Rates continue to get better

Friday, October 19, 2007

ECONOMIC DATA / NEWS

Sure enough, the Philadelphia Fed survey, released yesterday at 12:00 PM ET, confirmed that only manufacturing on the whole is far from a recovery.  This was a partial contributor to the afternoon rally in bonds.  The New York area has outperformed Philadelphia and Chicago for most of the last two or three years.  The Philly index was even worse than forecasts and than the previous month at 6.8.  That compares to 28.8 in New York.

The stock market has plunged from opening as more companies missed earnings targets.  Wachovia was hit by the credit downgrades like most banks in the third quarter.  Caterpillar, the largest producer of large construction equipment, also missed expectations and lowered forecasts for the next year.  And 3M, who offers brands like Scotch tape and Post-it notes, couldn’t hit their sales goals in the third quarter.  The Dow is down to 13, 740 and looks like it could fall further.

Oil prices crossed $90 as they’ve continued to rise at a ridiculous rate.  Weather is not unseasonably cold, nor are there any hurricanes on the way.  Supplies are not being depleted too quickly, and demand has not spiked.  The only reason for increases is concerns that Iraq’s supplies could be cut if civil war ignites.  The jump seems unreasonable, to put it mildly.  Gasoline prices have yet to match highs from back when oil was in the mid to high 70’s on average.  On the one hand, gas stations could feel that they are not able to increase their prices in these tough economic times.  At the same time, it may just mean that there could be significant increases yet to come.  Normally, this would stir up inflation talks, but the threat of a slower global economy is overpowering any concerns about inflation.

TECHNICAL ANALYSIS

MBS prices have been on an incredible run the last three days with no signs of slowing.  The FNMA 30-year 6.0% has already spiked 21bp to 100.75 in early trading, blowing through resistance at 100.59.  They gapped higher while bridging the previous gap lower from exactly a month ago.  100.62 should become our new support level, and there is room before our next resistance at 100.91, which is the six month high.

The 10-year Treasury yield is making that strong run toward 4.30% that we’ve been forecasting.  It is down to 4.43%, which is the lowest it has been in a month.  The stochastics are sharply downward, indicating strong downward momentum.  We expect this to carry on for at least the next three days to a week, and it could be longer if the stock market fall by more next week.

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