AccuWealth News

Today's Market 2/17/2011

2011-02-17T08:26:00.001-08:00

Treasuries and mortgages are doing better this morning; weekly jobless claims at 8:30 were right on, up 25K to 410K after tumbling 36K last due to bad weather. Continuing unemployment claims were essentially unchanged from last wee. Jan consumer prices rose 0.4% slightly higher than 0.3% estimate, removing food and energy CPI up 0.2% also slightly higher than 0.1% estimate. Yesterday Jan producer prices increased 0.8% about in line but when food and energy are left out the core jumped 0.5% much stronger than 0.2% estimates. Markets talk a lot about inflation concerns but the action in the interest rate markets appears to be ignoring any real concern so far.

At 10:00 Bernanke is testifying before Senate Banking Committee on Dodd-Frank reforms, with SEC Chair Mary Schapiro, FDIC Chair Sheila Bair, and CFTC Chair Gary Gensler, in Washington. He is not addressing either the status of the economy or monetary policy. He is staying on message on how the Fed is helping to establish the new Bureau of Consumer Financial Protection (CFPB).

Two reports at 10:00; Jan leading economic indicators expected +0.2% were up 0.1%, Dec revised to +0.8% frm 1.0%; no big concern. The Feb Philadelphia Fed business report, one of the Fed's favorites, jumped to 35.9 from 19.3 in Jan and well over the estimates of 21.9. The sub-components were better but not as powerful as the headline; new orders were about unchanged, 23.7 frm 23.6, employment at 23.6 from 17.6 and prices pd at 67.2 frm 54.3. Any index above zero is considered expansion, the higher the stronger. The initial reaction took the 10 yr note price down a little and mortgages dropped a touch; both still holding gains on the day. The stock market bounced of lows but still weaker.

The US bond market has been improving over the past week, not in huge chunks but steadily edging higher in price and lower in yields. The market appears to be ignoring recent economic data and inflation increases in Europe and Asia, event yesterday with US PPI core increasing over two and a half times estimates and a slight increase this morning in core consumer prices. We noted a few days ago that the turmoil ion the mid-east would likely spread to many nations; after Egypt and Tunisia were successful in toppling present regimes other countries are experiencing some of the same protests. This morning in Bahrain riots increased, protestors being tear gassed and shot at; Bahrain is the base for the Navy's 5th fleet. Reports coming from all over the mid-east; most not momentarily serious but as unrest spreads investors slowly adding to safe haven moves in US treasuries. Minor protests now in Qatar, Saudi Arabia, Iran and Libya in N. Africa. Geo-political issues now trumping domestic economic and inflation considerations on moves to safety trades increases.

While the Treasury and mortgage markets have improved on the increasing unsettled situation in the Mid-East and N. Africa, the technical situation in both markets remains bearish. The key momentum oscillators, key moving averages, and our proprietary models are still throwing off bearish readings. We believe the bond market is being supported by safety moves into treasuries, a slow process so far but as more reports of rioting and protests continue to expand from one nation to another in the region less attention is being directed to the improving economic outlook and inflation concerns. Until now the moves into safety have been rather moderate, if however tensions in the region continue to escalate the bond market will see more buying and take mortgage prices higher with them. Although in hindsight we have missed some opportunities we will keep our discipline and continue our slightly bearish bias until our models change and technicals turn positive.

Today's Market 02/15/2011

2011-02-15T11:11:00.001-08:00

Treasuries and mortgage markets started weaker this morning prior to 8:30 data. At 8:30 three data points were released. Jan retail sales were lower than expected at +03% against +0.6% expected, excluding auto sales up 0.3% also against estimates of +0.5%. We question the reliability of the data, as noted previously severe weather in most of the country in Jan likely distorted the data. Whether the sales would have been better or worse due to the weather is difficult to interpolate. Dec retail sales were revised slightly lower but not much.

The second report this morning, the Feb NY Empire State manufacturing data; the overall index was expected at 15.0 frm 11.92 in Jan, as reported it increased to 15.43. The new orders component fell however, to 11.8 frm 12.29; employment also fell, to 3.6 frm 8.42 and prices pd increased to 45.78 from 35.79. Overall the NY report didn't quite meet expectations.

The third report at 8:30; Jan export and import prices; import prices for the month increased 1.5% while export prices were up 1.2%. Yr/yr import prices increased 5.3% while yr/yr export prices increased 6.8%.

Weaker retail sales and softer NY Empire State manufacturing put a bid in the rate markets, prior to the 8:30 releases the 10 yr note traded off 7/32 and mortgage prices were down 5/32 (.15 bp). At 8:45 the 10 moved to unchanged on the day and mortgage prices improved to unchanged.

At 9:30 the DJIA opened -29, the 10 yr note -3/32 and mortgage prices -2/32 (.06 bp).

Dec business inventories rose 0.8% slightly better than 0.7% expected. Sales were up 1.1% with the sales to inventory ration at 1.25 months unchanged from Nov.

The final data point today, at 10:00 the NAHB housing market index, expected unchanged from Jan at 16, was at 16 the 4th month at that level.

As you know, markets are continuing to fret over inflation levels; in the US we don't see it but in England the inflation rate announced this morning was double what the Bank of England wants; up 4.0%. While we don't see it yet in the US Europe's and China's rates are increasing. Even with little inflation here, the increases in inflation around the globe will add additional pressure to US bond markets.

Yesterday the budget battle started with the Administration's 2012 release of it's budget. As noted yesterday, it is dead in the water from the start. A baby step that doesn't mention the entitlement programs that must be cut to bring down the expanding annual deficits. This yr the deficit is estimated at $1.5T and may actually exceed that amount. The first shot yesterday came from the Sec of Defense, Gates; he isn't happy with cuts to military projects for new planes and other weapons. Imagine when someone in power actually starts talking about cuts in entitlements. Unless our deficits are brought under control and are believable to foreign investors that fund our shortfall US interest rates will increase to double digits within two years. Without the world funding the US deficits the long term outlook for US interest rates and the economy is not good to say the least. In the end we are left with the question; who will take up the battle (politicians) and put the country's interest ahead of their individual interests?

The outlook for interest rates is still for a gradual move higher, however we continue to hold that rates won't increase much. The 10 yr note no higher than 4.00% and 30 yr mortgages holding at 5.5%.

This Week 2/14/2011

2011-02-12T08:51:00.000-08:00

This Week; after last week with little in the way of economic releases, the calendar has a number of key data points. Nothing on Monday or Friday but mid-week is loaded. Jan retail sales, both PPI and CPI for Jan, two regional Fed reports on the economy, two reports on the status of the manufacturing sector, and the minutes from the Fed's FOMC meeting on 1/26. Last week, after another swift spike in rates for mortgages and treasuries, the bond and mortgage markets improved a little; the 10 yr note yield fell to 3.64% frm 3.66% at the end of the previous week. Mortgages didn't show any improvement however, the 30 yr MBS price fell 12/32 (.37 basis points) on the week.

Interest rate markets continue their bearish trend and outlook. The economy is improving, as long as it continues and with the threat of inflation still high, rates will not show much improvement. We remain with our longer outlook that mortgage rates will continue to edge slowly higher but we still are not expecting a serious increase in rates. 5.5% on 30 yr mortgages by the end of the second quarter or early third quarter, then possibly a slow decline as the economic outlook stalls.

