Currency wars is what this is all about and the Fed is getting exactly what it hoped for, consumer expectations of rising inflation to shut the door on deflation.  This was evidenced in last week’s Michigan Sentiment Survey.  With QE2 priced in “before” it happened and the negative connotations mentioned above, treasuries have continued to be slaughtered, sending credit costs higher, doing nothing to stimulate the economy.  Look for the Fed to try and talk rates back down.

So far today, that hasn’t been the case as Uncle Sam bought about 8 billion in paper with little to no effect.  10’s are trading at 2.85%, down 22/32’s on the day.  Mortgage backs are off 9/32’s and stocks are up 65 on the big board.

Retail Sales hit the tape up 1.2%, a touch better than expected.  Stripping out autos, the index was plus .4%.  Business inventories/Sales were also released, up .9% and up .5% respectfully.  The week ahead is a doozy, starting with inflation numbers (PPI and CPI) over the next two days.

Technically, the selling today has taken the chart below the October lows (high yield mark) and then rebounded ever so slightly.  Bearish readings and Trend Intensity are evident on every chart time frame.  The best we can hope for is that the October low will hold (good so far) and the market will begin to repair itself.  Odds are good for a rally based on oversold conditions along.  Just the same, this is not a market to mess with.  Until there is a sea change in the way traders view QE2, this version of Sonny and Cher’s “the beat goes on” will continue.

Election day expectations are huge for the Republicans.  Both the Rothenberg and Cook Political Reports are predicting 50 House seats will be turned over to the Republican party.  39 are needed to take control.  If true, we can expect gridlock in the coming months as the split (House/Senate) will create an environment unable to find common ground on fiscal policy.  This is assuming the Dem’s hold the Senate.

The Fed Open Market Committee (FOMC) started its two day meeting this morning, apparently hashing out what to do to re-inflate the economy and create jobs.  QE2 will most likely be the outcome, with 500 billion expected to be pumped into the system over the next two quarters.  Most expect the Fed to leave the total amount of purchases “open,” allowing for dollar amount changes to be made depending on economic strength.  No doubt the next two days will be high drama and volatile.

We see all of the above “baked into the cake.”  In other words, it’s already priced into the market.  Our bias is for stocks to slip a bit, post election and mortgage backs to hold steady.  Currently, the 10 year is up while mortgage backs are unchanged.  Best bet for Austin mortgage borrowers is to be conservative/cautious with locking your interest rates as the political news will be tomorrow morning’s early trade.

Smooth line four week moving average is at 453K but is moving lower week by week.  Key for today will be the outcome of 29 billion in 7 year notes which will cross the auction block at high noon cst.  Technically, the 10 year candlestick chart has the makings of a bullish real body engulfing pattern which would limit further weakness.  On the other hand, Elliot Wave Theory points to an A wave which will take the market to targets I mentioned yesterday (2.78% on the 10 year note) before a B wave correction occurs.  “Real men and women” who use bar charts see shorter time frames (60 minute chart) oversold and due a small bounce.  That is what is happening now.  Longer term charts (daily) are still bearish and project a move to 2.78%.

As you can see, when multiple trading tools are not in harmony, nobody is happy.  Uncertainty leads to volatility and in this case, give the bears the edge.  Stocks will also be key, currently down a dozen on the big board.  Speaking of stocks, we feel that next week’s mid-term elections are priced in, reflecting a win for Republicans in the House (taking majority) but not in the Senate.  The political outcome would be gridlock, limiting spending/taxing/etc. as we move into 2011.  Outlier events would be a takeover of the Senate (very bullish for stocks/bearish for bonds) or not taking control of the House (bearish for stocks/bullish for bonds).

With the elections and the Fed meeting next week to hopefully clarify QE2, things could get wild.  We also have the Employment report for October a week from tomorrow.  Austin mortgage borrowers are advised to take advantage of any rate improvement we see as the skies have yet to clear.

Text book trading here as this baby is tracking the down trend line like a hunting dog.  Good news is that we are at good support mentioned this morning.  Play defense, Austin mortgage borrowers, as the light at the end of the tunnel  is not the other side.

