Given all the moving parts within our economy, it’s no wonder that every day presents a new challenge.  That’s why it is so important for the Fed to communicate to the market, setting expectations given certain economic developments.  To date, a grade of C is the best we can give them on this issue.  Case in point can be found in statements made by Fed Governor Plosser, making the case for rate hikes sooner than later versus Fed Governor Evans expressing concerns over 10% unemployment and the need for low mortgage rates well into the future. While a number of Fed Governors are pounding the rate rising drum, the policy statement continues to favor low rate, easy money well into 2010.

What they would like to do is communicate an upcoming transition period.  One that would produce a soft landing instead of going cold turkey.  With their focus on employment and inflation, it would seem that rates will remain low until the unemployment picture stabilizes and then starts to improve.  High oil prices and a falling dollars could throw a monkey wrench into the mix.  We would expect Gentle Ben or Fed Governor Kohn  to communicate this philosophy in the near future to settle the market’s ruffled feathers.

Existing Homes Sales completed the week’s data stream, jumping 9.4% to 5.57 million units.  The above expectation print was the best we’ve seen since July 2007.  Sales were up in every region of the country with the Wild West leading the pack (13.0%).  31% of the sales were directly linked to the 8K first time home buyers program.  Let’s hope the gang on Capitol Hill figures out a way to extend this into 2010.  Fast money players have been active in both bonds and stocks.  Currently, the 10 year note is down 14/32’s to yield 3.48%.  Mortgage backs have performed a little better as spreads have tightened but are still in the red, off 4/32’s.  Stocks are off as well, down 65 point on the Dow.  Even the blow out numbers by Mr. Softy could not help the cause.  I would like to call your attention to the daily 10 year note chart.  The two blue lines represent the 21 and 40 day moving averages.

As you can see, both have been violated as the market continues to trade in a lower high, lower low pattern.  Since the market peaked on Tuesday (yield 3.22%), the market has formed a bearish trend taking out a number of support levels.  Current yield levels (3.48% to 3.50%) are critical to the near term direction.  With supply coming next week (137 billion in auction paper), odds are good that support will fail to hold and a new target of at least 3.52% to 3.58% will be achieved.  On the glass half full side, the angle of decent of the down trend (line at the far right) is quiet steep and short term oversold.  This tells us that trading volume has been light with a higher percentage of fast money traders versus position trades.  Both are supportive of the market finding a bottom.  Trouble is, if the bearish trend continues, say above 3.58% on the note, there is nothing on this chart for support until we get to 116 15 (dark horizontal line).  That target would clip mortgage pricingif it comes to fruition.  The close today will provide us a better picture.