Risks favor: Cautiously Floating with prices above 200-day MA

Current Price of FNMA 5.5% Bond: $98.47, -6bp

Mortgage Bond prices are modestly lower, but have shown some positive signs, as they have bounced off the 200-day Moving Average this morning. A look at the chart shows how this pivotal marker has been tested a few times lately and prices have managed to hold themselves above it. So far today, the Bond has dropped down to touch exactly on the 200-day MA before bouncing higher.

The Overall Producer Price Index (PPI), a measure of inflation at the wholesale or producer level, swelled by 1.0% during January, which was more than double expectations of 0.4%. This hot reading left year over year Overall PPI at a smoking 7.4%, which is the fastest rate of year over year wholesale inflation since 1981. Meanwhile, the Core PPI, which excludes energy and food prices, also surged by twice expectations to 0.4%, bringing the year over year Core PPI rate to 2.3%. The steaming PPI data does not bode well for this Friday’s Core Personal Consumption Expenditure (PCE) report, and also may put further pressure on the Fed as they try to stimulate the economy in an effort to prevent a deep recession without simultaneously fueling inflation. But PPI does not always translate to higher consumer prices because the additional cost can be taken out of profit margins. But with such a beefy rate of increase, it is likely that some of these costs will wind up being passed on to the consumer, causing higher levels of inflation.

Consumer Confidence was reported at 75.0, which was much lower than expectations of 82.0. This report is in line with recent economic reports, which suggest the economy has indeed slowed some.

At 12:15pm ET, Federal Reserve Governor and voting FOMC member Donald “I Scream” Kohn will speak on the topic of “US Economy and Monetary Policy”. The market has been reacting to Fed speak of late, so stay tuned.

Mortgage Bonds are trading at an important juncture. Should prices move convincingly below the 200-day MA, it could signal a trend to higher rates ahead. However, should prices make a confident bounce higher, the Bond may regain some of its recent losses. We will cautiously float and give the Bond a chance to bounce off of the 200-day MA.