Rates getting better.

Wednesday, October 17, 2007

ECONOMIC DATA / NEWS

Granted, consumer prices will normally lag behind changes in producer prices, with the exception of gas prices, which usually quickly adjust with oil prices.  However, September’s CPI increase of just .3% suggests that even the gas stations don’t feel they can raise their prices too much for fear of losing business.  Oil, by the way, is up around $87 per barrel this morning, after soaring to a new record high above $88 yesterday.  Core CPI rose at a rate of .2%.  Inflation appears to be fairly tame still, which will make it easier for the Fed to cut their rate at least one more time this year.

The downward trend in housing starts continued in September.  They slipped to annualized rate of 1.19 million from 1.28 million the previous month.  Since sales of homes have been declining on nearly a monthly basis (especially new home sales), we do not expect building to pick up anytime soon.  As further evidence, building permits fell by 7.3%.  That’s the biggest month-over-month decline in over 12 years.  Even once sales numbers start to rise; there will be a delay of several months to over a year before builders lower their inventories enough to begin new construction.  Of course, all we’re looking for right now is an improvement in sales.

Today’s earnings reports were the complete opposite of yesterday.  JP Morgan, Coca-Cola, Intel, and Yahoo all beat analysts expectations.  Surprisingly, the stock market is struggling to produce any gains in the early going.  It’s very possible that losses by Altria and MGIC are offsetting the positive news.  It also isn’t helping that GMAC announced they will cut 25 percent of their staff.  And this comes just a day after Bernanke publicized his opinion that the housing slump is likely to have longer term effects on the rest of the economy.

TECHNICAL ANALYSIS

The FNMA 30-year 6.0% is up 6bp at 100.12.  That puts the current price 1bp above the 10-day moving average.  We’ll want to see a gain of another 6bp or more though before we officially declare prices to be out of the week-long trading range.  This will be tough because the 25-day moving average stands at 100.19.  But, healthy gains in the 10-year Treasury price might provide some incentive for traders to push MBS prices higher.

The 10-year Treasury yield has already sliced through the 10 and 50-day moving averages, and it is testing the next resistance, the 25-day moving average, at 4.59%.  This is a big test, because there is really no resistance before 4.30% after this level.  If the yield closes below the 25-day MA, we could see a big move lower over the next two to four weeks.  That should translate into better MBS prices as well.

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