Following Friday morning’s better than expected Employment report, Austin mortgage rates moved higher. Against a consensus forecast for a decline of 110K jobs, the economy lost 54K jobs in August. Temporary census workers accounted for a loss of 114K jobs, and the private sector added 67K jobs. The June and July figures saw significant upward revisions as well. The Unemployment Rate rose to 9.6% from 9.5%, matching expectations, as the labor force grew by about 550K workers.

After several months of housing data which has failed to meet expectations, this week’s data contained relatively good news. Investors were expecting July Pending Home Sales to remain at June’s record low levels, but instead they rose 5% from June. Pending sales are a leading indicator for the housing market, so home sales may pick up a little in coming months. The chief economist of the National Association of Realtors (NAR) expects “improved affordability conditions” to boost home sales, but warned that a housing market recovery will be a “long process.”

Tomorrow’s one day FOMC meeting will hold the key as any interest rate changes/policy changes will be released at 1:15 pm cst.  Some feel the Fed will take a baby step towards purchasing more securities (treasuries) to keep interest rates low.  Others talk more spending or tax cuts, infrastructure spending, a payroll tax holiday (like that one), and government backed guaranteed loans to small business.

Technically, it’s hard to find anything standing in the way of this bull.  The chart shows you how Friday’s trade took out the trend line that has capped the market for the past month.  Traders will now be looking a target of at least 2.75% – 2.78%.  The only thing we see that could derail the move is 84 billion in auction paper (3’s, 10’s and 30 year bonds) coming this week.  Keep in mind that the market has priced in a lot of bad news, even the high probability of a double dip.  With that in mind and the fact we’re trading at or near historic low yields, best bet is for Austin borrowers to lock in today’s great Austin mortgage rates and move on down the road.

Friday’s important Employment report reflected a slowly improving labor market. The economy lost -125K jobs in June, which was very close to expectations. The figures include a loss of -225K census workers who completed their temporary assignments. The private sector added 83K jobs. The Unemployment Rate fell to 9.5% from 9.7% in May, but this was due to 650K people leaving the labor force. The labor force consists of everyone in the US who either has a job or is looking for one, and the Unemployment Rate measures the percentage of the labor force without jobs.

There was mixed news in the housing sector this week. May Pending Home Sales declined 30% from April, as many buyers rushed to sign contracts ahead of the April 30 deadline to qualify for the homebuyer tax credit. On a more positive note, the “close-by” deadline for the homebuyer tax credit has been extended to September 30. Although the tax credit is not available for new contracts signed after April 30, extremely low Austin mortgage rates and high home affordability levels make conditions very favorable for home purchases.

In the glass half full category, Ford, Chrysler, and GM all posted sales gains as that sector starts to stabilize.  Currently, stocks are off 61 points on the big board, 10 year note is plus 8/32’s, and mortgage backs are off 2 to 5/32’s, depending on the interest rate.  As I have talked about in the past, money flows are coming out of foreign sovereign debt and into treasuries.  Trouble is, that’s as far as the money goes.  Risk/reward is moving more and more towards risk in MBS, corporate paper, and anything other than an instrument backed by the full faith of Uncle Sam.  With stocks trading firmly below 1040 on the S&P chart, investors are net bearish, looking for a pull back to 940/970.  That would clip the Dow for 1 large.  Add to it the uncertainty of tomorrow’s Employment Report and all you see is traders with a fist full of scared money.

Speaking of the jobs number, the call is for job losses of 100K.  We’ll preview the report later today.  Given what we know, we see the pull back in mortgage paper (higher Austin mortgage rates,  lower pricing) as nothing more than consolidation, expecting that it will not become a major reversal.  However, we are seeing a divergence set up on the daily chart, telling you that a least a pause is in order until tomorrow’s fireworks begin (7:30 am cst).

With risk reward not in your favor, Austin borrowers are advised to lock in their Austin mortgage interest rates and step aside as we’re not sure whether the light in the tunnel is the end or a train.

The Employment Report did not disappoint, posting a plus 290K jobs with the unemployment rate at 9.9%. Services and Manufacturing sectors had gains of 166K and 44K respectfully.  Even construction added 14K.  Consensus workers (temp positions) rose 66K.  Back month revisions (higher) were also posted for February and March.  Overall, the economy has gained over 500K new jobs in 2 months. If not for the situation in Greece/Euro-zone, this would have been a “Katie bar the door” game changer for bonds, notes, and mortgage backs.  Nonetheless, both stocks and bonds have been quite volatile this morning, trading in a wide swinging range.  Currently, stocks are off 125 on the big board (range down 185 to up 20).  Mortgage backs have been down as much as 15/32’s to down 4/32’s.

