Locking bias going into the holiday

Mortgage bonds are trading near unchanged levels so far this morning.  Volume is very light as expected, as many bond traders have stepped away from their trading desks to begin their Thanksgiving holiday in the Hamptons J.

We received a great deal of economic news reports this morning, highlighted by the Fed’s favorite gauge of inflation.  Personal Consumption Expenditures (PCE) was unchanged on a month over month basis and remained at 1.3% year over year.  Although inflation remains well beneath the Fed’s target level of 2.0%, it is still highly anticipated that the Fed will raise short term interest rates when they meet next on December 16^th.  In fact, the likelihood of this happening is now targeted at 76% based on a recent poll of economists.  When the Fed does begin the process of raising rates, it will likely be slow and in small increments.

Personal Income was reported 0.4% higher in the recent month, which was in-line with expectations.  Spending, however, was only up 0.1%, which was lighter than the 0.3% anticipated.  Since spending is the backbone of the economy, this wasn’t a welcomed sign.  However, given that we are now entering the heavy consumer spending season that will likely move higher in the next report.

Durable Goods Orders appeared strong, coming in 3% higher than the prior month.  However, a deeper look shows that the move higher was due to a large amount of orders being placed with Boeing for 787 Dreamliners.  When you take out the transportation component, Durable Goods were only up 0.5% for the month.

With mortgage bonds showing little hope of significant improvement, the safe play will be to lock going into the holiday.  Both the stock and bond markets will be closed tomorrow, with Friday being a short trading day.