Todays Market Update

Mortgage Bonds are starting the day slightly lower, but much improved from their worst levels seen earlier today. Yesterday’s “Closing Technical Signal”, which we highlight each day in the Market News feature, did show a weak or negative candle…and so far this morning, prices are following through to the downside. A look at the Bond Page shows how this morning, Bond prices dropped down and hit exactly on support at the 25-day Moving Average, then rebounded higher from the lows.




There are no economic reports due for release today - but the Fed speak continues, as Philadelphia Fed President Charles "Three Swing Charlie" Plosser will be talking at 1pm ET today, and could be yet another Fed Member helping to spread the love regarding the next round of Quantitative Easing (QE2) – and perhaps he’ll even drop some clues on how much and what the Fed will be buying, as they are expected to make a formal announcement about QE2 on Nov 3rd.

Just yesterday, St. Louis Fed President James "Raging" Bullard said that the Fed may want to purchase Treasury Securities in $100B monthly increments to improve conditions...this is the third source saying the Fed will purchase $100B a month in just the past 48 hours. It sure looks to us like the Fed is trying to show their hand, and get the market somewhat prepared and positioned ahead of the formal Fed announcement, so as not to rattle the markets into more volatility with any surprises.



But the Fed members aren’t presenting a totally united front just yet – vocal Kansas City Fed President Thomas "BBQ" Hoenig is still warning that excessive liquidity, or pumping of more money into the system, could lead to some very bad unintended consequences. And we happen to agree – this is a bit of a dangerous game, and the amount of debt being pumped into the system is historically unprecedented.



And speaking of pumping more money into the system...yesterday, the Treasury announced that it will be selling a fat $109B in additional government debt next week, and although not a record, the announcement of this additional supply is also weighing on the market.



This weekend there is an important G20 Meeting, which brings government financial leaders of the 20 largest economies together to discuss key issues. And one of the key issues we are seeing is the actions being taken by many countries to devalue their own currencies, in order to help boost their exports…and thereby improve their economies. We would not want to see a currency devaluation war as it could spur massive global inflation down the road.



And in an effort to set a calming tone heading into these meetings, Treasury Secretary Tim Geithner said yesterday that the major currencies around the globe are "roughly in alignment" now…meaning that there is no need for countries to try and manipulate or devalue their currency. But as countries may all shake hands at the meeting and take a “Boy Scout” style pledge of honor not to do such a thing…their primary concern is their own countries economic strength, so they may be keeping their fingers crossed behind their backs as they all agree not to manipulate currency.



This morning, Bonds have successfully tested the floor of support at the 25-day Moving Average a couple of times. The last time we tested this floor, Bond prices improved over the next few days.
By MMG Barry Habib