Reaction, post auction has seen the 10 year note slip a few ticks, now off 18/32’s.  Mortgage backs are off 4/32’s, 1/32^nd worse than the pre-auction release.  Not much has changed with our bias which remains tactically neutral/bearish short term.  With another 13 billion of 30 year paper on the block tomorrow, choppy trading and volatile conditions will persist.

The fear factor today will be the results of 21 billion in 10 year notes crossing the auction block (high noon cst).  After yesterday’s dismal 3 year offering, the street is wondering who will show up to buy the paper.  Notes, bonds, and mortgage backs are respecting the fear of the unknown.  Currently, 10 year notes are off 15/32’s, the 30 year bond is off 40/32’s, and mortgage backs are cheating fate, down only 3/32’s.  Stocks are having a party, up 110 on the big board as corporate America churns and earns.

Technically, there are a couple of things you need to pay attention to.  First is the Elliott Wave count which has probably completed its 5 wave.  This pattern started in June and has been very accurate.  The break of yesterday’s trend line and continuance to trade below it is strong evidence that a new A wave has begun.  If correct, the pattern projects a trade to at least the 38% retracement target of 125 28 (10 year futures) or the yield equivalent of 2.58%.  This type of corrective trade could last for a month, slowly eroding Austin mortgage pricing until a bottom is found.

From our perspective, the market seems to have fully priced in QE2 and now must wait until the next FOMC meeting (11/2) to see if it comes to fruition.  The “wait” is making some nervous.  Continued corporate earnings, with the expectations that most will beat, will add additional pressure to fixed income and Austin mortgage pricing.  Best bet for Austin mortgage borrowers is to take a defensive posture.  With so much bond-friendly news priced in, the risk reward for better mortgage pricing is just not there, folks.

With both retail and fast money accounts quiet, pricing reflects much of the same.  10 year notes are up 1/32^nd, current coupon mortgage backs up 1/32^nd, and stocks down 20 points on the big board.  The week ahead will feature Import Prices tomorrow, Weekly Unemployment Claims and inflation data (PPI) on Thursday, and CPI (inflation at the consumer level), Retail Sales, Empire State Manufacturing, and Michigan Sentiment Survey on Friday.

Currently, the best bet for Austin mortgage borrowers: don’t take historic low Austin mortgage rates for granted.

Mortgage backs performed like dogs, widening out to treasuries while closing up 10/32’s on the day.  We see traders and money managers taking a neutral bias, waiting for pullbacks (consolidation) in the market to buy.

Keep in mind that tomorrow will be “square up day” where trading is typically quiet before a big release like Friday’s Employment Report.  More on that tomorrow.

In other news, the Mortgage Bankers Association reported a rise in purchase activity led by FHA lending (up 9.3%).  Refinances’s decreased 2.5% in the same period.  Bank of America also made headlines, announcing the shutdown of their wholesale lending unit, apparently to focus on consumer direct business.

Going to be tough sledding out there for the brokers.  Stocks have not done much following yesterday’s 200 point gain.  Currently, the Dow is close to unchanged.  Bonds and notes on the other hand have been on fire with the 10 year note up 1 point.  Trouble with this picture is that treasuries are the only thing in stealth rally mode due only to quantitative easing in the air.  Mortgage backs are not doing bad, just not up in lock step with treasuries.

Given the “juice” provided by QE2 (rumor or real), we may be set up for a blow off top and hard reversal.

Japan chimed in, announced an interest rate move from .1% to 0.  They also have announced a plan to purchase government fixed income assets, hopefully allowing the Yen to fall and improve their export business.  Seems as though QE is going global.

Earlier today, the ISM Manufacturing Index rose nearly two points to 53.2.  The index unfortunately is still below the first half of the year and reflects GDP growth of 1.8% to 2.0%.  Stocks have had a nice day, starting with gains in Europe.  Currently, the Dow is up 187 points while the Naz has tacked on 54 points.

Under “normal” circumstances, one would expect Austin mortgage pricing to be getting its head handed to it.  Not so fast my quantitative fans.  10 year notes are up and mortgage backs are unchanged.  Don’t expect much of a down draft in pricing unless the Employment Report, due out Friday at 7:30 am cst is plus 200K or higher.  More on that Thursday.