"I've fallen and I can't get up", is the famous line from the TV commercial by Life Alert, which many TV viewers are familiar with. And this may be applicable to trading in Mortgage Bonds, as they have fallen below both their 50 and 100-day Moving Averages...but are attempting to get back up after a mixed bag of news items this morning.
Initial Jobless Claims were reported at 342,000, much better than expectations of 375,000 and the lowest reading in over 2 months. Additionally, the more closely watched four week Moving Average declined to 369,500 - that's the best number in a month. This better than expected report has applied some early selling pressure to Mortgage Bonds.
Also adding to the selling in Bonds was the Durable Goods Report. Even though last month's reading was lousy at -0.3%, a favorable revision to February's dismal -1.7%, improved it to -0.9%. Still bad, but not as terrible as first indicated. Starved for a glimpse of any type of silver lining, Traders took this as a net positive for the economy and sold off more Bonds.
You may recall in last Wednesday's update, we had discussed how the rising cost of materials for building new homes had made them more expensive to construct than it would be to purchase a comparable existing home. We felt that this change would be very problematic for home builders. And this morning's New Home Sales numbers for March were reported at a paltry 526,000, much worse than expectations of 580,000. Of even greater concern was an almost alarming increase in the inventory of New Homes, which rose to an 11 month supply. It is highly likely that the existing home market will bottom, stabilize and begin to inch higher, well before the New Home market does. Overall, Bond Traders took this news as an opportunity to buy back some Bonds. And as you can see on the Bond Page, prices have improved somewhat from their lows after this report.
Fed Day is here once again, and at 2:15pm ET, the Fed will announce their interest rate decision and policy statement. We expect that the Fed will make a .25% cut, bringing the Fed Funds Rate to 2.00%. But as I mentioned in yesterday's Update, what will really grab attention is the policy statement. There is speculation that the Fed may signal the present cutting cycle is nearing an end, especially in light of renewed concerns over inflation. If this is indeed the case, we may actually see Mortgage Bonds improve on the news - whereas in the past, Bonds have worsened in response to the Fed's cuts, as they serve to fuel inflation. This announcement should be very interesting so stay closely tuned later today.
In the mix this morning was a better looking ADP Employment Report, which showed 10,000 new jobs created, far exceeding their own estimates for 60,000 jobs lost. ADP has not been a super accurate indicator for the official Jobs Report, but this positive reading did raise some eyebrows in the trading pits. Tomorrow, I will lay out my Jobs Report strategy heading into Friday's important release. At the moment, economists are expecting the Department of Labor's report to show a loss of 75,000 jobs for the month of April.
The Chicago Purchasing Manager's Index for March was reported at 48.3, slightly better than expectations of 47.5. The market offered little reaction to the news.
Mortgage Bonds are tip-toeing on the 50-day Moving Average, but the news from the Fed this afternoon will trump all technical signals. I will be patient and carefully float into the Fed announcement later today.
After two days of nice gains, Mortgage Bonds are taking a little breather as prices test a ceiling of resistance at the 50 and 100-day Moving Averages. Stocks are under some selling pressure on news that Germany's largest Bank, Deutsche Bank, reported its first quarterly loss in five years after writing down 2.7 Billion Euros ($4.2 Billion) in sub-prime related losses.
Today kicks off the two day Fed Meeting and tomorrow the monetary policy decision and statement will be announced. I expect the Fed to lower the Fed Funds Rate by .25%, to 2.00% and this is also what the Fed Funds Futures are presently pricing in.
At 10:00am ET, Consumer Confidence will be reported. Unless the report wildly misses expectations, I don't expect the market to react too dramatically in advance of the Fed tomorrow. I will float, but very carefully as prices test a dual layer of resistance at the 50-day and 100-day Moving Averages. As mentioned in yesterday's update, a signal from the Fed tomorrow that the rate cutting cycle is over should help Bonds. But because they are testing resistance, this a very delicate situation. I will float and give the Bond a chance to improve, but be ready to lock should things change in this volatile market.
