I referenced traders taking up "battle positions" in yesterday's post due to the immense amount of highly pertinent economic data set to release this week. The battle has begun begun today with a moderate show of force from both sides. Here's the data:
1. Durable Goods Orders (which tracks the purchase of goods by domestic manufacturers) rose an impressive 5.2%. Expectations among analysts were only for a 1.6% rise. To many, this is a sign of economic strength as it signifies the manufacturing sector expects a higher level of production. To me, it is an outlier in a 12 month period of stagnant numbers from this report, possibly inflated by rapidly dropping interest rates, slightly lower oil prices, and a slightly better dollar.
2. Consumer Confidence. Even though slightly higher than expectations--it came in at 87.9 instead of 87.5--this is a drop from the previous month. Furthermore, the reading of consumer expectations fell to a low 69.6 down from an expectation of 75.8. This is another piece of evidence for the case I've been building against consumer participation in this economy.
The Durable Goods reading has caused selling in MBS's. We have currently given back all of our gains from yesterday and are dancing around 9/32nds down for the day on the 5.0% coupon. Pricing will be similar to last Friday.
The biggest fights of the battle are yet to come with the FOMC announcement and GDP advance tomorrow, Income/Outlays and jobless claims the next day, and the hugely important employment situation backed up by ISM manufacturing numbers, Construction Spending, and Consumer Sentiment on Friday.
The question is will the consumer data continue to be weak and will the manufacturing sector continue to show strong numbers? Even more importantly, what will investors care more about? That's difficult to say, and the answer will also depend on any surprises with the expected .5% rate cut tomorrow and/or an impactful post meeting statement.
Trust no one that tells with certainty where the market is headed this week! Yesterday was the safest day to lock. If you didn't, you must evaluate the potential volatility presented by the massive amounts of information yet to come. In this battle, the weak consumer is on our side.
If you feel like this 5 day rally in stocks is a "dead cat bounce" and we are headed right back down due to a non-participating consumer and weak employment numbers, you should float.
If you feel that unexpected stimulation by the Fed along with strong numbers in manufacturing and construction will be signs of a "bottom," you should lock.
I maintain that I don't see a way for consumer participation to be strong in this economy, and since it's over 2/3rds of the economy, we'll have resistance from rebounding. Whether that effect is felt in time to effect rates on the loans in your pipeline is a question I'm not clairvoyant enough to answer. As I typed the last paragraphs, bonds slipped further by another 5/32nds. If your lenders released early rate sheets, it may be safer to lock immediately as a reprice for the worse is likely if bonds hold these levels.