Market Update – February 29, 2008
Risks favor: Floating – but very cautiously
Current Price of FNMA 5.5% Bond: $100.47, +34bp
It’s Leap Day…and Bonds are leaping higher. Ever since bouncing off the 200-day Moving Average on Tuesday, Mortgage Bonds have leaped an amazing 216bp higher! Prices have just edged above a dual layer of overhead resistance provided by the 25 and 50-day Moving Averages, so we will have some caution with our Floating stance as prices battle along this ceiling. Much will depend on how stocks fare today, with them already down significantly in the early going.
The Core Personal Consumption Expenditure Index (PCE), the Fed’s favored gauge of consumer inflation, was reported at 0.3% for the month of January. This matched expectations and left the closely watched year over year Core rate at 2.2%, which is outside of the Fed’s desired target zone for Core Inflation of 1- 2% – but not crazy. Bonds reacted little to the report, as “dovish” comments by Fed Chair Bernanke over the past two days released the potential steam out of the report. Personal Income and Spending both matched expectations and offered no surprises. Again, the cuts and stumulus have yet to affect the current environment, so inflation may be a much more serious concern as the year goes on…and that will eventually hurt rates.
The Chicago Purchasing Manager’s Index was reported slightly below expectations and the University of Michigan Consumer Sentiment Index for February met expectations. The market reacted little to these reports.
The Fed will be on parade today with several officials scheduled for appearances. This morning, Boston Fed President Eric Rosengren “colored glasses” and Fed Governor Frederic “Fast Freddy” Mishkin will speak. Later today, Atlanta Fed President Dennis “The Spider” Lockhart and St. Louis Fed President William “Everyone In The” Poole will talk. Question and answer sessions are expected to follow each appearance and the nature of their unscripted commentary during Q&A could sure influence the markets as we’ve seen in the past.
After such a fast rally higher in prices and with the Bond testing a dual layer of resistance at the 25 and 50-day Moving Averages, we will continue to Float, but extra cautiously, as we watch how Bonds react to this ceiling.