With no economic news on the calendar today, action is slow as Traders gear up for what is expected to be a week filled with some of the biggest economic events of the month.
On Wednesday, the Fed will release their Policy Statement and interest rate decision. At the moment, the Fed Fund Futures are pricing a 75% probability of a .25% cut to the Fed Funds Rate. We also see a .25% cut, but of far more importance will be the Fed's Policy Statement. As you know, Bond prices have reacted very poorly after Fed Rate cuts, due to the expectation that the cut will spur on inflation. But if the wording of the Policy Statement leads Traders to believe this may be the final cut, it might just have the opposite effect, helping Bonds actually move higher with the reduced prospect of the Fed spurring future inflation.
Right on the heels of the Fed decision and statement, Thursday will bring the Fed's most favored gauge of consumer inflation, the Core Personal Consumption Expenditure Index (PCE). Especially since it will come after Fed day, it will be interesting to see the inflation read in light of the Fed's decision. And as if this weren't excitement enough for the week, Friday will bring the important Jobs Report, where early estimates are for a loss of 80,000 jobs.
With Bonds currently trading between overhead resistance at the 50-day Moving Average and support at the 200-day Moving Average, Bonds will likely take their cues from action in the Stock market today. For now, I will Carefully Float - but as usual, keep your transactions ready to lock, as we have seen many dramatic intra-day reversals of late.
It's another wild ride so far this morning, but these days, we'd be surprised if it wasn't. Bonds have been extraordinarily volatile, which can be a bit stressful. However, remember to use this to your advantage, as your competitors without this information are left scratching their heads...while you are able to help your clients and referral sources through these crazy times.
Mortgage Bonds opened a whopping 56bp lower than yesterday's close, but cut their losses in half as they attempt to stabilize. The reason for the negative open was inflation concerns from around the globe - it's becoming a smaller world, that seems to be more interconnected every day. Oil prices remain stubbornly high, while food prices have increased at an alarming rate. These inflationary pressures are creating some stiff headwinds for Bonds.
The University of Michigan Consumer Sentiment for March was reported at 62.6, which was just slightly below expectations of 63.2. The market did not react much to the news.
After this week's relatively slow economic news calendar, things really heat up next week with many potential market moving reports, including the Fed's favored gauge of consumer inflation, the Core Personal Consumption Expenditure Index (PCE) on Thursday, and Friday's important Jobs Report, where early estimates are for a loss of 80,000 jobs. Plus, on Wednesday the Fed will announce their interest rate decision. At the moment, the Fed Fund Futures are pricing a 75% probability of a .25% cut to the Fed Funds rate.
Much like yesterday, this morning we woke up and saw considerably worse pricing right out of the gate. The volatility has created large differentials in the pricing windows on the Bond Page. Therefore, keep an eye on the Bond Page.
The Bond is now trading between the 50 and 200-day Moving Averages and will likely take their direction from Stocks.
"Go on, take the money and run"...Steve Miller. This morning, Bond prices ran up and touched a ceiling of resistance at the 25-day Moving Average. But then Traders quickly sold Bonds, took some money by grabbing the profits gained and ran to the sidelines. We literally saw Bond prices drop 38bp in a 15 minute time span. But this is becoming a very common occurrence, as huge intra-day price swings and rapid directional changes are now the norm.
On a day like today, when there isn't any economic news to feed off, the markets are more reliant on technical signals like resistance and support. As long as the Bond remains above both the 50 and 100-day MA, prices may once again attempt to move higher and break above resistance at the 25-day MA, hence I am floating very carefully. However, should prices break below this close layer of support, I will quickly switch to a locking bias.
The volatility continues this morning, on the heels of yesterday's incredibly wild session.
