing numbers are providing mixed signals this month.  While the New York and Philadelphia regions were showing severe weakness at mid-month, Chicago got a big surge.  The Chicago PMI index jumped from 52.9 to 56.6.  The national average has tended to closely mirror the Chicago area, so manufacturing on the whole may have actually improved considerably in December.  The ISM manufacturing data comes out next week.

New home sales were much lower than expected in November.  They took a 9% dive to an annualized rate of 647,000, the lowest rate in 12 years.  Existing home sales are much more important though, because they make up the majority of total home sales.  Nevertheless, the new homes data was enough to cut down some of the stock market gains and create an immediate surge in bond prices.

Another concern for the economy is oil prices, which had eased to under $90 earlier this month, are back above $97 per barrel.  Yesterday’s combination of the assassination of Pakistan’s Bhutto and a decline in U.S. crude stocks revived fears that supplies may not meet demand.  It seems that every time oil prices have surged higher they have reached new highs.  So, there is a very real threat that prices might top $100 on this latest rally.  That adds to the danger of inflation mixed with a slowing economy.

TECHNICAL ANALYSIS

MBS prices lunged higher straight out of the gates, but the weaker home sales and receding stock gains have propelled the rally higher.  The FNMA 30-year 6.0% is up 37bp!  That’s on top of the 28bp gain from yesterday.  At a price of 101.34 we’re now well above the 50, 10, and 25-day moving averages.  If prices close at their current level or higher, then all of these levels will become supports once again.  Prices are also back within the upward trend channel and the stochastics have crossed firmly upward, so the last few days appear to have been an exaggerated fluke move that is now correcting itself.

The 10-year Treasury yield burst through the 10-day moving average.  It has plummeted from 4.20% to 4.10% this morning, and it is currently testing the waters just under 4.10%.  There is moderate psychological support at this level, but the next strong support is the 25-day moving average around 4.06%.

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