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.

After yesterday’s FOMC meeting, it became apparent that the Fed would pull out all the stops in an effort to get the economy and employment going again.  “Asset” purchases are all the rage as the government is once again the buyer of choice (treasuries).  Stocks love the idea of free money and a weakening dollars, boosting value in equities across the board.

Gold is up $40.00 as well, pricing in heightened expectations of inflation down the road.  Seems to me that the Chairman and the Prez met by the water cooler and the conversation when something like this.  “Ben, I’m in a tough spot here, my party just got its head handed to it and unemployment is nearly 10%, now I’m not telling you what to do but……… I need a game changer.  What you say we fire up the printing press and go on a buying spree.  Just a thought.”

In the news, Weekly Unemployment Claims jumped 20K to 457K while 3^rd Quarter Productivity rose 1.9%.  No one noticed as traders were too busy trying to buy bonds and stocks.  With the Employment Report for October due out at 7:30 am cst tomorrow, the prudent thing for Austin mortgage borrowers is to lock their Austin mortgage rates now.

Given that we are at the best levels in a month, your timing couldn’t be better in front of such a high profile release.  We’ll preview the Employment Report early this afternoon.

Technically, trading has been a whipsaw affair.  You will notice the downdraft yesterday (post FOMC) and the reversal this morning.  Typically a good indication the market has run its course in the short run, especially in front of the high profile data coming tomorrow.  Just the same, this baby is a bull and will be well supported into year-end given the Fed and their reloaded check book.  Call the market neutral/bullish.  Take advantage as the Employment trade is always volatile.

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.

Leading Economic Indicators were also released, up .3%.  This index has posted positive gains for the last three months yet the six month index is down .8%.  Doing better but a long way to go.  Last on the data plate was the Philly Fed Index which rose from minus .7 to plus 1.0.  Slow growth in manufacturing did the trick.

Stocks have been all over the board but holding a positive bias so far today.  The big board is up 102 points, primarily on the heels of solid earnings from Caterpillar and Mickey D’s.  Companies with global exposure are the place to be.  Bonds, notes, and mortgage backs are seeing some profit taking today.  Currently, the 10 year note is off 10/32’s while current coupon mortgage backs are off 7/32’s.  Mortgage backs have been trading like a roller coaster, down 10/32’s and then a minute later, down 4/32’s.

Weakness today has formed bearish divergences on the 60 minute chart.  ADX has turned bearish as well.  These signals hint that a new leg down is forming on the triangle pattern we follow.  Odds are starting to increase that the next move could send the 10 year note down another ½ point.  Austin mortgage borrowers are advised to be defensive. Stocks will be the key.  If they slip, we’ll do better.  Overall, QE2 will keep a floor under the market.  Just the same, we’ll need to deal with the volatility.

Retail Sales and strong manufacturing results out of the Empire State didn’t help either.  Mortgage backs performed better than treasuries as spreads tightened.  Technically, it is time to pay attention.  Weak day structure on the 10 year note chart is reinforced by a second consecutive day close below the 8 day moving average.  That’s the bad news.  Good news is that intraday studies are very oversold and the market has good support close by.  So to speak, we are at that line in the sand.

Next week will be the true test, one that we would expect will see the market trade sideways to a little better (slightly improving mortgage pricing). Overall, we think this is the low probability trade as QE2, even though it is fully priced in, is a force to be reckoned with.  When the Government is the buyer of choice, most follow the ant age, “Don’t fight the Fed.”

Call it neutral/bearish and not a market to throw caution to the wind.  Next week’s data is light with Housing numbers, Leading Economic Indicators, Philly Fed Survey, and the Fed’s Beige Book.  Have a great weekend.

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.

Weekly Unemployment Claims were also on the docket, rising 13K to 462K.  Just when we though the employment picture looked to be improving, reality is telling us that a sideways move with little improvement is probably the correct call.  Continuing Claims were the bright spot, falling 112K to the lowest level since November 2008.  Yesterday’s price action was somewhat of a surprise as late in the day, notes, bonds, and mortgage backs made a comeback.  Not sure why, given an as expected 10 year note auction and positive stock market.

Seems as though the reason has to do with QE2, the 600 pound quantitative easing gorilla that is still in the picture.  Tells us two things; one is that the market will (should) be supported on pullbacks until details are released.  Two, the market is trading only on this, so to speak its a one trick pony.  Austin mortgage borrowers need to be careful.

Currently, the 10 year note is off 5/32’s, mortgage backs are down 3/32’s, and stocks are off 20 something on the Dow.  Yesterday, I talked about the Elliott Wave chart and the high probability of a new A wave beginning.  Notice how the uptrend has been broken yet needs confirmation.  Now look at the bearish cross on the RSI oscillator.  These are good early signals of a market that is in transition, moving from bullish to neutral/consolidative or possible bearish given a shift in economic fundamentals.  Similar patterns are showing up on the candlestick chart.

Austin mortgage borrowers: best to take a conservative approach given the amount of volatility we expect.

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.

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.