Time to use your HELOC

Friday, September 28, 2007

ECONOMIC DATA / NEWS

Consumer spending was a little better than economists were forecasting, but it was nothing special.  The .6% gain in August was slightly better than the mediocre .4% from July.  The month of September, the final month of the third quarter, will be reported on toward the end of next month.  Auto sales rose as dealers offered deals to make way for the new models, and gas prices rose, which means they contributed extra to consumer spending.  We believe spending probably dropped off in September as gas prices have climbed, making consumers more hesitant to spend elsewhere and consumer confidence has been falling.

Inflation keeps easing, so the Fed will not have to worry about it when making their next rate cut decisions.  The core PCE price index rose just .1% last month, which has become the norm for this piece of data.  The year-over-year rate has dipped to 1.8%, nicely within the 1.0 – 2.0% range the Fed has been targeting.

Construction spending gained .2% in August after a .5% loss the previous month.  And as more proof that the housing slowdown is affecting other aspects of the economy, lumber analysts predict that the lumber producers will have to shutdown plants and scale back workers as demand has decreased substantially.  The housing market has become similar to a slow leak in your ceiling.  Initially, it’s going to be held back, but eventually it’s going to seep through and get everything wet.  It won’t necessarily soak everything, but the effects will be just enough so they can be felt all over.  This is why it seems likely that we are headed toward a recession.  It was interesting though, that Greenspan pulled back on his recession forecast this morning.  He is saying there is a less than 50/50 chance, but he has been very fickle lately, so his opinions carry a little less weight that they did two or three years ago.

The Chicago PMI was a little stronger than expected, but 54.2 is only a mediocre reading for this index.  Manufacturing sometimes gets little bursts when large orders come in for automobiles or aircraft, but don’t expect this mild improvement to be a trend.

TECHNICAL ANALYSIS

The wide-ranging candlestick from yesterday was able to break both the 200 and 25-day moving averages.  That momentum carried through to this morning where the FNMA 30-year 6.0% price gapped higher.  It is now up 15bp at 100.41.  There is a moderate resistance at 100.44, which is the level at which prices gapped lower last week.  Then, it would have to break 100.59 before it could completely close the gap.

The 10-year Treasury yield did break out of the upward trend as we expected.  And, it fell all the way to the 25-day moving average at 4.52%.  There yield is currently trading around 4.54%.  We will probably see traders make another attempt at pushing the yield to 4.30% or lower.

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