Rates slowly come down

Monday, August 27, 2007

ECONOMIC DATA / NEWS

There goes the news reporting community, blowing things out of proportion again.  I’ve already seen the headline on four major news websites that read something to the effect of “Home Prices Fall Again.”  But most of them are not highlighting (or in some cases not even mentioning) the fact that they were stronger than economists were expecting.  The consensus estimate for July was for a drop to around 5.60 million.  Instead, they barely changed, only dropping .2% from an upwardly revised 5.76 million to 5.75 million.  If we factor this in with the unexpected jump in new home sales, we’re looking at a housing market that may not be quite as bad as most people think.  Keep in mind that most people are reading the general public news, which tries to dramatize situations in order to attract readers.  It is our job to assure clients that things are not as bad as they are being made out to be.  We know the truth about the figures.  In fact, condo sales actually rose 1.4% last month.  And since August’s sales numbers will be based on sales originated in June and July, we could even see a rebound in home sales when the data comes out late next month.

The rest of the data for the week is significant.  However, it may go widely unnoticed because traders are much more concerned with what the Fed is going to do.  The Fed meeting minutes from three weeks ago will probably be overlooked, because the way the Fed felt three weeks ago is very different than how they feel today.  Fears of inflation have been swept away, and it has been accepted that economic growth is almost certain to slow.  This should lead to further improvements to rates.

TECHNICAL ANALYSIS

We are officially switching back to the FNMA 30-year 6.0% as the primary mortgage-backed security.  As of this morning, it has reached its highest price in three months.  The gap higher from last week remains as our primary support at 99.59.  But that should not even be a concern right now, since we’re up another 12bp at 100.09.  That puts prices just 7bp shy of the 200-day moving average.  We could see some mild resistance coming from the 200-day MA, but prices should have no trouble breaking it as soon as the Fed cuts their overnight lending rate, if not before.

Traders are doing everything they can to push the 10-year Treasury yield under 4.60%, but this level is putting up quite a fight.  A new downward trend has developed, and in fact it has created a nice downward trend channel between the new trend line and the previous trend line.  The yield should not only be below 4.60%, but it should be close to our next support at 4.45% within the next three weeks.

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