Ben Bernanke still holding to his QE 2 plan, $600B of treasury buying through the end of the 2nd quarter. Debate now is whether the Fed will try another easing move with QE 3, unlikely in our opinion, nevertheless if the economy were to falter and unemployment increases Bernanke will not hesitate. Bernanke is scheduled to speak again on Friday this week on global imbalances and financial stability at Banque de France Financial Stability Review in Paris

Today's MBS Market 2/11/2011

2011-02-11T08:32:00.001-08:00

Treasuries and mortgages opened better this morning after Treasury auctions. The 10 yr note continues to imp[rove after the spike up in rates last week, mortgages also tracking better. Not much driving news this morning, most talk is about Egypt but in terms of market impacts there hasn't been any. Mubarak didn't resign yesterday as media reported he would, demonstrators still there. Mubarak apparently has left Cairo and will continue as leader in name only but Egyptians still wanting him to resign now.

Economic data this morning had Dec wholesale trade balance at 8:30, the deficit was as expected, -$40.58B. The US imported that much more than we exported; no news there, it has been that way for years and will not change. The only significance to the report is the amount of deficit; less is good as a measurement of US competitiveness.

At 9:55 the morning the U. of Michigan consumer sentiment index, expected at 75 from 74.2, was 75.1. The current conditions component at 86.8 frm 81.8, expectations index at 67.7 frm 69.3 and the 10 month outlook at 78 frm 87. Treasuries and mortgages improved a little on the data with a less positive outlook. The sentiment index is volatile, we don't place a lot of emphasis on it but today's weaker current conditions, expectations and 12 month outlook will need to be monitored.

Foreclosure filings in the U.S. fell 17 percent in January from a year earlier, the fourth straight month of declines, as legal scrutiny of lender practices slowed actions against delinquent homeowners, RealtyTrac Inc. said. A total of 261,333 U.S. properties received notices of default, auction or seizure, the Irvine, California-based data seller said today in a statement. One in every 497 households got a filing. It was the third consecutive month with fewer than 300,000 filings, following 20 straight months above that mark. “Unfortunately, this is less a sign of a robust housing recovery and more a sign that lenders have become bogged down in reviewing procedures, resubmitting paperwork and formulating legal arguments related to accusations of improper foreclosure processing,” James J. Saccacio, RealtyTrac’s chief executive officer, said in the statement. (Bloomberg News)

Treasury Sec Geithner and Housing and Urban Development Secretary Shaun Donovan presented three approaches for a future housing finance system. It also calls for the government to shrink “and ultimately wind down” Fannie Mae and Freddie Mac, the bailed-out government-sponsored enterprise companies that helped fuel the housing bubble before being felled by investments in subprime mortgages. We won't take time now to go over the three plans, none of which will be fully implemented as presented, it is however going to happen. The time frame is long, possibly as soon as five years, more likely longer than that. At this time it isn't something to be focused on other than following the process over the next year or two.

Today's MBS Market 2/10/2011

2011-02-10T10:31:00.000-08:00

Weekly jobless claims at 8:30 were another surprise; claims were expected to be down 3K to 412K as reported claims fell 36K to 383K, the lowest level of weekly filings since July 2008. Continuing claims also fell more than expected, to 3.888 mil frm 3.935 mil. Measuring the actual status of the employment sector is increasingly more difficult. In Jan the unemployment rate fell to 9.0% from 9.4% in Dec, non-farm jobs were anemic at best. Today weekly claims added more confusion. Is the weather the culprit or is the employment situation actually better than most believe? Eighteen states and territories reported an increase in claims, while 35 had a decrease. The initial reaction to the data wasn't much, the stock indexes didn't budge, the rate markets held levels prior to the report. By 9:00 however the bearish interest rate markets did back off, prices of mortgages and treasuries fell.

Recent employment data is almost impossible to square with conflicting data becoming the norm. Spinning the employment report in either direction to fit ones outlook has become easy with recent data points measuring the job sector. Earlier this week a Labor Department report showed job openings in the U.S. decreased by 139,000 to 3.06 million, the fewest since September. The number of people hired also dropped along with the number of workers fired. Fed Chairman Bernanke told the House Budget Committee yesterday that while the declines in the jobless rate in December and January “do provide some grounds for optimism,” companies need to hire more to reduce joblessness. “With employers reportedly still reluctant to add to their payrolls, it will be several years before the unemployment rate has returned to a more normal level,” Bernanke said.

At 9:30 the stock market opened weaker; the DJIA down 50 on the open. The 10 yr note lower in price with its yield up 2 basis points on the new 10 yr auctioned yesterday. Mortgage prices at 9:30 -7.32 (.22 bp)

At 10:00 Dec wholesale inventories, expected up 0.6%, were up 1.0%. Sales increased 0.4% with consensus at +1.3%; the sales to inventory ratio at 1.16 months from 1.5 months in Nov. No initial reaction to the report.

At 1:00 Treasury will auction $16B of 30 yr bonds; the 10 yr auction yesterday was exceptionally well bid fueling short-covering and improvement in the rate markets.

Over night the Bank of England left its base interest rate unchanged as expected. Stock markets in Europe all weaker today. Today’s debates were based on new quarterly economic forecasts, that will be released on Feb. 16. Inflation accelerated to 3.7% in December, the fastest pace in eight months, and the rate may rise above 4% before easing to the bank’s 2% target. Food prices increased the most in 19 months in January. The BOE as well as Germany and other European countries facing inflation while here in the US our Fed is more concerned that our inflation remains too low.

The recent spike in interest rates wasn't unexpected; the rate markets have been technically bearish for three months. Rates likely will continue to increase through the year however we still hold that while rates are likely to increase the magnitude won't be severe. Presently we are not expecting the bellwether 10 yr note to exceed 4.00% and mortgage rates to hold at 5.50%.

Written by Zachary C Shansey;V.P. Accuwealth Financial Services, LLC

Mortgage Banker with Evolve Bank & Trust

Today's Market 2/9/2011

2011-02-09T07:23:00.001-08:00

A better start this morning in the bond and mortgage markets. As we noted in yesterday's 4:30 comments the rate markets are temporarily oversold after seven consecutive days of prices falling and yields increases. Technically both the bellwether 10 yr note, driver of MBSs and the MBSs themselves are now registering very oversold momentum oscillators and some rebound is likely. While improvement is likely, it will not change the overall bearish longer term outlook for the rate markets. We suggest using any improvements to get deals done but not adopt a bullish view. Although we have been bearish on rates since last Nov, we still hold that interest rates for mortgages will not increase over 5.5% and the 10 yr note won't move above 4.00% this year. Any improvements in longer term rates should be seen as opportunities, interest rates will not likely fall much from these current levels.

Markets were rattled yesterday on very weak demand frm foreign investors for the $32B 3 yr notes sold at the Treasury auction. After the recent spike in rates traders were more optimistic than they should have been that the 3 would see strong demand. At last month's 3 yr auction it was the same; it didn't see much demand. Today Treasury will offer $24B of new 10 yr notes, the demand should be much better, just as it was for last month's 10 yr.

Ben Bernanke is about to begin his testimony to the House Budget Committee; the first such appearance under the Republican leadership. He will be questioned on economic issues, trade issues, the dollar's worth, the Fed's quantative easing that has come under increasing fire both within the Fed and in Congress. When initiated last Nov Bernanke made the point that by buying $600B of treasuries would keep interest rate low; most bought into it, we however said it wouldn't and of course it didn't. Congress will ask today whether the Fed will do another easing move; Bernanke will dance around it but it is highly unlikely there will be more money printing-----so-called easing is over. The economy is recovering, slowly but nicely; the Fed should stop. An increasing number of Fed officials are voicing opposition. The Fed is continuing to chip away at purchases everyday; today $6 to $8B of issues maturing 2015/2016.

