Current Trend Direction: Sideways - Battling Resistance
Risks favor: Floating
Current Price of FNMA 5% Bond: $101.62, -3bp
Bonds have already traded in a 62bp range within the first hour of trading. Uncertainty over the outcome of the US auto bailout as well as dismal Retail Sales and inflation concerns have Traders dazed and confused this morning.
Last night, the Senate rejected the $14B bailout for the US automakers, citing a lack of wage concessions by the United Auto Workers (UAW). GM and Chrysler are now on the brink of bankruptcy, which could come within the next month if an alternate plan can not be worked out. Additionally, vehicle sales for US cars have recently plummeted as consumers are hesitant to purchase from the Big Three over concerns they may not be around to back their warranties. This is making a bad problem much worse. Just a short while ago, word from the White House is that the government may be willing to use Troubled Assets Relief Program (TARP) funds to save an immediate collapse of the auto industry. We are closely watching how this plays out.
Inflation at the wholesale or producer level came in near expectations in November for the 4th month in a row, as the Producer Price Index dropped 2.2%. The decline was fueled by an 11.2% drop in energy prices. The Core PPI, which strips out food and energy, was inline at 0.1% leaving year over year prices at a 4.2% rate.
Retail Sales for November fell for a fifth straight month by 1.8%, this was actually slightly better than market expectations of a 2.0% drop. Either way, Retail Sales are very weak and indicative of the current economic climate. When stripping out auto sales, Retail Sales was -1.6%, also just slightly better than expectations.
Consumer Confidence was reported at 59.1, a bit better than expectations of 55.0.
We need to be very cautious floating here as the technical signals appear bearish. The Bond is showing a Double Top with prices "overbought" - and with floors of support quite a ways beneath current levels, there's potentially a lot of pricing to lose from here. But as we know these are not normal times and volatility remains high. Prices can swing dramatically on any news from Washington, which will trump technical factors. Therefore we will float carefully here and keep you posted.
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