The roller coaster will continue to be in play as Germany’s Parliament just passed the bailout package for Greece.  France approved the package yesterday.  Markets like this are dangerous as fear makes a strange trading bedfellow.  Overall, once Greece becomes a back burner issue (and it will), the focus will be on our economy which is starting to turn the corner.  That will inevitably lead to higher Austin mortgage rates.  Not that much higher but just the same, not the levels you are seeing now.  Borrowers are smart to lock their Austin mortgage rates NOW.

1)      Nonfarm Payroll – Plus 200K

2)      Unemployment Rate – 9.7%

3)      Average Hourly Earnings – Plus .1

4)      Average Workweek – 34.1

Given the data we have, standard deviation mathematics, regression analytics, and the Ouija board, we’re comfortable with the 200K number or just slightly less (say 190K).  The unpredictability here comes from the weather related rebound and the number of census worker hired, both hard to handicap.  The household survey points to a much stronger number, up 264K while the ADP estimates out yesterday point to plus 32K.  That spread is big enough to drive a truck through.  Manufacturing and Construction will also be a key with expectations that both are showing signs of improvement.  Strength in the Philly Fed Survey, Empire State Survey and IMF Manufacturing data gave us that tip.  Construction jobs took a beating with the cold weather so more spring like temperatures should show a little pent up demand and hiring in the sector.  Private sector jobs look to be flat to slightly improved and temporary jobs are still increasing, albeit at a slower pace that seen in the first quarter.  So, we’ll place our bet on plus 190K Nonfarm payrolls, 9.6% unemployment rate, and Average Hourly Earnings and Average Workweek to come in on the consensus screws.  What are others saying;

1)      JP Morgan – Plus 145K and 9.7%

2)      Credit Suisse – Plus 165K and 9.6%

3)      RBS – Plus 185K and 9.7%

4)      Wells Fargo – Plus 200K and 9.7%

5)      Barclays – Plus 200K and 9.6%

Expected reaction to an as advertised report should favor stocks and bother bonds.  Reason being is that it would mark two consecutive months of job creation with a “getting better all the time” feel.  We still need to get to 250K just to break even given attrition.  Over 250K should give stocks a lift and punish our pricing for about .25 to .50.  Anything less than 50K would hold Austin mortgage rates steady and probably put another whippin’ on stocks.  With all that is moving markets these days, only the almighty know where we’ll be this time tomorrow.  Best bet for borrowers is to lock your interest rate NOW and buckle up!  Should be a wild ride.

In this current enviornment, markets are more complex than ever and the flow of money with it’s associated risk can be powerful and detrimental.  The trend is changing and even though we don’t like it, a “new normal” for Austin mortgage rates is in the works.

The large channel dating back to last year, which gave us a series of lower highs and lower lows in yield has now been breached.  Phase two was the triangle formation that was trapped between 3.29% and 3.81%, winding itself tighter and tighter headed for a breakout.  That breakout happened yesterday and if you remember our comments a couple of weeks ago, our bias carried a high probability of that breakout leading to higher yields.  Wished we were wrong.

Damage done, it’s time to move on and get back to business.  Earlier today, Weekly Unemployment Claims fell 14K to 422K.  Continuing Claims also fell.  Both are not indicative of a trend but a better reflection of improving weather across the country and government consensus hiring.  Bill Gross, often refered to as the “bond god”, is talking about how he’s bearish on bonds and feels that stocks are a better buy.  He also commented that he expects to see the 1 year TBill rate at 1.25% to 1.50% within a year.  Today’s rate is .41%.

Currently, the 10 year note is off 14/32’s (yield 3.87%), mortgage backs are off 16/32’s, and stocks are on fire, up 100 points on the big board.   With the upward trend gaining momentum, the 10 year note is on a clear path towards 4.0% plus.  Best case on any rebound/reflex rally is back to 3.75%/3.77%.

We all know why the trend is higher but here’s some of the factors that could stop the selling and improve Austin mortgage pricing:

• One would be a good 7 year note auction today (12:00 cst).
• Two is month-end buying by hedge funds and money managers to extend duration.
• Three being weaker than expected Employment Report next week.  The market is looking for a gain of 200K.

Markets like this are very dangerous.  They can travel to higher yields beyond where you think they can.  They can stay over sold for long periods of time.  The bottom will not be put in until the last person sells.  On the bright side, markets do not go down forever, it just feels like it.  Hang in there.

Weekly Unemployment Claims fell 27K to 469K as seasonal factors and the weather related snafu has everyone guessing is this real or Memorex.  The big picture points to the percentage of eligible people receiving unemployment benefits being 3.5%, well above the reading that creates jobs.  Seems to us that unemployment is stabilizing albeit at higher levels.  Not the makings of a vibrant economy.

Pending Home Sales looked like a Rottweiler as well, falling 7.6% in January.  Economists were looking for a plus 1.0% print.  Once again, the NAR Chief Lawrence Yun blames the weather for affecting home shopping.  Maybe we’ll get a clear read in July.  For the record, all regions were in the red with the West falling 13.2%.  Did it snow in California?

