Leading economic indicators were negative again in December, falling by .2%. It was the third month in a row that it declined. We have said in the past that until there is consistency in this gauge, it is somewhat irrelevant. However, now that it has remained negative, it looks like it really is signaling weakness in the economy over the next three to six months. Weekly jobless claims and building permits were two of the biggest drags on the index, and both employment and construction are expected to lag for the next six to twelve months. It is further evidence of a possible impending recession.

The University of Michigan consumer sentiment survey has made a surprising 5 point jump to 80.5 this month. Perhaps it is just optimism over a new year, or it could be that people are hoping that Fed rate cuts and government plans are going to help. We know that most people cannot be overly confident about their job security or their financial situation in general. This could be just a temporary improvement, so it is not a reason to believe that consumer spending is going to increase.

This morning is a perfect example of why we did not switch to a strong float yesterday, even as MBS prices ended up 18bp. The FNMA 30-year 6.0% was down 9bp for much of pre-rate sheet trading. It is only down 3bp now as the stock market as pulled back from a 150 point gain to no change on the day. The candlesticks have been riding the top of the trend channel higher. However, with the stochastic remaining high in overbought territory, it is difficult to say how much longer prices can sustain gains.

Treasury yields gapped higher when stock index futures indicated a much higher opening. Now that the stock markets have turned negative, traders are quickly packing money back into Treasuries. It has matched yesterday’s intraday low of 3.62%, but it keeps bouncing off this level back up to yesterday’s close of 3.64%. We’re around a four-year low, so there will be strong support at this level.