Playing tug-of-war

Wednesday, September 26, 2007

ECONOMIC DATA / NEWS

Yesterday we were talking about signals that could foreshadow a recession.  This morning it was reported that durable goods orders fell by 4.9% in August.  It does follow a 6.0% increase in July, so it could be just normal vibrations that we see in this data.  These are large, expensive items, so the orders to vary dramatically from month-to-month.  A few months in a row of weak orders would be more indicative of an impending recession.

One issue that could have had a lasting affect on durable goods if allowed to go for too long was resolved early Wednesday morning.  The United Auto Workers Union has reached a tentative agreement with GM, ending the two-day long strike.  The deal is expected to shave $3 billion off of GM’s annual expenses, by cutting the amount that GM is required to pay for certain workers.  But, it also created a health care fund that will benefit retirees.  Both sides appear to be satisfied with the results, but it still needs to be ratified by the local union chapters and approved by the courts.

The stock markets are up this morning, helped by the end of the UAW strike.  However, normally we would figure that the drop in durable goods orders would be a deterrent to stock investors.  But instead of looking at the data itself, investors are looking at what may happen as a result.  As we’ve said, the weaker the economic data gets, the more likely additional Fed rate cuts become.  These people believe that the Fed rate cuts will boost economic activity, thereby keeping the value of companies (and their stocks) higher. 

Ironically though, one of the main purposes of the rate cuts is to take some pressure off homeowners and encourage new home buyers to enter the market.  But if traders are buying stocks instead of bonds, then rates will rise rather than fall.  It’s somewhat of a circular logic.  Stock traders are acting based now, based on what they believe will happen in the future.  The problem is that their current actions could be spinning the future off in a different direction.  The main point is that at some point, whether it is next month or next year, the stock market should decline while bonds improve.  It will either be in anticipation of a temporarily slowing economy or as a result of one.

TECHNICAL ANALYSIS

MBS prices turned south this morning, not because of the data, but because of technical factors.  The 200-day moving average does not appear to be much of a factor, but the 25-day moving average has been knocking prices down for the last four days.  Right now we’re looking at a drop of 12bp, which has been unchanged for most of the morning.  The upward trend line is up to 99.75, which is just 16bp below the current price of 99.91.  If that doesn’t hold, there is also support at the 50-day moving average and the previous gap higher at 99.59.

Treasury trading has been much milder relative to MBS activity.  The 10-year Treasury yield is up to 4.66% right now, but it has been held below the 50-day moving average to this point.  The sharp upward trend has lasted for two and a half weeks now, but it should at least flatten out, if not change directions, within the next few days.

Read more articles on our Mortgage News page, or view our entire Mortgage News Archive.

Mortgage News & More Info

Modesto mortgage news feed provided by Winchester Lending Group