Lower rates to come?

The trade gap in August improved, thanks primarily to a weaker dollar.  The deficit fell from $59.0 billion to $57.6 billion, which is the second best reading of the year for this data.  When the dollar is weaker (i.e. foreign currencies are stronger), it means that U.S. goods are cheaper relative to competing goods in other countries.  The losses in the dollar have escalated over the last month, so we will probably see the trade deficit improve even more in September and October.

For those economists who are still nervous about inflation, they may point to the 1.0% increase in September import prices as justification.  However, if we exclude oil prices, which were spiking during the month, import prices for all other goods fell by .2%.  Again, this is related to foreign countries’ need to lower prices in order to compete with the U.S.  This is completely reversed from “normal” periods in which the U.S. is struggling to beat foreign competition.  In fact, it has been one of the main reasons that the economy has not slowed more quickly.

And weekly jobless claims dropped this morning.  The 308,000 claims from last week are fairly consistent with the average for the year.  There have been many announced layoffs this year, but many of them have not actually been executed as of yet.  It is reminiscent of what we’ve seen during other slowdown periods where companies cut back on hiring, but they try to hold on to the employees they have in case there is a quick recovery.  Since the markets seem to be betting on a quick upswing, businesses may be relying on that optimism when making their employment decisions.

You may hear in the news today that foreclosures are twice what they were from September of 2006.  But we already know that foreclosures are rising significantly over previous years.  It’s the media’s attempt at dramatizing an obvious situation.  The more significant measurement is that foreclosures were down 8 percent from August.  They have been forecast to get progressively worse over the next six months, so the fact that they improved at all gives some hope that things may not get quite as bad as some people have predicted.

Overall, today’s economic reports are not directly affecting bond prices.  However, the data is being taken as positive news by the stock markets, and that is subsequently drawing money out of bonds.  Despite the fresh gains in stocks though, bonds are holding on with just minimal losses so far.

MBS prices took a sharp dip shortly after the stock market opened.  The FNMA 30-year 6.0% is down 9bp at 99.91.  Although it is a modest move, it has pushed the current candlestick below the upward trend line.  Prices are also barely below the 50-day moving average now.  There was a similar move yesterday, which did eventually reverse itself by mid-day.  There will also be mild support from the short-to-medium-term low of 99.78.  Plus, with stochastics getting deep into oversold territory, there is a good probability that prices will turn upward again within the next few days.  The only thing that could hurt those chances would be an unexpectedly strong retail sales report.

The 10-year Treasury yield did jump as stocks gained, but it has found resistance at 4.70%.  The yield is holding around 4.69%.  Its stochastics are also into oversold territory, so we should see yields head lower shortly.