At the moment, Mortgage Bonds are trading just slightly lower as Stocks try to rebound from yesterday’s sharp losses. The selloff may have been triggered by Chairman Bernanke’s talk, which painted a slow economic recovery and repair of the credit markets. Stock Traders were groping for a more hopeful message from Mr. Bernanke and when they didn’t get it, they sold with both fists.
Yesterday was also a wild one for Mortgage Bonds – prices had dropped early in the day, dipping right into a support zone marked by the price lows of 2008 and then bounced significantly higher.
Some good news on inflation as the headline Consumer Price Index, (CPI) for September was reported at 0.0%, better than estimates of 0.2%. And Core CPI was reported at 0.1%, also lower than forecasts of 0.2%. Over the past year, the headline CPI has increased by 4.9% while the Core CPI has risen by 2.5%. These tame inflation numbers are to be expected as energy prices have dropped sharply since their July highs.
Initial Jobless Claims were reported at 461,000, slightly below expectations of 470,000. For the week ended Oct. 4, the number of Americans continuing to collect benefits rose 40,000 to 3.71 million — the highest level since June 2003. The four week average of continuing claims rose 65,750 to 3.63 million — the highest since July 2003. Weakness in the labor market continues.
The frozen credit market is showing signs of a thaw as the overnight and 3-month bank-to-bank rates have edged lower. The overnight bank-to-bank lending rate, known as LIBOR, fell to 1.94% from 2.14% while the 3-month LIBOR fell to 4.50%. As central banks continue to inject liquidity into the global financial system, LIBOR should continue to move lower.
Industrial Production for September was reported at – 2.8% versus estimates of 0.8% and Capacity Utilization was 76.4, well below expectations of 78.0. This lower Cap Utilization number is also a good news for inflation, because it suggests that there is more room for businesses to expand before pricing pressures set in. A Capacity Utilization reading closer to 85 suggests that businesses are operating near full capacity, which starts to fan inflation flames.
The Bond is trying to build on yesterday’s gains, but will have to overtake a Window of Resistance right at present levels in order for prices to improve further. Until then 30 year mortgage rates will remain in the 6% range.