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.

The Fed slashed the Fed funds rate by .75%. They announced at 8:20 AM ET this morning that were making an emergency rate cut. It is the largest cut since 1984! And yet the futures markets are still indicating that traders want at least another .50% mark down at the Fed meeting next week. Most agree that the Fed is “behind the curve,” and Bernanke himself acknowledged last week that it takes at least 12 months for the effects of rate cuts to be felt. Traders are probably remembering those comments as well as noting that it shows a major lack of confidence by the Fed for the markets to correct themselves.

There is not much to talk about in this holiday-shortened week as far as economic data goes, but that doesn’t mean it is going to be a boring week. The stock market closed at a 9-month low on Friday. This morning the Dow has now hit a new one-year low, and the S&P 500 index is off to its worst start to the year on record. Heavy selling generally creates a snowball effect, which means that the downward momentum in the stock market may actually pick up speed. The housing slowdown is already the worst seen since the Great Depression, and now the stock market is taking on a similar tone. We already expected extreme volatility this week, but at this point it could almost be classified as scary volatility.

Foreign markets are being hurt even more than U.S. markets. Asian indexes fell anywhere from 5 to 12 percent last night. European indexes dropped 4 or 5 percent. A U.S. recession may very well lead to a global recession. Economic strength in other countries is primarily fueled by exports, much of which goes to the U.S.

And, if President Bush’s pleas were not enough to get OPEC to bring oil prices down, global economic weakness might do the trick. Demand is undoubtedly going to slip, and OPEC may need to drop prices significantly if they want to maintain a steady flow of income. Don’t be surprised if oil prices dip back to $80 per barrel with haste.

It’s somewhat ironic that mortgage-backed securities are going to benefit from a problem that started with mortgage defaults. We have switched to the FNMA 30-year 5.5% because mortgage rates have plunged. It is currently up 37bp at 101.75.

When the 10-year Treasury yield was up above 5.00% back in July, we predicted that it would fall to the mid to high 3.00% range. Now with the yield dipping to 3.52% this morning, we foresee 3.00% as a very real target. As long as stocks keep sinking, support levels and overbought conditions are irrelevant. Investors will need to stash their money somewhere safe where they can earn more than in a money market account.

Consumer inflation is about where economists believed it was; a little on the higher side. But, the numbers were not too bad. CPI rose .3% last month, and core CPI was up .2%. The good news for inflation is that oil prices have fallen to $90.75 this morning. Maybe traders have faith that President Bush will get to OPEC and they will have a change of heart and start producing more oil. Or, what’s more likely is that we’re entering a period of lower demand, causing prices to decline naturally.

Industrial production came to a standstill in December, which does not bode well for manufacturing jobs. It also signals less demand for consumer goods, automobiles, and machinery. If nothing is being built, it means there is no demand for the products. Clearly, most businesses are not counting on very strong sales to start the year.

Stocks are sliding again after Intel announced weaker than expected earnings for the fourth quarter. They also came out with a low profit forecast for this quarter. The Dow is down about 80 points, and it has held under 12,500 for most of the first hour of trading. Unless another company comes out with some incredible earnings, stocks are likely to float lower again today. In fact, the downward momentum may even gain strength later in the day, since there is very little support for the Dow.

The FNMA 30-year 6.0% did tick higher, but it turned negative after the stock market opened. It is currently down just 6bp at 102.47, and today’s candlestick is actually sitting just above our trend channel. Like we mentioned yesterday, traders are going to be hesitant to let prices fly away. However, money is still flooding the Treasuries markets, and usually when they become stuffed, money will spill over into MBS in search of greater returns.

Meanwhile, Treasury yield keep setting fresh lows. The new bottom today is 3.62%, but it has since popped back up to 3.66%. That brings us within a stone’s throw of a four year low. That support level is 3.56%. At this point, if the stock market does eventually hit our target of 11,500, the 10-year yield will probably be at it’s all-time low of 3.08%