Walking the line

Tuesday, September 04, 2007

ECONOMIC DATA / NEWS

The Chicago PMI proved to be an accurate gauge of national manufacturing again in July, as the ISM index came in only about 1 point below it at 52.8.  It looks like May and June were temporary spikes when the index moved to 55.0 and 56.0 respectively, but the overall average has been in the low 50’s.  That puts manufacturing at a level barely above the expansion/contraction border of 50.0.

Construction spending had been forecast to come in flat for July.  Instead, it dropped by .4%, which is even greater than Junes decline.  Construction spending and housing starts are expected to keep falling until home sales begin to improve.  However, the slowdown is becoming somewhat greater than many were thinking six months ago, due to the greater than expected number of defaults by current mortgage holders.  What we should be focused on now though is home sales themselves, as well as the trend in defaults, and whether or not they continue to worsen.  And most importantly, we need to be on top of what the Fed and the government are doing to relieve some of the pressure.

Hurricanes Felix and Henriette are reminders of the power that these storms have, potentially able to affect the world economy.  Felix is a category 5, which is the strongest possible on the hurricane scale.  It is touching down in Honduras and Guatemala, and then is expected to move onto southern Mexico.  Henriette is supposed to hit the Pacific coast of Mexico around Baja California.  Both of these storms may destroy numerous crops and could possibly take out some oil supplies.  This would push international prices on these goods higher if a significant amount is destroyed.

TECHNICAL ANALYSIS

The FNMA 30-year 6.0% is down another 9bp at 99.81.  It has clearly broken the 10-day moving average, and there is nothing to stop it ahead of the next strong support at 99.59.  The upward trend line will meet this level soon, and should hopefully keep prices on track to move higher for the longer term.

The 10-year Treasury yield has jumped just in the last half hour from 4.53% to 4.57%.  This is going to be an important situation to watch, because it is right up against the downward trend line now.  There is a more gradual trend line that could yet develop, but the yield could very easily move to 4.70% before that takes shape.

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