The weekly MBA mortgage applications out early this morning for the week ending February 4, 2011. The Market Composite Index, a measure of mortgage loan application volume, decreased 5.5% from one week earlier. The Refinance Index decreased 7.7% from the previous week. The seasonally adjusted Purchase Index decreased 1.4% from one week earlier.
The four week moving average for the seasonally adjusted Market Index is down 0.9%. The four week moving average is down 0.8% for the seasonally adjusted Purchase Index, while the average is down 1.5% for the Refinance Index. The refinance share of mortgage activity decreased to 66.6% of total applications from 69.3% the previous week. This is the lowest refinance share observed in the survey since the beginning of May 2010. The adjustable-rate mortgage (ARM) share of activity increased to 5.9% from 5.5% of total applications from the previous week. The average contract interest rate for 30-year fixed-rate mortgages increased to 5.13% from 4.81%, with points decreasing to 0.84 from 1.02 (including the origination fee) for 80%loans. This is the highest contract 30-year rate recorded in the survey since the week ending April 9, 2010. The 32 basis point jump is the largest rate increase since June 2009. The average contract interest rate for 15-year fixed-rate mortgages increased to 4.29% from 4.13%, with points increasing to 1.02 from 1.01 (including the origination fee) for 80% loans. This is the highest contract 15-year rate recorded in the survey since the week ending May 7, 2010.

The rest of the day is about Bernanke's testimony and the results of the $24B 10 yr note auction at 1:00 this afternoon.

Today's Market 2/08/2011

2011-02-08T10:31:00.000-08:00

Treasuries and mortgage markets opened softer this morning but nothing major. Over night China raised interest rates for the third time since the middle of Oct as its inflation rate hangs at 4.0% for the third month. In Europe German Dec industrial production fell unexpectedly for a second consecutive month on colder weather that hampered construction, down 1.5% frm Nov and against +0.2% that was expected. The US stock market isn't being hit early but with the weaker data from Germany Europe's stock markets trading lower. In Germany, where the economy is booming and import-price inflation is running at the fastest pace in 29 years, workers are demanding bigger pay increases. Inflation concerns are spreading abroad (China, India, Germany to name a few); not here yet but investors in long term fixed income investments (10 yr notes and 30 yr bonds and long term corporates) are not waiting for the whites of the eyes. With interest rate so low any thoughts of inflation are going to pressure rate markets.

Are we headed for an increase in inflation? If so, will it be much of an increase? Inflation concerns are currently based on rising energy and commodity prices, it depends on whether commodity prices remain at these or higher levels; producers and businesses so far have been able to absorb price increases but that is likely over. Unless prices decline inflation will increase a little; the Fed wants it up to 2.0% frm the present 0.8% to 1.0% rate. The bond market is moving up in yield anticipating deflation is now dead, with the very low existing rates just the talk of a small increase in inflation has driven rates up 30 basis points on the 10 yr and 20 basis points on mortgages in less than a week.

Earlier this morning Richmond Fed's Lacker was speaking, he said he wants the Fed to re-consider the remaining QE 2 now that the economy is growing faster than the Fed expected. Lacker has been dissenting on about every QE move the Fed has undertaken. He is concerned that inflation will increase as it is in China and many emerging markets. It is highly unlikely the Fed will abandon QE 2 but equally unlikely there will be a QE 3 as some have mused recently. Lacker estimates the US economy to grow 4.0% this year; he sees a better jobs market, "robust" consumer spending, and the inflation rate between 1.5% and 2.0%.

The Johnson Redbook retail report this morning reported chain store sales for the first week of Feb up 1.7% frm Jan; yr/yr +2.7% frm the the first week of Feb. 2010.

Looking to tomorrow, Ben Bernanke is scheduled to testify at the House Budget Committee. He will be grilled to explain what the Fed is planning to withdraw its easing. His testimony is the first that we don't have Barney Frank running to testimony, although barney will have his moment. With Republicans now in control of the committee the hearing will get a lot of attention.

The only thing scheduled today is the $32B 3 yr note auction at 1:00 this afternoon. Auctions this week will be interesting to monitor as yields have broken out of their month and a half long ranges and may entice buyers at these higher levels. If demand isn't strong look for the bond and mortgage markets to work higher in rate and lower prices. The 3 yr usually sees decent demand, tomorrow's 10 yr auction is what we are concerned with, weak demand will push mortgage rates higher.

Written by Zachary Shansey VP. Accuwealth Financial Servicves, LLC and Mortgage Banker with Evolve Bank & Trust

Today's Market 2/7/2011

2011-02-07T13:27:00.001-08:00

This Week; after a big increase in interest rates last week the market will have supply to contend with. Treasury will conduct its quarterly refunding beginning Tuesday with $32B of 3yr notes, Wednesday $24B of new 10 yr notes and Thursday $16B of new 30 yr bonds. After the 10 yr not increased 29 basis points in yield and the 30 yr bond up 14 basis points the auctions should see good demand. This week doesn't provide much data, in fact only weekly jobless claims that carry any significance.

The bond and mortgage markets have solidly broken out of their long tight ranges to higher rates. The 10 yr note appears to have a clear path to 3.75% while mortgage rates are likely to increase another 10 to 15 basis points in rate. Concerns of higher interest rates in Europe, China and the rest of the BRICs as well as improving economic conditions will keep US rates from falling with the most likely path being up for rates. One key thing to keep in mind, US rates remain as low as we have had for generations. If lenders don't see it as a positive consumers certainly won't.

Today's Market 2/04/2011

2011-02-04T07:14:00.000-08:00

It is the first Friday of the month, the day each month we suffer through the monthly employment report. Suffering to understand and make sense of it is the norm and today is no different. Recent employment reports are getting even more difficult to manage than the norm. Today non-farm payrolls were expected to be up about 140K give or take, with private non-farm jobs +160K give or take; what we got was non farm jobs up just 36K and private jobs up 50K. In Dec the unemployment rate fell from 9.6% in Nov to 9.4%, Jan was supposed to see the rate up to 9.5%, what got was the unemployment rate fell to 9.0%.

Unless you are a mystic or an economist that can twist data like spaghetti on a fork, the employment report always has something for everyone, at the end of the day though it will remain difficult to understand. One has to just accept what analysts settle on. The report this morning makes little sense; we know that the unemployment rate is determined by telephone surveys, we know that a respondent that answers that he/she is not looking for a job even though unemployed, they are not considered unemployed. The non-farm jobs also begs debate, every regional report and the two national ISM reports (manufacturing and services) have shown increases in the employment component yet today's anemic 36K total non-farm jobs gain and +50K private jobs doesn't square.

That job growth was well short of forecasts is likely due to weather; construction jobs and other jobs that bad weather can impact may have caused the soft job gains. Dec and Nov revisions added an additional 40K jobs from previous reports. Average hourly earnings increased 0.4% one of the biggest increases seen in a long time and that in itself has put pressure in the rate markets as another indication inflation may be getting a toe hold.

Summing; the employment report today should be taken with that grain of salt. Job growth is better than the report indicated, the unemployment rate is closer to 10.0% than 9.0% and if those not looking for jobs want jobs then the unemployment is closer to 15%.

Interest rates have broken out of their well-defined and long term range; the 10 yr at 3.58% at 10:00 is headed to 3.75% the next target and mortgage rates will also increase. Inflation fears, the economic strength, increasing interest rates around the globe coming; all will keep rates from declining.

The DJIA opened -4 points at 9:30, the 10 yr note -9/32 at 3.59% +4 bp and mortgage prices at 9:30 -4/32 (.12 BP).

Nothing else for the markets to think about today. Next week Treasury will auction $72B of notes and bonds. We are now sellers on any rallies in the rate markets.

