Greetings from Buenos Aires, Argentina this time.  Just last night I was in Miami, FL, now I am in Buenos Aires, and by tomorrow morning I will be in Dallas, TX.  Mortgage backed securities are having a similar tale, you just don’t know where they will be next.

Why?

Well, let’s review what happened this last week and then we will get into the BIG week ahead.  Remember that there is a tug of “fears” between a bad performing economy and inflation, with both sides winning from time to time, this last week was a great example.

We started the week with a killer PPI report, once again showing inflation at its highest level since the early 1980s and even the core level mimicked what the last PCE report said, which was the highest since the early 1990s.  Mortgage bonds should have dropped like a rock, but plunging oil prices doused those inflation fears for the most part.

The Philadelphia Fed Index beat expectations, showing the economy may not be as bad as it is portrayed to be, something we have seen now and again.  That means that the upcoming Chicago PMI may beat expectations as well.

As oil rose, stocks dropped, and that meant more money flowing into bonds, sending them all the way through their 50-day moving average, and trying to paint a “pretty picture” for the future.  Even Initial Jobless Claims beating expectations, though not by much, couldn’t beat mortgage bonds back down, so bonds managed to end the week with slight gains despite their radical fall on Friday.

So, what is in store for bonds’ future?

Taking a look at the upcoming economic reports, the tug of war will be bitter this week, with some big reports on each side.  The week will end with both the Chicago PMI and the Fed’s favorite gauge on inflation, the PCE.  Will inflation keep rising, or will we see it drop for the first time in a very long time?  As was said earlier, expect Chicago PMI to beat expectations, so PCE may need to drop to protect the future of mortgage rates.

Here is the play by play of economic data this week:

• Monday:  Existing Home Sales (10:00)
• Tuesday:  Consumer Confidence (10:00), New Home Sales (10:00), FOMC Minutes (14:00)
• Wednesday:  Durable Goods Orders (8:30)
• Thursday:  Initial Jobless Claims (8:30), GDP Chain Deflator (8:30), GDP (10:00)
• Friday:  PCE (8:30), Personal Spending (8:30), Personal Income (8:30), Chicago PMI (9:45), Consumer Sentiment (10:00)

As you can see, there are some big movers coming up this week, so we can hope bonds can break through the barriers and send mortgage rates lower finally.  The Fed “unplugged” report will certainly get the ball rolling one way or the other.  With data covering the strength of the economy and the latest read on inflation, it will definitely be an interesting, and likely volatile, week.

Looking at the technical side of things, there are some hurdles bonds still need to overcome.  Stochastic indications are showing bonds remain overbought and need a “correction” at least.  While the short term trend is for bonds to move higher, the longer term still has them pointing lower.  Bonds will need to be strong this week if mortgage rates are going to improve both near and far.

As the week begins, I am going to hold a cautiously floating stance as bonds managed to remain above their 50-day moving average and that could mean a good week ahead.  As the week goes on, be ready for anything, but I think bonds may finally be seeing daylight.