Mel's Blog

The market volatility continues as Mortgage Bonds are trading higher after yesterday’s 34bp sell-off.  Prices still remain below a very tough and now tested ceiling of resistance at the 200-day Moving Average.  

This morning’s economic news had little initial market reaction.  But there were some clues about the labor market from another increase in Initial Jobless Claims numbers.  Initial Jobless Claims were reported at 334,000, above expectations of 320,000, and the highest level since April 14.  As we have said, it was just a short time ago that this number was around the 300k level.  Let's keep this in mind ahead of next Friday's Jobs Report.  

The Preliminary Gross Domestic Product (GDP) for the second quarter was revised to 4.0%, which was slightly below expectations of 4.1%.  The number is better than Q1, but still a bit on the slow side.  The good news is that the growth is still positive and not recessionary.    

Traders are very focused on tomorrow's action, which includes a speech from Fed Chair Ben Bernanke and the release off the Core Personal Consumption Expenditure (PCE) – the Fed’s favorite measure of consumer inflation.  

Everyone wants to know…will Benny and the Feds soon pull the trigger on an interest rate cut?  Or will they continue to tweak inter-bank interest rates at the Fed Discount Window with repurchase agreements and then sit back and see what unfolds in the financial markets?  The stock market wants a cut in the Fed Funds Rate badly and will likely sell-off sharply if it does not materialize.  Bonds will look to the Fed's posture on the decision.  If the Fed says inflation is in check, bonds should be happy.  But inflationary remarks will hurt bonds.  We still think the Fed has the green light to cut...but we have two very important economic hurdles to first clear.  Tomorrow's PCE and next Friday's Jobs Report.

Speaking of Core PCE, economists are expecting a reading for July at 0.2%, which would leave the year over year Core rate within the Fed's target zone of 1 to 2%.  Should this number be reported at 0.1%, like it has each of the past several months, Bonds may receive a boost.  We think PCE will remain within the Fed zone, bonds will like it, but hang under the 200-day MA.