Today's Market 2/3/2011

2011-02-03T08:43:00.000-08:00

Interest rate markets continued to sell-off this morning; the 10 yr note moving slightly out of its six week range, at 9:00 am the 10 yield at 3.52% and likely will test the intraday high rate at 3.55% hit on Dec 16th. Mortgage prices down 8/32 (.25 bp) at 9:00 am.

8:30 data was a mixed picture; weekly jobless claims fell 42K to 415K, estimates were for a decline of 19K. Continuing claims were lower, 3.925 mil from 4.009 mil. Q4 worker productivity was better, up 2.6% a little better than +2.3% expected. Q4 unit labor costs fell 0.6%, forecasts were a decline of 0.1%. The better productivity brings debate about future hirings, stronger productivity implies less need for new hires. That said, productivity is a lot weaker now than it was

two years ago.

January chain store sales were surprisingly strong with most expecting a soft Jan due to weather conditions, it didn't happen. The results counter the weakness reported by ICSC-Goldman and Redbook which had been warning of strongly negative weather effects. Today's reports point clearly to another month of strength for the ex-auto ex-gas category of the monthly retail sales report.

The DJIA opened down 12 points at 9:30, the 10 yr note at 3.54% +6 bp and mortgage prices -9/32 (.28 bp) frm yesterday's close. (see below for 10:10 levels)

More key data at 10:00; the Jan ISM services sector index, expected at 57.0 frm 57.1 jumped to 59.4. Yet one more data point that beats estimates; the employment component increased to 54.5 frm 52.6, the new orders component increased to 64.9 frm 61.4 and the price component increased to 72.1 frm 69.5. Any of the indexes above 50 is expansion, the higher the stronger.

Dec factory orders out at 10:00, expected to be down 0.4%; increased 0.2% and Nov orders revised from +0.7% to +1.3%.

The two 10:00 reports pushed the 10 yr to 3.55% before backing off momentarily. Mortgage prices held lower at -9/32 (.28 bp).

Markets still have Bernanke to think about; he will be speaking to the National Press Club in Washington, taking questions from reporters.

Overnight the ECB left interest rates unchanged after rattling markets recently with comments that the bank would begin tightening to head off inflation. The bank is weighing the risk of faster inflation against the danger that higher borrowing costs could worsen the region’s sovereign debt crisis. Trichet said last month that while the jump inflation is “temporary,” risks to the price outlook “could move to the upside.” That prompted investors to bring forward expectations for an ECB rate increase to as soon as the third quarter. ON inflation, ECB's Trichet like Bernanke, talking tough on inflation but finding good reasons not to raise rates and

run the risk of choking off economic recovery.

The situation in Egypt remains tense but still having little or no impact on financial markets as most continue to believe the situation will not spread to other mid-east countries. Crude oil doesn't need much of a reason to increase as it has but not much. News now from Egypt is that reporters are being rounded up and buildings being searched to find anyone with a camera; what isn't clear is who is doing it---Mubarak followers or Mubarak protestors.

Technically, the bond and mortgage markets are increasingly bearish; the 30 yr FNMA coupon failed at its key 20 and 40 day averages, the 10 yr note is moving out of its almost two month trading range to higher yields. We have been saying for months interest rates are headed higher, the economy can't be ignored for its strength, prices are increasing but so far haven't filtered down to consumers. The general outlook for global rates is for increases from emerging markets to China to Europe and here in the US. The Fed can control short term rates but isn't much of a force for long term rates, investors and traders increasingly moving out of bonds and into equities just what Bernanke wants. The equity markets haven't rallied on the better economic reports this morning

keeping the rate markets from deteriorating further.

Today's Market 2/2/2011

2011-02-02T08:02:00.001-08:00

Prior to 8:15 this morning treasuries and mortgages were doing a little better with US stock indexes slightly weaker after the strong rally yesterday. The 10 yr note at 8:00 +7/32 to 3.42% -2 bp and mortgages +4/32 (.12 bp). At 8:15 the infamous and market-unsettling ADP employment estimate for Jan; ADP was expected to show an increase of 140K/150K jobs, as reported up 187K. The ADP report on jobs in Dec sent markets scrambling when the company reported job growth of 297K, in the report this morning they revised it to 257K. After the huge miss on jobs in Dec (BLS reported 113K non-farm private jobs), most traders simply ignored the report as they should. Over the previous six reports, ADP’s initial figures were closest to the Labor Department’s first estimate of private payrolls in July, when it understated the gain in jobs by 29,000. The estimate was least accurate in December, when it overestimated the employment gain by 184,000.

Today’s ADP report showed an increase of 21,000 workers in goods-producing industries, which includes manufacturers and construction companies. Service providers added 166,000 workers. Employment at factories increased 19,000 jobs, ADP said. Companies employing more than 499 workers expanded their workforces by 11,000 jobs. Medium-sized businesses, with 50 to 499 employees, created 79,000 jobs and small companies increased payrolls by 97,000.

The "official" employment report hits on Friday; estimates are for an increase of 140K jobs. Already economists and analysts are hedging their estimates because of the weather issues that have hammered much of the east through Jan. One thing is likely, the actual report won't be near the estimates; either much stronger or much weaker, take your pick.

It is Wednesday; the MBA released its Weekly Mortgage Applications Survey for the week ending January 28, 2011. The Market Composite Index, a measure of mortgage loan application volume, increased 11.3%. The previous week did not include a holiday adjustment for Martin Luther King, Jr. Day. The Refinance Index increased 11.7% from the previous week. The seasonally adjusted Purchase Index increased 9.5% from one week earlier. The four week moving average for the seasonally adjusted Market Index is up 1.0%. The four week moving average is down 1.5% for the seasonally adjusted Purchase Index, while this average is up 1.7% for the Refinance Index. The refinance share of mortgage activity decreased to 69.3% of total applications from 70.3% the previous week. This is the lowest refinance share observed in the survey since the week ending May 14, 2010. The adjustable-rate mortgage (ARM) share of activity increased to 5.5% from 5.2% of total applications from the previous week. The average contract interest rate for 30-year fixed-rate mortgages increased to 4.81% from 4.80%, with points decreasing to 1.02 from 1.19 (including the origination fee) for 80% loans. The average contract interest rate for 15-year fixed-rate mortgages increased to 4.13% from 4.12%, with points decreasing to 1.01 from 1.26 (including the origination fee) for 80% loans.

At 9:15 Treasury announced the details of next week's quarterly refunding. Tuesday $32B of 3 yr notes, Wednesday $24B of 10 yr notes and Thursday $16B of 30 yr bonds. The total of $72B is in line with what dealers were expecting.

At 9:30 the DJIA opened down 21, the 10 yr note +6/32 3.42% -2 bp and mortgage prices +5/32 (.15 bp).

We are not expecting much for the rate markets today. Friday's Jan employment report looms and next week Treasury will conduct its quarterly refunding auctioning $72B of notes and bonds. By 10:00 the 10 yr and mortgages have already drifted off their best levels seen prior to 9:30 when the equity markets opened. The 10 still confined to its six week range, mortgages also stuck in their tight range keeping mortgage rates essentially unchanged for the past month. We continue our longer term bearish outlook for interest rates, the economic recovery is improving and inflation while not yet an issue, prices pd for commodities and energy are increasing and keeping investors and traders reluctant to press the bond market much.

Today's Market 2/1/2011

2011-02-01T07:41:00.003-08:00

More selling in the bond and mortgage markets this morning; at 8:30 the 10 yr note -15/32 at 3.43% +5 bp and mortgage prices -11/32 (.34 bp). Yesterday the 10 declined 11/32 to 3.38% +5 bp, mortgage markets held well against treasuries, off just 4/32 (.12 bp) in price. The stock market managed a gain yesterday after the 166 point decline in the DJIA on Friday; better economic data continues to fortify investors. Dec personal spending yesterday was better than what was thought and the Chicago purchasing mgrs index was the highest since July 1998.

