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Rates on a downward trend
Thursday, August 30, 2007
ECONOMIC DATA / NEWS
The first revision of two to 2nd quarter GDP bumped the growth rate from 3.4% up to 4.0%. It’s a strong growth rate, but no one expects follow through in the final two quarters of the year. Plus, it follows a dismal .6% rate from the 1st quarter. The economic data for the 3rd quarter so far suggests that the growth rate will slow to around 2.0%, but we believe it may even be worse than that. At the very least, it should be well under 2.0% by the 4th quarter, and getting very close to going negative. A recession still looks to be a likely scenario by the early to middle part of next year, which would help to improve lending rates even more.
As further evidence that the economy is taking a turn for the worse, weekly jobless claims rose to 334,000 last week. It’s the highest they’ve been since mid-April. This figure will probably continue to climb over the next several weeks at least. Monthly employment gains should start to decline significantly as well, which should be reflected in next week’s release of August’s employment payrolls data.
TECHNICAL ANALYSIS
Technical factors took over on a larger scale than we imagined yesterday, but everything should have been locked in from the day before anyway. The FNMA 30-year 6.0% has recouped 15bp of yesterday’s 34bp plunge. That is evidence that Wednesday’s move was extreme and traders are now more than willing to pick up MBS at bargain prices. Yesterday’s move did do a lot to help ease overbought conditions, but prices may level off now ahead of the next Fed meeting, about two and a half weeks from now.
The 10-year Treasury bond did not do nearly as poorly as MBS, but the yield did pop back up to 4.56% yesterday. It is down to 4.52% this morning. We do have to be wary of the fact that the stochastics have just crossed upward, but we’re still well within the downward trend channel. And, the yield is holding nicely below the previous support at 4.61%.
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