Yesterday, Bonds were so volatile that the price differentials from just one half hour to the next in the windows on the Bond pricing grid put lenders in a position to re-price for better and worse at the same time depending on when pricing was distributed. This clearly provides additional challenges for all of us attempting to navigate through these wild times, which include both enormous price swings as well as rapid directional changes in the market. Please check the pricing window that most closely approximates the lender's rate sheet you receive.
And the reason for yesterday's sudden rally in Mortgage Bonds was an announcement from The Bank of England, allowing Banks to swap Mortgage Bonds for government bonds, which creates greater value and stability for mortgage backed securities. Since this announcement did not effect Treasuries, they did not participate in the rally. This further illustrates the pitfalls of watching incorrect indicators like the 10-year Treasury Note - be sure to use this information against your competition.
Existing Home Sales for March was reported at 4.93 Million, meeting expectations. The inventory of unsold homes rose to a 9.9 month level from February's 9.6 month reading. The median home price was $200,700. All in all, this was not a great report but it was not worse than the market had expected.
Yesterday's move higher pushed Bond prices above both the 50 and 100-day Moving Averages, which may now serve as a floor of support. Stocks are trading lower, which may also help support Bonds.
After a wild Friday to close out last week, Bonds are trading slightly lower this morning and just below a dual layer of resistance at the 50 and 100-day Moving Averages. There are no economic reports due today, so Bonds will likely respond to the action in the Stock market as well the aforementioned technical signals.
Bank of America said profits fell for a third straight quarter, and announced that they are setting aside $6 Billion for bad loans. This has applied some selling pressure to Stocks overall, but there was some good news for the financial sector, as National City Corporation announced they are getting a $7 Billion cash infusion from a group led by Corsair Capital LLC. This news suggests that investors are seeing value in the battered financial sector and are willing to invest at current levels. As we've mentioned before, it does appear that the markets are feeling that there is a bottom being reached in the credit crunch.
Last Friday saw intraday price swings of 100bp, ending in a nice rally higher. And if you take a look at the Bond chart, you can see how the rally in Bonds stopped exactly at overhead ceilings of resistance at the 50 and 100-day Moving Averages...pretty amazing. So far today this dual layer of resistance has kept a lid on any further price advance. For now I will Float and enjoy this morning's improved rate sheet - but be ready to lock as prices could quickly give up some of the gains seen on Friday.
Another leg lower this morning for Bonds. As I mentioned in yesterday's Update, Bond prices appear to be destined to test the next clear floor of support at the 200-day Moving Average, another 36bp below current levels.
And it's been a very negative run for Bonds lately - in fact, since our Alert to Lock on April 10th (which was followed by four more Alerts to Lock), Bonds have lost more than 200bp in just over a week.
This morning's move lower in Bonds was prompted by some very positive news from the Stock market, including Google, who posted an amazing 30% profit increase and blew analyst projections out of the water. Although Citigroup reported some losses, their share prices are actually moving higher, because the news wasn't nearly as bad as anticipated. Caterpillar posted a 13% jump in quarterly profits, while Honeywell profits rose 22.2%. All this positive sentiment in Stocks is pulling money right out of Bonds, forcing prices lower.
With no economic reports or Fed speeches due today, Bond trading is likely to continue responding to the action in Stocks...and if Bond prices stay on their current track lower, will soon be testing support at the 200-day Moving Average.
Volatility remains in vogue. After yesterday's break below the 50 and 100-day Moving Averages, which prompted our Alert to Lock, Bonds started out this morning by opening another 34bp lower than yesterday's close, but are now attempting to recover.
After the ugly open, Bonds had received a boost early on from a soft Initial Jobless Claims report, indicating continuing weakness in the labor market. The report showed 372,000 new claims, essentially in line with expectations, but the more closely watched four week moving average of Claims stands at 376,000 - a level which historically spells recession. Additionally, the Philadelphia Fed Manufacturing Index for April was reported at -24.9, far worse than expectations of -15.0. The negative headlines are helping Bonds in their attempt to recover some of the morning's losses.