At 9:30 the DJIA opened 43 points higher ahead of the ISM manufacturing report. The 10 yr note at 9:30 -16/32 3.44% +6 bp and mortgage prices -11/32 (.34 bp).

This morning two reports hit at 10:00; the Jan ISM national manufacturing index, expected at 58.0 frm 57.0 in Dec.The overall index increased to 60.8, the highest since 2004; the sub components were also much better. New orders index at 67.8 frm 62.0, prices pd really is increasing, 81.5 frm 72.5 and employment increased to 61.7 frm 58.9. Any reading over 50 is considered expansion. The initial reaction sent interest rate markets lower in price after already being substantially lower early.

U.K. as domestic and export demand boosted orders. The gauge based on a survey of companies by Markit Economics and the Chartered Institute of Purchasing and Supply surged to 62 from a revised 58.7 in December, like the US ISM manufacturing index, any read over 50 is considered expansion.
manufacturing grew at a record pace in January

Also at 10:00 Dec construction spending, the estimate is an increase of 0.2%; late last week estimates were for a decline of 0.5%. As released spending fell 2.5%. Traders not concerned with it as the ISM data overrides the volatile construction spending.

Retail sales in Jan have been negatively impacted by bad weather; the Johnson Redbook US chain store sales for Jan were down 0.9% frm Dec, sales were up 1.8% however from a year ago. Another retail sales report, the ICSC-Goldman store sales confirmed the weather related decline in Jan; sales were 1.0% in Jan but up 1.6% from Jan 2010. The measure of comparable store sales at major retail chains, published by the International Council of Shopping Centers, is related to the general merchandise portion of retail sales. It accounts for roughly 10% of total retail sales. We were looking for Jan sales as confirmation of the pace of recovery, unfortunately weather has made the data less reliable.

Germany The number of people out of work declined a seasonally adjusted 13,000 to 3.135 million, the lowest since November 1992, the Nuremberg-based Federal Labor Agency said today. Economists forecast a drop of 10,000, according to the median of 32 estimates in a Bloomberg News survey. The adjusted jobless rate fell to 7.4% from 7.5%. Friday we get the Jan US employment data, expectations now are for NFP jobs to have increased 150K with private jobs up 163K, the unemployment rate at 9.5% +0.1%.
reported an increase in employment; unemployment fell to an 18- year low in January.

Although the economy is gaining momentum there is no reason to fear inflation, the key reason US interest rates remain very stable over the past six weeks after the spike in Nov and early Dec. The Fed continues its $600B purchases of US treasuries and additional Treasury buying using the repayments from the $1.25T MBS buying binge a year ago. That the Fed is buying almost the equivalent of all recent Treasury borrowing has kept rates from increasing. Mortgage interest rates have kept within a narrow 10 basis point range for 30 yr rates; as long as the 10 yr note doesn't move above 3.50% (currently 3.44%) mortgage rates will remain generally unchanged.

Today's Market 1/31/2011

2011-01-31T07:23:00.003-08:00

Treasuries and mortgages started a little soft this morning, prior to 8:30 the 10- yr note was off 9/32 at 3.36% once again finding resistance at 3.31% which was Friday's low before closing at 3.33%. Mortgage prices prior to 8:30 -5/32 (.15 bp). At 8:30 Dec personal income and spending were reported; income up 0.4% with forecasts of +0.5%, spending +0.7% against expectations of +0.6%. In 2010 income was up 3.0% while spending increased 3.5%. There was little reaction to the data, the 10 yr improved a few 32nds. Stock indexes after the report, the DJIA up 40 points after falling 166 points on Friday. The personal consumption index, slowed further below the central bank’s long-term forecast. The Fed’s preferred price index, which is tied to spending patterns and excludes food and fuel, increased 0.7% from December 2009, the smallest increase since records began in 1959. The core price index was unchanged in December for the fifth time in the past six months. The gauge was forecast to increase 0.1% from November and 0.8% from December 2009.

The unrest in Egypt continued over the weekend but is having little or no affect on US markets. Mubarak is on his way out after 30 years but markets believe the transition to a new government will not disrupt US/Egypt relations or disturb oil flows through the Suez Canal with only about 3.0% of oil moves through it. Mubarak, Egypt's president, has sworn in a new cabinet in a bid to quell days of mass uprising against him and the government. The changes are unlikely to save Mubarak, riots and protesters still occurring; meantime a lot of press on it but markets seem non-plused.

At 10:00 the Chicago purchasing mgrs index, expected at 65.0, jumped to 68.6 frm 66.8 in Dec; the highest index reading since July 1998. New orders increased to 75.7 frm 68.7, prices pd increased to 81.7 frm 78.0 and employment component increased to 64.1 frm 58.4 (any index reading over 50 is considered expansion, the higher the stronger). The initial reaction wasn't much in the bond market.

Last Friday the DJIA fell 166 points in what may be the start of the expected correction in the equity markets. This morning the all key indexes opened better and at 10:00 still a little better but struggling a little. The 10 yr note rate fell to 3.31% on Friday on the stock market weakness, the recent level that has stopped any rallies in the past couple of weeks. This morning, after opening higher the 10 yr at 10:00 is firming at 3.34% up just 1 bp and mortgage prices at 10:00 unchanged.

The stock market is presently hanging in there but looks soft. If the 10 has any chance to break to lower rates the equity markets will need to roll over. A rally in equities today will keep rate markets from improving much. With the employment report on Friday the financial markets are more likely to sit still with some choppiness and no real changes until later this week.

This Week's Economic Calendar:

Tuesday;

10:00 am Dec construction spending (-0.5%)

Jan ISM manufacturing index (58.2 frm 57.0)

3:00 pm Jan Auto and Truck sales

Wednesday;

7:00 am weekly MBA mortgage applications

8:15 am ADP employment estimate for Jan (+150K private jobs)

Thursday;

8:30 am weekly jobless claims (-19K at 425K, con't claims 3.925 mi frm 3.991 mi)

10:00 am ISM manufacturing index (57.0 frm 57.1 in Dec)

Dec factory orders (-0.7%)

Friday;

8:30 am Jan employment data (non-farm jobs +150K, private jobs +163K; unemployment rate 9.6% frm 9.4% in Dec)

Today's Market 1/31/2011

2011-01-31T07:23:00.001-08:00

This Week's Economic Calendar:

Tuesday;

10:00 am Dec construction spending (-0.5%)

Jan ISM manufacturing index (58.2 frm 57.0)

3:00 pm Jan Auto and Truck sales

Wednesday;

7:00 am weekly MBA mortgage applications

8:15 am ADP employment estimate for Jan (+150K private jobs)

Thursday;

8:30 am weekly jobless claims (-19K at 425K, con't claims 3.925 mi frm 3.991 mi)

10:00 am ISM manufacturing index (57.0 frm 57.1 in Dec)

Dec factory orders (-0.7%)

Friday;

8:30 am Jan employment data (non-farm jobs +150K, private jobs +163K; unemployment rate 9.6% frm 9.4% in Dec)

Today's Market 1/28/2011

2011-01-28T07:14:00.001-08:00

Two very key economic releases at 8:30 this morning. Q4 GDP was expected to be up to 3.6% frm +2.6% growth in Q3 2010, the advance report showed growth at 3.2%; the miss occasioned by the biggest drag from inventories in two decades. Q4 employment cost index was at +0.4% as expected. Those were the headlines but the details revealed better comparisons. Final sales in the fourth quarter increased 7.1%, the best showing in sales since 1984. The employment cost index for all of 2010 at +2.0%, was the second lowest on record at 2.0%, in 2009 the employment cost annual index was up 1.4%. GDP growth in 2010 at +2.9% was the strongest in five years. Household purchases, about 70% of the economy, rose at a 4.4% pace, the most since the first quarter of 2006. Retailers’ holiday sales jumped 5.5% for the best performance in five years. The report this morning is the first of three that will be released over the next two months before the final GDP hits in March, nevertheless there is little doubt that the economy is recovering at a pace better than what we were expecting, still however, we want to see retail sales data for Jan and Feb for confirmation. That may be a problem though in that Jan will be negatively impacted by many snow storms through the month.