Factory Orders were up 1.7% with the ex-transportation up .1%.  A 15% gain in transportation orders did this trick for this number.  Maybe new accelerator parts for Toyota.  Productivity gains were off the chart, rising 6.9%.  The flip side was a drop in labor costs of 5.9%.  We are putting computers to work, not Joe the Plumber.  All of the above has flattened the yield curve with the 10 year note up 4/32’s and the bond plus 13/32’s.

One positive here is that until we work through this massive off sides market position in MBS, mortgage pricing will be supported, helping to keep pricing stable.  I’m going to give you our best guess on tomorrow’s jobs data.

Expectations for the February Employment Report are as follows;

1)      Non-Farm Payrolls – Minus 50K

2)      Unemployment – Rate 9.8%

3)      Hourly Earning – Plus .2 month on month

4)      Average Work Week – Minus .2

As we have been talking about, the weather is going to make a mess of the numbers.  We expect continued job losses in manufacturing, construction, and private services payrolls.  Construction should be hit the hardest, probably losing another 50K.  Consensus workers are a wild card as the government is expected to ramp up hiring, adding 1.2 million short term workers over time.

Using one standard deviation and a dart board, our bias is for 100k in job losses and a 9.9% unemployment rate.  JPMorgan has the call at minus 90K and 9.9%, Barclays at Minus 75K and 9.8%, Wells Fargo at minus 80k and 9.7%, and Credit Suisse the outlier at minus 125K and 9.9%.  If there is a miss, it will be towards more job losses than less.  You may recall that I wrote about John Ryding call that job losses would be minus 250K.  Don’t know if he is right but I do know he’s a pretty sharp dude.  What will the market do?  Most likely blow the numbers off due to distortions in the weather but trade nonetheless in a volatile fashion.  Once the dust settles, we would expect that pricing will be close to today’s levels “unless” the number is below expectations.

Let’s say we see a -25K or unchanged print.  We feel the market would interpret that to be much better than expected once you factor in the weather distortion.  Really, this one is a crap shoot.  Technically, we’re not getting much help as the 10 year note chart has formed a triangle pattern on the daily time frame.  We would need to close below 3.45% to turn this into a raging  bull (currently 3.61%) so not much help there.  Triangle patterns typically wind themselves up, tighter and tighter before a break out occurs.  Given the distance in basis points for a bullish outcome, we would side with a break out to higher yields/ worsening mortgage pricing to coincide with the ending of the short squeeze in the MBS market.  To put this in English and cut to the chase, be careful out in the days ahead.

Speaking of unemployment, Friday’s number could be as weird as it gets.  With the consensus call for job losses of 50K, a number of economists are talking about 100K in losses with John Ryding, chief economist at RDQ Economics, calling for losses of 250K.  Blame it on the weather.  With spreads so wide you could drive a truck through them, Friday’s print will be one volatile ride.  After being down as much as 7/32’s this morning. Mortgage backs have crept back a few 32’s.  Stocks have been up 30 to 40 points most of the day and the 10 year note now trades at 3.62%.  Honestly, most markets are as quiet as a church mouse! Call it neutral, treading water until the next headline breaks.

Market Consensus:

1. Nonfarm Payrolls – Minus 5K
2. Unemployment Rate – 10.1%
3. Average Hourly Earnings – Plus .2%
4. Average Work Week – 33.2 Hours (unless you are in Mortgage Banking)

One of the difficulties with handicapping today’s report is that of revisions.  Seasonal revisions, benchmark revisions, and workweek revisions (now all workers rather than production and nonsupervisory) will present themselves and need to be accounted for.  A trend towards stability in Manufacturing, even if it is primarily inventory rebuild, is also in the mix.  Some are calling for an improvement in construction jobs due to milder January weather but I’m not sure exactly where they live.  Texas has been nothing but cold and rainy.

Street talk is looking for the government sector to prop up jobs with more consensus workers hired and on and on.  Seems to us like the “Street” is trying to talk itself into a bullish jobs number, one that could see growth of 20K to 30K.  Matter of fact, Barclays is calling for a net job creation of 25K jobs.  We see this report as not so rosy.

Given the recent uptick in Weekly Claims (used in the household survey), the ADP call for job losses of 22K, and our view that the labor market is losing jobs as fast as they are creating them leads us to the following “guess”:

1. Nonfarm Payrolls – Minus 30K
2. Unemployment Rate – 10.2%
3. Average Hourly and Average Workweek to be spot on with consensus.

Given that the “Street” is looking for better than expected numbers, that reality would once again put a top in our market and produce higher yields, worsening mortgage pricing post release.  We do feel that any selling will be shallow as the global doom and gloom will be with us for some time to come.  Stocks would benefit and maybe just in time to save that market from a much bigger correction.  If our bias is correct, you should see mortgage pricing hold steady to improve, watching to see if stocks can find their sea legs.