Later this afternoon, the Fed is auctioning $25 Billion in 28-day credit through its new Term Securities Lending Facility (TSLF). This provides banks with an option to pledge their mortgage-backed securities as collateral in exchange for US Treasuries, which can in turn be more easily sold on the open market, with the proceeds being used for new loans. How well the TSLF auction is received could impact the Bond market, as the last auction showed mediocre results and caused Bonds to move lower.
Adding to the excitement of the day are a couple of Fed speeches, from the likes of Fed Governor Donald "Ice Cream" Kohn and our infamous friend, Dallas Fed President Richard "Loose Lips" Fisher. You just never know what Loose Lips might say and how the market will react - so stay tuned this afternoon.
Much like we have seen in the past, after breaking below floors of support at the 50 and 100-day Moving Averages, Bond prices dropped pretty quickly. Hopefully you locked on yesterday's Alert, and avoided the price erosion. It is very volatile, and I'll be watching closely to see if Bonds can mount a recovery. We can carefully float on new transactions taken today, but be ready to lock should we see Bonds turn lower once again. The next clear level of support is at the 200-day Moving Average, which lies about 70bp below current levels.
It's been a wild morning, with prices all over the map. Mortgage Bonds started lower, tested the dual floor of support at the 50 and 100-day Moving Averages, bounced much higher, dove lower below support and most recently have improved to sit at support. Shew...a roller coaster ride for sure.
The Consumer Price Index (CPI) for March showed consumer inflation at reasonably acceptable levels - especially when considering yesterday's Producer Price Index (PPI) showed wholesale inflation ticking higher. The Overall CPI rose by 0.3%, mostly due to increased costs of energy and food. After factoring out volatile energy and food costs, the Core rate of consumer inflation increased by 0.2%. Both inflation numbers were in-line with expectations. The more closely followed year over year Core CPI rate now stands at 2.4% and this number is pretty tame considering the deep rate cuts the Fed has delivered since September. Overall, the number was friendly to both stocks and bonds. But it likely gives the Fed a green light to cut again on April 30th.
Housing Starts and Building Permits for March were both reported worse than expectations and their lowest levels in 17 years. The market had already been expecting a poor number, so the reaction to the news was tempered. And through our research, we have some interesting information about new construction homes...typically, new construction homes are less costly to create than an existing home. This has always added to their appeal and profitability. But due to significantly higher construction costs and lower existing home prices, a new construction home is more costly to create than an existing one. I think this portends some bumps in the road for home builders and for the new construction sector.
Industrial Production and Capacity Utilization were both reported close to expectations.
Stocks are bouncing higher so far today on the heels of better than expected corporate earnings and guidance from Intel and banking giants J.P. Morgan Chase and Wells Fargo.
At 2pm ET, the Fed's Beige Book being prepared for the April 29-30 FOMC meeting will be released and this could move the bond market later this afternoon. Also later today, San Francisco Fed President Janet "Always" Yellen and Philadelphia Fed President and voting FOMC member "Three Swing" Charlie Plosser both hit the stump. As always, the Traders will be listening for anything that could move the markets.
Don't blink - the market will likely change. I am locking as of yesterday, but this crazy market can rebound from this floor of support. But should this floor be broken, the next strong floor lies at the 200-day MA...a whopping 130bp lower.
It's tax day, so make sure your taxes are filed by midnight. And it's been a taxing experience of late to watch Mortgage Bonds begin the day to the upside, only to reverse lower, causing us to send an Alert to Lock yesterday. But prices are starting the day lower this morning, so perhaps there is a reversal in the cards where prices may improve later today.
In the news, the wholesale inflation measuring Producer Price Index (PPI) jumped 1.1% in March, well above expectations, thanks to record high oil prices and a 17-year high on food prices. This left the year over year PPI at a beefy 6.9%. But the more closely watched Core rate of PPI, which excludes volatile energy and food prices, increased by just 0.2%, matching expectations. The year-over-year Core PPI is at a more modest, but still concerning 2.7%. As we have explained in the past, increases in wholesale inflation don't always get passed on to the consumer, especially in slower economic times, as retailers have little pricing power.