Treasuries and mortgage markets were soft into the 8:30 releases, initially weakened more before settling down by 9:00; at 9:00 the 10 yr note -11/32 at 3.43% +4 bp, mortgage prices down 7/32 (.22 bp). (see below for 10:00 levels). The economic improvement is increasing the possibility that the six week trading range for the 10 yr and mortgages is going break to higher rates soon. There are two factors that are still holding rates stable; inflation is low and there is nothing out there that suggests it is about to increase, and there is a potential for the equity markets are due for a correction after the huge improvement over the past six months.

The stock indexes opened better at 9:30; DJIA +4 points. The indexes are struggling recently; although improving the equity markets are showing some signs of exhaustion after the very strong rally over the past six months. Most of the optimism that drove stocks higher have now been about completely discounted; the economic rebound has essentially met market expectations. To take the market higher now it will need an infusion of new news and data. Many analysts that remain bullish in the long run are talking about a correction, a few are looking for as much as 10%. If (when) a correction begins it will support the rate markets on safety moves.

The 10 yr note still is holding in its 25 basis point yield range; mortgages following along. This week so far the 10 yr note and mortgages are unchanged from last Friday's closes. So far there isn't enough momentum to drive the 10 yr note above 3.50%, however recent action is less optimistic. Rallies have been weaker than days when prices fall and yields increase. The rest of the session for the bond and mortgage markets will depend on how stock indexes trade.

The final economic data point this week; at 9:55 the U. of Michigan consumer sentiment index, expected at 73.0 frm 72.7. Sentiment came at 74.2; the current conditions index at 81.8 frm 79.8 and the 12 month out expectations unchanged at 87.0. No noticeable initial reaction to the report as it was in line with investors' forecasts. The stock indexes did back off a little but not much.

Today's Market 1/27/2011

2011-01-27T08:21:00.001-08:00

Prior to 8:30 interest rate markets were lower in price with the 10 yr note yield at 3.47%, touching its support level at 3.50%, mortgage prices traded down 9/32 (.28 bp). Two data points at 8:30 stopped the selling while leaving traders trying to square with the data. Weekly jobless claims were expected to increase 1K, as reported claims increased 51K to 454K the highest weekly claims since last Oct. Continuing claims also increased for the first time in four weeks, to 3.99 mil frm 3.87 mil. Unemployment claims were distorted by the winter weather in the South with four states reporting claims higher than normal. It took 30 minutes but by 9:00 the 10 yr note moved back to unchanged at 3.42% and mortgages at 9:00 +2/32 (.06 bp).

Dec durable goods orders were out at 8:30; orders were expected to be up 1.5%, as reported orders fell 2.5%. When transportation orders were excluded orders were thought to be up 0.6%, as reported +0.5%. Durables is a very volatile series and usually sees revisions later when factory orders are released (Feb 3rd), markets normally don't get too worked up over any deviations and with the volatile transportation orders excluded orders were generally in line with forecasts. Bookings for goods like computers and communications gear excluding aircraft climbed 1.4% after a 3.1% gain in November that was larger than previously estimated, figures from the Commerce Department showed today in Washington. Total orders fell 2.5% as noted, depressed by volatile demand for aircraft, which plunged 99%.

Stock indexes were looking good prior to the 8:30 data then backed off; at 9:30 the DJIA opened -2 points but within a few minutes managed to move a little higher. Mtgs at 9:30 +3/32 (.09 bp) and the 10 yr note +2/32 at 3.42%; by 9:45 however the 10 traded lower by 3/32.

Nov pending home sales released at 10:00 were expected to be down 0.5%; sales increased 2.0%, pending sales are sales with contracts but net closed. Yr/yr sales however down 2.2%. The NAR said better employment and good values were forces that improved the sales report. The initial reaction pushed prices on the 10 and mortgages off a little but no major reaction, nevertheless it is another measurement that beat the estimates.

Later this afternoon Treasury will complete this week's auctions with $29B of 7 yr notes. Yesterday's 5 yr note auction was met with strong demand, Tuesday's 2 yr auction however was not well bid.

The bond and mortgage markets continue to show bearish technicals, fundamentals also are working against the rate markets. The economy is improving, while data this morning is weaker investors will likely dismiss them as anomalies as most reports support the improving outlook for the US economy. We believe it is only a matter of time before the 10 yr note and MBSs break their ranges to higher rates. That said, as long as the 10 yr note and MBSs hold within their respective six week ranges there remains the potential of improvement but the potential is lessening with each economic release.

Today's Market 01/26/2011

2011-01-26T07:26:00.001-08:00

Like clock work! Yesterday the 10 yr note rallied taking the yield to 3.31% intraday and closing at 3.33%, the yield fell to its key resistance area (again); this morning the 10 yr yield at 9:00 back up to 3.37%. You can almost guarantee any rally taking the 10 yr note back to 3.00%-3.28% will fail the following day; equally it is almost 100% sure that when the rate climbs to the 3.45%-3.50% it will also fail to climb higher. Mortgage rates follow; yesterday mortgage prices increased 10/32 (.31 bp) this morning at 9:00 -10/32 (.31 bp)----running on a tread mill.

Last night the President had an opportunity to take a huge step toward setting the agenda this year on cutting federal spending. He could have laid out his ideas and strategy to address the exploding budget deficit that if left unchanged will eventually send interest rates a lot higher and drag the economy down. He didn't; he spoke eloquently as always but most of his speech was shallow on specifics, lots of platitudes and lots of feel good comments but he left with no details. Pres Obama is caught in the cross hairs of his political party; liberal Democrats do not want smaller government and less spending, they want more; the President knows he has to move more to the center. He knows the federal deficit has to be reigned in, he realizes he has to work with Republicans toward that end. His speech last night seemed designed to not alienate the far Left in his party while also trying to appear conservative and tough on spending. He failed to take up the challenge.

The MBA released its Weekly Mortgage Applications Survey for the week ending January 21, 2011. The Market Composite Index, a measure of mortgage loan application volume, decreased 12.9% on a seasonally adjusted basis from one week earlier. The Refinance Index decreased 15.3% from the previous week and reached its lowest level since January 2010. The seasonally adjusted Purchase Index decreased 8.7% from one week earlier. The Purchase Index is at its lowest level since October 2010. The unadjusted Purchase Index decreased 3.1 percent compared with the previous week and was 20.8% lower than the same week one year ago. The four week moving average for the seasonally adjusted Market Index is down 1.0%. The four week moving average is down 3.7% for the seasonally adjusted Purchase Index, while this average is down 0.1% for the Refinance Index. The refinance share of mortgage activity decreased to 70.3% of total applications from 73.0% the previous week. The adjustable-rate mortgage (ARM) share of activity increased to 5.2% from 5.0% of total applications from the previous week. The average contract interest rate for 30-year fixed-rate mortgages increased to 4.8% from 4.77%, with points decreasing to 1.19 from 1.20 (including the origination fee) for 80% loans. This week the increase in the rate followed three consecutive weekly decreases. The average contract interest rate for 15-year fixed-rate mortgages decreased to 4.12% from 4.16%, with points increasing to 1.26 from 0.90 (including the origination fee) for 80% loans.

