Fed to drop rates lower

Tuesday, October 09, 2007

ECONOMIC DATA / NEWS

Any significant market movement will probably be on hold until the Fed meeting minutes are released at 2:00 PM ET.  Investors will be looking for hints as to what the next Fed move will be.  Most analysts still expect at least one more rate cut before the end of the year, but the amount and timing is a mystery.  Their next meeting is at the very end of this month.  One rate cut will not be nearly enough to open up lending capacity.  Some people believe the Fed will need to drop their overnight lending rate at least another full percent, which would bring it down to 3.75%.  We believe that the rate will be at 4.25% by the end of the year (most likely at their next meeting).  And unless the economy were to see a very sudden improvement, then they are almost certain to lower it even more early in the next year.

As for the rest of this week, there is not much data before Friday.  But, the week could end with a boom (for the better or worse) with retail sales and PPI numbers both coming out at 8:30 AM ET that morning.  Retail sales are expected to be lackluster already, so it would take a far worse reading to be much help for bonds.

TECHNICAL ANALYSIS

This morning’s mild 9bp rally is evidence that traders have acknowledged they may have been overly aggressive in their selling of mortgage bonds last Friday.  The FNMA 30-year 6.0% is at 100.12, which puts it back above the 200-day moving average.  Prices have made several attempts to dip below this line, but there have been no convincing breaks yet.  It is a very weak support at best, but it does still remain a support.

The 10-year Treasury yield is at 4.62% after closing at a two week high of 4.64% last Friday.  The 10-year has some tougher levels to break than MBS prices.  It must face the 50-day, 10-day, and then the 25-day moving average.  Meanwhile, there is virtually no resistance before 4.70%.

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