The volatile Empire State Manufacturing Index for April was reported at 0.6, far improved from March's -22.2 level and much better than expectations...but still a soft reading. It remains to be seen if today's report is the start of an improving trend in manufacturing, or just one good number.
Bond prices are improved from their worst levels, after dipping down towards a dual floor of support at both the 50 and 100-day Moving Averages. Bonds are currently struggling to move back above their 25-day Moving Average. I'll Float for now to give Bonds a chance to make a recovery.
Prices have gone from up to down to near unchanged and then down a bit as of now. Some poor earnings numbers from Wachovia got bonds moving up before the market opened, but then a slightly better than expected Retail sales number turned things around.
The volatile Retail Sales for March showed a 0.2% reading, higher than the 0.1% expected, but still not that great. Additionally, February's prior reading of -0.6% was revised to a slightly better -0.4%. When excluding the effect of vehicle sales, Retail Sales increased by 0.1%, just below expectations of 0.2%.
Wachovia, the fourth largest US bank, reported a loss of $393 million related to investments in sub-prime mortgages. The bank also announced it is cutting its dividend by 41% and is selling stock to a private investment group to raise $7 Billion in capital. This bad news weighed on stocks in the early going.
Federal Reserve Governor and voting FOMC member Kevin "Car" Warsh is scheduled at 3:15pm ET, with a question and answer session to follow. With the market so jittery, stay tuned during this time, as there is always the potential for some more volatile price movement.
If you take a look at the chart on the Bond Page, the floor of support at the 25-day Moving Average has moved higher and is now about 38bp beneath present levels. For now I will carefully float.
Stocks are trading lower this morning on news that Dow component, General Electric, reported worse than expected earnings and also said their future earnings would be lower than previously thought. GE stated the primary reason for the shortfall was due to the credit crunch and a slowing economy. The profit shortfall took the Stock market by surprise and as a result, Stocks moved lower and Mortgage Bonds improved higher.
The University of Michigan Consumer Sentiment Index for April was reported at 63.2, which was far below expectations and represented a 26-yr low for the index. This very ugly reading suggests that consumers may be hesitant to make large purchases, which does not bode well for future economic prospects.
Mortgage Bonds continue to bounce around in a very wide trading range. I will carefully float for now.
The Initial Jobless Claims report showed 357,000 new claims, well below expectations of 383,000...and a big improvement from last week's reading. However, the more closely watched four-week moving average of Claims rose to 378,250, the highest four-week average since October 2005. Overall, this report confirms the continued weakness in the labor market, and as a result, Mortgage Bonds are trading slightly higher.
It was no surprise that the European Central Bank left its benchmark interest rate unchanged at 4.00%, but the Bank of England cut their own benchmark rate by .25%, bringing it down to 5.00% in an effort to stimulate their economy. Great Britain has been experiencing some of the same economic issues as the US has...a tight credit market, declining home values, and a stagnating economy.
At 1:00pm ET, Fed Chairman Ben Bernanke is scheduled to speak, followed by a question and answer session. The markets will be listening, and could react should Big Ben offer some surprise remarks.
I will continue to carefully Float, and see if prices can improve and retest resistance at the top of the current trading range.
There are no economic reports scheduled for release today and Mortgage Bonds are trading a bit higher in the early going.
Yesterday, the Fed Minutes were delivered and gave some insights on the dissenting votes from both Fed Presidents Richard "Loose Lips" Fisher and "Three Swing" Charlie Plosser. As expected, they both are concerned about inflation risks. They also both went on to say that "inflation expectations could potentially become unhinged if the Fed continued to lower the funds rate in the current environment." This meeting marked the first time since 2002 that two FOMC voters dissented. And expect to hear more from Dallas Fed President Richard "Loose Lips" Fisher, who will be speaking at 1:30pm ET on the current state of the economy. As we have come to know, Loose Lips can move the markets with his uncontrolled outbursts and outrageous comments. Knowing he is very concerned about inflation, which bonds hate, it is very likely that he may upset the markets with his unbridled remarks.
