01 Dec Locking Bias
Mortgage bonds challenged their first ceiling of resistance this morning and managed to break through. Although this move may be reversed as the trading day continues, it is so far a great sign of strength in the bond market. The next major resistance level will be the 50 and 200 day moving averages, which are currently about 10 basis points above current levels. Since a break above the 200 DMA is typically a sign of a market reversal, it is not likely that we will make that dramatic of a move higher ahead of Friday’s BLS Job’s Report and the December 16th Fed meeting where it is widely anticipated that short term interest rates will be pushed higher for the first time since June 2006.
The ISM Manufacturing Index, which measures the results of a survey of 300 manufacturing firms, came in today at 48.6. In-line with yesterday’s low Chicago PMI, the figure is once again below the 50 threshold. A number greater than 50 reflects expansion in the economy and a number below 50 is reflective of contraction. There is a growing weakness in the volume of new orders for manufacturing, which will likely result in a continued slowing in the segment of the US economy. Given that there is often a delay from the time the consumer begins to slow their spending to where the job market is greatly impacted, this could be a sign of slower job growth in the months to come.
Although there is no need to rush in to lock immediately, there is great risk in floating. With bonds at the top of a trading range, we will maintain our locking bias.