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Risks favor: Locking as Prices Press Against a Brick Wall
Current Price of FNMA 6.0% Bond: $101.53, +3bp
The saying goes "Don't fight the Fed", and after favorable comments by Fed Chief Ben Bernanke in his speech last night, as well as a tame read on inflation this morning by way of the Core PCE, another Fed cut on December 11th is in the bag. The question of whether the cut will be .25% or .50% should be highly influenced by next Friday's Jobs Report.
In other comments, Bernanke stated the housing slump and related mortgage problems are "adding greater than usual uncertainty to the economic outlook. These developments have resulted in a further tightening in financial conditions, which has the potential to impose additional restraint on activity in housing markets and in other credit-sensitive sectors."
Core Personal Consumption Expenditure (PCE) - the Fed's key read on the state of inflation - was reported at 0.2% for the month of October. After the prior month's reading was revised slightly higher, today's number leaves year over year Core PCE at 1.9% and within the Fed's target zone of 1 - 2%. Stock traders are in rally mode, as they look forward to another Fed cut.
Overall Personal Consumption Expenditure (PCE) price index rose by 0.3%, which matched expectations. Meanwhile, Personal Income grew at a slower 0.2% pace while Personal Spending also was sluggish with a 0.2% rise. Both were below market expectations calling for 0.4% and 0.3% gains respectively.
The Chicago Purchase Managers Index (PMI) came in at 52.9, above expectations of 50.5, and showing the economy is still modestly expanding.
Bonds are in an almost "no-win" situation. Stocks are rallying, an inflation-inducing Fed cut looms near, and after a powerful rally, prices are pressing against a brick wall ceiling of resistance. Other negative technical factors include an overbought state and prices drifting far above their 25-day Moving Average. All these factors tell us that it's time to lock, and pocket the handsome gains we have seen of late - even though Bond prices are relatively flat for now. Information brought to you by Barry Habib and the Mortgage Market Guide