At 10:00, a few minutes ago, Dec new home sales expected up 3.4%, increased 17.5%, just like last week's existing home sales spiked 12.3%. The headline looks good, the guts were less so. In the west sales increased 71.9%?, 2010 sales declined 14.4%, and it still leaves a 6.9 month supply. In Dec rates increased and may have contributed to better sales as buyers made their moves before rates moved even higher. The initial reaction to the report added more selling in the treasury markets, mortgage prices slipped a little so far but not as much as the 10 yr note fell on the report.

At 1:00 Treasury auction $35B of 5 yr notes, the second of three auctions this week raising $99B. Yesterday the 2 yr auction was not met with very strong demand.

At 2:15 the FOMC meeting will conclude with the short policy statement. The Fed will not increase interest rates, will sound supportive on the economy, say it wants inflation levels a little higher. Essentially about the same as the statement after the Dec 15th meeting.

Today's Market 1/25/2011

2011-01-25T11:53:00.001-08:00

Treasuries and mortgage markets opened better this morning on lower US stock indexes following very weak British Q4 GDP report this morning. Britain’s gross domestic product sank 0.5% in the three months through December after increasing 0.7% in the previous quarter. Economists had predicted 0.5% growth in the U.K.’s GDP. By 9:45 however all the early gains in mortgage markets were gone and the bellwether 10 yr after being up 12/32 early was +5/32.

The Nov S&P/Case-Shiller index of home values in 20 U.S. cities fell 1.6% from November 2009, the biggest 12-month decrease since December 2009. Home values fell 0.4% for the 10 largest markets.

Treasury starts the week's borrowing this afternoon with $35B of 2 yr notes; should see good demand but recent auctions have been spotty with some issues seeing strong bidding while others don't do so well. Two weeks ago Treasury auctioned a 3 yr note that was not well bid. Tomorrow $35B of 5 yr notes and Thursday $29B of 7 yr notes.

The Fed begins two days of the FOMC meeting today, nothing today but at 2:15 tomorrow the policy statement will be released to fanfare and potential trepidation. The Fed is highly unlikely to alter its $600B purchases of treasuries even though business lending is increasing and the economic outlook appears stronger. Recent Treasury auctions amount to a little over $200B a month, the Fed is buying about half that amount in seasoned notes lessening the supply a little and adding some support for longer term rates.

The Johnson Redbook chain store sales increased 2.3% for the week ended 1/22 versus the same week a year ago. Yr/yr chain store sales increased 2.5% (Jan 2011/Jan 2010). Month to month sales however declined 0.7% in Jan compared to last month (Dec).

The Jan Conference Board's consumer confidence index, expected at 54.4 frm 53 (revised frm 52.5).5 in Dec, increased to 60.6. The expectations index also climbed, to 80.3 frm 72.3. The huge increase in confidence is the highest reading since last May. The reaction took mortgage prices lower and the 10 yr back to unchanged from +4/32 prior to the report. Also at 10:00 the FHFA housing price index was unchanged from Oct which was up 0.7%.

Gold and crude oil continue their fall this morning; gold is off about $80.00 frm its recent highs over the past couple of weeks, now at a two month low. Crude oil, widely expected to increase to $100.00 this spring, hit $91.00 levels recently but has been sliding recently, this morning early crude was off another $1.00 at $87.00 (see below for 10:00 levels for gold and crude).

The DJIA opened -21, the 10 yr note at 9:30 +8/32 3.37% -4 bp and mortgage prices +3/32 (.09 bp). The infamous 10 yr note still confined to its six week cage between 3.50% and 3.25%, nothing seems to shake it, a traders delight; no directional trend. Traders moving the note in its range and doing quite well with not much risk; buy 10 yr note futures when the yield hits above 4.45%, sell at 3.28%.

The 10:00 data (consumer confidence) took everything out of the early gains; lenders that priced prior to 9:30 this morning may already be setting up for re-pricing lower. At 9:30 mortgage prices were +3/32 (.09 bp) and 10:05 -5/32 (.15 bp) a drop of 8/32 (.25 bp).

Today's Market 1/24/2011

2011-01-24T08:09:00.001-08:00

The bond and mortgage markets started rather quietly this morning, stock indexes slightly better early but mostly unchanged. There are no economic data points to think about today. This week markets will contend with Treasury auctions and the FOMC meeting on Wednesday. Economic reports include two measures of consumer attitudes, new home sales for Dec and Q4 GDP advance look.

Treasuries and mortgage markets continue to trade in their narrow ranges that is now going on five weeks with interest rates contained in a 25 bp range for the 10 yr note and 15 bp for 30 yr mortgages. Investors still holding bonds, not yet willing to believe completely that the economy will improve as much as most now believe and not being influenced by all the talk about inflation. How much longer interest rates can stay at these low levels depends on economic reports for Jan, most we won't see until Feb when the key points are reported. While recent trading has been well defined, the outlook is for rates to move up as the year moves on.

This week the FOMC meeting with its short policy statement in Wednesday afternoon, The State of the Union address on Tuesday eve, and Treasury auctions are the critical elements. On Friday the first report on Q4 GDP is expected to show growth increase of 3.7%, up frm +2.6% in Q3.

At 9:30 the DJIA opened unchanged, NASDAQ +5 and S&P 500 unch; mortgage prices +1/32 (.03 bp) and the 10 yr note +2/32 at 3.40% -1 bp.

This Week's Economic Calendar:

Tuesday;

9:00 am Case/Shiller home price index for Nov (-1.5%)

10:00 am Conference Board's consumer confidence index (54.2 frm 52.5)

FHFA Nov housing price index (N/A)

1:00 pm $35B 2 yr note auction

Wednesday;

7:00 am weekly MBA mortgage applications

10:00 am Dec new home sales (+3.4% to 300K annualized)

1:00 pm $35B 5 yr note auction

2:15 FOMC policy statement (no change in interest rates)

Thursday;

8:30 am weekly jobless claims (+6K to 410K, con't claims 3.835 mil frm 3.861 mil)

Dec durable goods orders (+1.5%, ex transportation orders +0.6%)

10:00 am Nov pending home sales (-0.5%)

1:00 pm $29B 7 yr note auction

Friday;

8:30 am Q4 advance GDP (+3.5%)

Q4 employment cost index (+0.4%)

9:55 am U. of Michigan consumer sentiment index (73.2 frm 72.7)

President Barack Obama said in a video to supporters that tomorrow’s State of the Union address will focus on cutting the deficit, reducing unemployment and ensuring the U.S. can compete with economic rivals. “My principal focus, my number one focus, is going be making sure that we are competitive, that we are growing, and we are creating jobs not just now but well into the future,” Obama said in a video released over the weekend.

Inflation worries appear to be lessening; Goldman/Sachs successfully sold 20 yr bonds on Friday with good demand. Economists are lowering forecasts for consumer price rises next year, with the median estimate declining to 1.9% this month from 2% in December, according to a Bloomberg survey. The record $13B auction of 10-year Treasury Inflation-Protected Securities last Thursday attracted lower-than- average demand and the difference between yields on 10-year notes and TIPS narrowed the most since May. Businesses are not likely to have much pricing power, consumers will likely not spend as much on discretionary purchases with food and energy prices expected to continue increasing, keeping price pressures low and business earnings subdued.

This year we will experience 4 unusual dates 1/1/11, 1/11/11, 11/1/11, and 11/11/11. Now figure this out; Take the last 2 digits of the year you were born plus the age you Will be this year, and IT WILL EQUAL 111. Very Strange...