Mortgage Bonds are trading in the middle of a very wide range and have lots of room to move in either direction. We will float this morning, but very carefully because Loose Lips could turn things sour as he unleashes himself this afternoon.
First quarter earnings season for Stocks has gotten off to a rough start with disappointing news from aluminum company Alcoa and chip makers Advanced Micro Devices and Novellus Systems. Their weak earnings reports and guidance have set a negative tone over the Stock Market, thereby helping Bonds move a bit higher this morning.
At 2pm ET, the minutes from the March 18th Fed Meeting will be released. At that last meeting the Fed's decision to cut rates was not unanimous. Dallas Fed President Richard "Loose Lips" Fisher and Philadelphia Fed President "Three Swing" Charlie Plosser both voted against the decision. The reason they had both dissented was that these two well known inflation hawks both feel that the recent Fed cuts could set off a spike in inflation. As their concerns are released in detail through the minutes, it is possible that the Bond Market may get jittery as the inflation dialogue ensues.
Mortgage Bonds are attempting to climb higher, but in this volatile environment, the ride has been and will continue to be very bumpy. With Stocks undergoing some selling pressure, we will float very cautiously, but be ready to lock, especially later today when the Fed Minutes are released.
The recent euphoria in the Stock market continues, and the word in the trading pits is that perhaps the credit crunch is over. Today, we are hearing about more financial institutions raising capital, and this time it is Washington Mutual saying that it has investors injecting $5 Billion in cash. Traders are reading the recent investments and capital raising in the financial sector as a sign that the worst days of the credit crisis may be in the rear view mirror. As a result, Stocks overall are trading higher, and as money flows out of Bonds and into Stocks, this is hurting Bond prices a bit this morning.
Today kicks off the beginning of earnings season for Stocks, which may have the potential to add to the euphoria or change the mood to a negative one depending on the results. With the scent of recession in the air, the quality of corporate earnings and especially future guidance will largely influence the direction of both Stocks and Bonds in the coming days. If corporate earnings are reported weaker than expected, Stocks may come off the happy gas and head lower, which would provide a boost to Bonds.
Mortgage Bonds, while trading lower, are improved from the worst levels seen earlier in the day. Additionally, prices remain well above support at the 50-day Moving Average. For now, I will continue to Float and give Bonds a chance to further improve - but be ready to Lock if things turn sour.
The Jobs Report is in. This morning, the Labor Department reported a loss of 80,000 jobs in March - the biggest monthly job loss in five years. The unemployment rate also ticked significantly higher to 5.1% from 4.8% last month. Expectations were for a 5.0% reading. As a result of this lousy Jobs Report, Mortgage Bonds are trading nicely higher.
In yesterday's Daily Update and Jobs Report Strategy, we talked about how the Labor Department uses averaging to come up with a number more quickly...and how this likely understates the REAL number of jobs lost. And only until we receive later revisions do we get a true read on the Job market. And sure enough - this morning's revisions do suggest the labor market is even worse than previously reported, as huge downward revisions to both January and February erased an additional 67,000 jobs, over and above the 85,000 job losses that had been reported during that period. Overall, this dismal Jobs Report tells us the economy is indeed in a recession, and may even be worse than many think. And yesterday's very poor Initial Unemployment Claims number was not factored into today's Jobs Report because it was outside the cutoff. This tells us that the jobs picture may get worse before getting better.
Mortgage Bonds are trading in the middle of a wide range, with the next clear overhead resistance about 66bp higher than current levels. I will maintain my float position for now, but be ready to lock and preserve these gains in this volatile environment.
Mortgage Bonds are higher after a weaker than expected Initial Jobless Claims Report provided a boost.
