Did you enjoy the wild ride we had last week? Volatility reentered the market as data and news went both ways providing moves both up and down. Mortgage backed securities ended the week up 63 basis points, providing a slight tick down in rates.
Those big events I mentioned last week played a huge role in the volatility, with Friday’s jobs data sending bonds into their wildest single day ride in a long time (the candlestick measured about 135 basis points). But what all happened last week?
As was expected, the Fed dropped rates another .25%, but the policy statement’s wording changed, giving a boost to bonds. Normally, bonds react negatively to the Fed’s move, causing mortgage rates to tick higher on Fed rate cuts, but this time the Fed stated they were all but guaranteed to stop the “insanity”. Since that means the Fed is finally facing the facts regarding inflation and changing their stance to a potentially more combative one, bonds moved higher this time.
However, the very next day, the Fed’s face got slapped by the PCE report. One of the statements the Fed had made Wednesday was “Although readings on core inflation have improved somewhat”, and that is where they were proven wrong by the PCE data. PCE came ticked higher and beat expectations, even at the core level. In fact, core inflation rose outside the “comfort zone” again, coming in at 2.1% year over year. Remember that this is the Fed’s favorite gauge on inflation, so that move had to have stung a bit. Bonds shrugged off the news for the most part though.
Then came Friday, and its much better than expected report, which sent bonds into oblivion. While the job market is still shrinking, the loss was much less than expected, and that brought back wage-based inflationary fears. The market sentiment changed later in the day as the thoughts became more regarding recession, and bonds managed to regain almost all of the lost ground.
So, now we have started a new week and this one should be much calmer. After last week, we all could likely take a breather and this week’s agenda should allow some of that. There are a few reports ahead that could send some ripples through the markets, though, so stay alert. Here is the breakdown:
- Monday: ISM Services Index (10:00)
- Wednesday: Pending Home Sales, Crude Inventories (10:30)
- Thursday: Initial Jobless Claims (8:30)
- Friday: Balance of Trade (8:30)
As you can see, not a lot of economic data to digest this week, so let’s look at the technical side. If you look at the larger picture, there is a general trend lower, but there are strong support layers that held up against Friday’s assault. Stochastics are in the middle, so they will not help determine the direction for now. Bonds are off their highs of the morning, but the support of the 50-day moving average has held as well.
Normally, I suggest a locking stance for the week, obviously subject to change as conditions warrant. This week, I can say that the way the markets appear, my stance will likely be that of locking, but as support holds, there may be some opportunity to float as well.
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6 responses so far ↓
1 Ling // May 7, 2008 at 4:22 am
I reckon the only thing of importance happening this week is the price of oil. Just keeps going up, and I think there’s an article being bandied about on the net which says $150 oil could soon become reality.
2 Robert D. Ashby // May 7, 2008 at 6:28 am
I have actually been hearing talk of $200 oil. It will be interesting to see what happens if the Fed does indeed stop cutting rates. We still have yet to see the full effects of their last rate cut on commodities, so there is definitely room for their prices to rise.
3 Cliff Pape // May 7, 2008 at 6:59 am
This is true but, the fed at this point has to be less concerned will oil. Current oil inventory is at a surplus so basic economics tells us the price must fall. However, there is one problem people are speculating in the market holding up the price. The fed is aware of this and knows eventually the market will have to correct itself. Then if necessary they can step in.
4 Robert D. Ashby // May 7, 2008 at 9:23 am
The Fed has been less concerned about oil, and inflation overall, which is what presents the problem. Hoenig spelled it out in his speech last night and he hit some points I have mentioned in the past on my own blog. The Fed has got to fight inflation or we may end up replaying the late 70s, early 80s.
5 Cliff Pape // May 7, 2008 at 10:44 am
Yes I agree inflation is definatley a concern and the fed needs to address it. So they will need to make a change in the near future by raising interest rates to head off inflation. However, the long run goals of the fed will also factor into that decision if the credit crisis becomes less of a factor.
6 va refinance // May 7, 2008 at 8:38 pm
Inflation is a huge concern and growing problem as we try to fix the broken economy.
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