Today's Market 1/21/2011

2011-01-21T10:23:00.001-08:00

Treasuries and mortgages opened a little better this morning after rates increased yesterday on strong economic data in housing, weekly jobless claims and the Philly Fed business data. The benchmark 10 yr note yield increased to 3.45% close to 3.50% level that has supported long term rates for 25 trading sessions, mortgage prices fell and their rate increased but also still in their trading range.

There is nothing on the schedule today, no data and no Fed speakers now until after the FOMC meeting next Wednesday. The bond market will likely take direction from how equity markets perform today. In early pre-market trade the key stock indexes were pointing to a better open at 9:30. With the indexes improving at 9:15 this morning the rate markets, after opening better were losing momentum. At 8:30 mtgs +.25 bp, at 9:15 -.03 bp; the 10 yr note at 8:30 up 10/32 at 9:13 +3/32 at 3.44% -1 bp.

US The euro currency is strong against the dollar this morning on News out of Germany; he Ifo Institute’s business climate index, based on a survey of 7,000 German executives, was 110.3 in January, up from the 109.9 median of 41 forecasts in a Bloomberg News survey. That’s the highest since records for a reunified Germany began in 1991.

We realize we speak of the 10 yr trading range almost everyday, but it is important especially now where the 10 yr is trading this morning and what lies ahead next week. With the 10 yr at 3.45% at 9:30, the stock market strong on the open and next week's Treasury borrowing and the FOMC meeting, the 10 today may make a move to test its high yield at 3.50% that has held the rate increases in check since mid-Dec. Technicians are well aware of the easily noted range, a break above 3.50% would likely add more selling and push the rate up to 3.55% the reactionary high of a few weeks ago that was immediately rejected.

At 9:30 the DJIA opened +50, the 10 yr note -1/32 at 3.46% and mortgage prices -4/32 (.12 bp).

With interest rate markets close to their key support levels this morning today's trading needs close attention. Its early, but so far so good, the 10 is still holding its range as is the mortgage market-----but it is early. Hard to handicap today with nothing in the way of news or data to think about.

Today's Market 1/20/2011

2011-01-20T07:30:00.000-08:00

Not a good start in the bond and mortgage markets early this morning; weekly jobless claims at 8:30 were expected to have declined 20K last week, as reported claims fell 37K to 404K filings. Last week claims were revised from 445K to 441K; continuing claims continue to decline, 3.86 mil last week from 3.887 mil the previous week. The 4 week average declined to 411,750 frm 415,750. Unemployment claims are declining furthering the optimistic outlook for this year, still a long way to go but looks like we are on the right track. The reaction drove mortgage prices down .34 bp on mortgages and -16/32 to 3.40% +6 bp on the 10 yr treasury.

Keeping pace; at 9:15 30 yr mtg prices -9/32 (.28 bp) frm the close yesterday. The 10 yr note -13/32 at 3.39% +5 bp. At 9:30 mtgs -11/32 (.34 bp) and -2/32 (.06 bp) frm 9:30 yesterday. The 10 yr at 9:30 -15/32 3.39% +5 bp; the DJIA opened -30.

More data; at 10:00 Dec existing home sales, expected up 4.1% (earlier this week the forecast was an increase of 2.5%), jumped 12.3% to 5.28 mil units annualized, the best sales report in months.

Dec leading economic indicators, expected +0.6%, increased 1.0%.

Finally today and for the remainder of the week, the last data point. The Jan Philadelphia Fed business index was expected at 20.5 was 19.3; new orders component 23.6 frm 10.6, employment component 17.6 frm 4.3 in Dec and prices pd increased to 54.3 frm 47.9.

The four economic reports this morning were all better than forecasts and is fueling more selling in the rate markets after the 10:00 data. The 10 yr note creeping up to 3.41% at 10:07 with mortgage prices -11/32 (.34 bp) about where mortgages traded at 9:30. The stock market didn't rally much on the data, the DJIA made an attempt to get back to unchanged but failed, the DJIA at 10:07 -22.

At 1:00 Treasury will auction $13B of 10 yr inflation indexed notes; normally TIPs auctions don't generate any significant movement in the market.

Every time the interest rate rally to resistance levels buying dries up, the 10 yr note this morning is reeling over the better economic data and momentary fears of inflation increases. There is no way the rate markets will give up inflation fears with rates at these historic lows. The bearish technicals cannot be shaken, although interest rates have been stable for the past few weeks the direction remains up for rates as long as the economic data continues to confirm the optimistic outlook for 2011 growth.

Today's Market

2011-01-19T07:32:00.001-08:00

Treasuries and mortgages opened better this morning prior to 8:30. At 8:30 Dec housing starts and permits were released; starts were lower than expected, declining 4.3% with estimates of a decline of 1.0%. Building permits were expected up 4.4% but jumped a huge 16.7%. Starts at 529K (annual) and permits 635K (annual). Prior to the data mortgage prices were trading better by .15 bp frm yesterday's close, at 9:00 the price was down .03 bp. The 10 yr note at 9:00 unchanged after being up 8/32 prior to 8:30. Starts at the lowest level since October 2009. By 10:00 support developing; the 10- yr up 6/32 and mortgage prices +4/32 (.12 bp) after being down 2/32 (.06 bp) at 9:30.

Nothing more on the economic calendar today. President Obama meeting with China's leaders today (Pres Hu), nothing that will impact markets however.

The MBA released its Weekly Mortgage Applications Survey for the week ending January 14, 2011. The Market Composite Index, increased 5.0% on a seasonally adjusted basis from one week earlier. The Refinance Index increased 7.7% from the previous week. This is the third consecutive weekly increase in refinance applications and is the highest Refinance Index observed since the beginning of December. The seasonally adjusted Purchase Index decreased 1.9% from one week earlier. The four week moving average for the seasonally adjusted Market Index is up 1.4%. The four week moving average is down 0.8% for the seasonally adjusted Purchase Index, while the average is up 2.3%for the Refinance Index. The refinance share of mortgage activity increased to 73.0% of total applications from 72.1% the previous week. This is the highest refinance share observed since the week ending December 10, 2010. The adjustable-rate mortgage (ARM) share of activity increased to 5.0% from 4.9% of total applications from the previous week. The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.77% from 4.78%, with points increasing to 1.20 from 0.91 (including the origination fee) for 80% loans. The average contract interest rate for 15-year fixed-rate mortgages increased to 4.16% from 4.15%, with points decreasing to 0.90 from 1.01 (including the origination fee) for 80% loans.

So far over the last two years the percentage of adjustable rate mortgages has been low, last week 5.0%; we expect adjustable rate loans as a percentage of overall mortgages will increase this year, possibly tripling to 15% or maybe higher. As interest rates increase through the year it is likely consumers will move more to adjustables. The Fed is going to keep short rates low (Fed funds) while longer term rates increase making it more desirable to turn to adjustables that will carry much lower rates as long as the Fed keeps rates low as the Fed says it will. Even today a 5/1 adjustable is attractive.

At 9:30 the stock market opened a little better after trading weaker in pre-market futures trading after the Dec housing starts declined more than thought and on Goldman/Sachs quarterly earnings report. Mortgage prices off slightly and the 10 yr note sitting unchanged at 3.37% about in the middle of its five week range. The 30 yr FNMA MBS coupon is backing off and has resisted cutting through technical resistance levels.

The interest rate markets presently in a comfort zone; for weeks the bellwether 10 yr and mortgage have found solace in a 20 basis point range for the 10 yr and 12 basis points for mortgages. How much longer the sideway movement will last depends mainly on what the economy does in Jan and Feb, or at least what traders believe it will do. Right now sellers of notes, bonds and mortgages are offset with equivalent buying keeping rates very stable.