Initial Jobless Claims were reported at a worrisome 407,000, reaching their highest level since September 2005. The more closely watched four-week moving average rose to 374,500...even worse than the levels seen during the past two recessions. The data suggests a weakening trend in the labor market and an economy that is in a recession.
The ISM Services Index for March was reported at 49.6, which was better than expectations of 48.5. On the positive news, Bonds gave up some of their earlier gains.
Jobs Report Strategy
It is never easy to forecast the Jobs Report, but recent signals are pointing to a weak number. Certainly, this morning's dismal Initial Unemployment Claims reading indicates that the labor market is under pressure. It is expected that tomorrow's Jobs Report will show a loss of 50,000 jobs, but there are some whispers about it being even worse. This is in sharp contrast to yesterday's ADP Report, suggesting the official Jobs number would show positive growth of 40,000 for the month - still pretty weak, but a differential of about 90,000 jobs between the estimates from economists and ADP.
So in formulating our strategy, we have clear signs of a recession, significant increases in unemployment claims and modest pressure on hourly earnings. All this points to a lousy report, with lots of job losses. But ADP has it coming in with gains and a big 90k difference from the estimates.
And there is another interesting fact to consider...The Labor Department uses a lot of averaging to help it come up with its numbers more quickly. That's why there are often huge revisions later. Think of it this way - and because it's now Baseball season, I'll use a Baseball analogy - let's say that mid-way through the season a hitter has been red hot and has a batting average of 340. But he has declined into a bad slump for several weeks since. So while he now can't even hit a basketball thrown underhand to him, his average, while lower to 300, is still very strong due to his previous hot performance. So someone looking at just the statistics may think that this guy is terrific, but he is really someone the fans are booing as he approaches the plate. This is not very different from the current numbers being reported by the Labor Department - previous averaging will likely overstate the amount of job creations, which will mask how bad the job market really is. This is similar to the recovery we had seen in 2002 - 2003. The averaging method understated the true job gains back then, causing many to incorrectly say it was a jobless recovery. The later upward revisions proved this point.
This all brings us back to how difficult it is to forecast this report. The REAL number is probably worse than what will be reported tomorrow...but it will take months for the revisions to shake that out. We think we will see a loss of jobs in the report, of around 35,000 - better than what the market expects, but worse than ADP projects. How will Bonds react? Initially worse because it will be better than expectations, but prices should stabilize later as traders come to the realization that it is still a crummy number. I will suggest floating, but watch the 50-day as well as the 100-day MA closely. It will be volatile.
Stocks are trading sharply higher on sentiment that the worst is over for the credit crunch. Major investment banks like Lehman, UBS and Deutsche Bank are reporting new capital raising measures and removing sub prime assets from their books. Stocks, led by the financial sector, are sharply higher on the optimistic outlook. As a result, Mortgage Bonds are being sold off.
A significant amount of write downs from UBS and Deutsche Bank was announced today. And although the news is negative, it has given the markets the feeling that these Bankers are throwing in the "kitchen sink" and getting rid of all the bad news. While it is difficult to say if this is indeed the worst and perhaps the last of the bad news on sub prime, for today at least the markets are celebrating it, thinking that the only place to go from here is up.
Additionally, US investment bank Lehman Brothers announced plans to raise additional capital by offering three million convertible preferred shares. The offering is being very well received by the markets, as they are buying it up with both fists. This news is also being taken as a sign that the damages to major banks caused by sub-prime woes and the ensuing credit crunch may be nearing an end because investors are willing to invest fresh capital into the same financial institutions that have had negative exposure to sub prime.
The ISM Manufacturing Index for March was reported at 48.6, surprisingly higher than expectations of 47.5. On the news Stocks moved a lot higher and pressured Mortgage Bonds even lower.
Prices are down thus far, after both favorable economic news and a strong stock market. But the Bond did dip down to within a whisker of the floor of support at the 50-day Moving Average, and has since rebounded slightly. This level will be important to watch today, as it has acted as a firm floor for the past couple of weeks. I will float for now and see if this floor does hold.