Risks favor: Locking Bias as bonds remain beneath 200-day Moving Average

Current Price of FNMA 6.0% Bond: $100.06, + 6bp

“I’m addicted to ya babe, You’re a hard habit to break” – Chicago. Mortgage Bonds are having a hard time trying to break the habit of touching the 200-day Moving Average and moving lower. In fact, it has touched this level each of the past six days, but has been unable to close above this strong ceiling of resistance.

The final reading on Gross Domestic Product (GDP) for the second quarter showed the US economy growing at a 3.8% annual rate, which was essentially in line with expectations and is the quickest rate in more than a year. This report had little effect on the market as it is a second quarter number. Traders will be much more focused on 3rd Quarter GDP numbers which will be a more timely reflection of the economy.

Meanwhile, Initial Jobless Claims was reported at 298,000, which was well below expectations and the lowest level since early May. Traders have been making a living off the weak Job numbers of late, but the recent strength in jobless claims may signal that the streak of poor jobs reports may be turning – which would be bad for Bonds.

New Home Sales for August was reported at 795,000 which was lower than expectations of 830,000. The median price came in at $225,000, which was the lowest level since January 2005. The inventory of unsold New homes rose to a 8.2 month supply from last month’s 7.5 month reading. No matter how you look at it, this is a weak report. On the news, Bond prices moved slightly higher as Stocks were pressured lower. It remains to be seen if this lousy report can help bonds climb above the 200-day MA.

At 1pm ET today, the US Treasury will be selling $13 Billion in Five-year Notes. Yesterday’s 2-year Note auction didn’t impact Mortgage Bonds even though it went well. But today’s auction of slightly longer maturities could be more influential on MBS pricing.

The 200-day MA has been very difficult to break without strong news to help push through it. Tomorrow brings the release of the Core Personal Consumption Expenditure Index (PCE), the Feds favored inflation gauge. This report could cause a decisive move in Bonds because it may dictate if the Fed can cut again with inflation tame, or if the Fed needs to hold because inflation is on the rise. Both Stocks and Bonds could have sharp reactions.