August ISM Non-manufacturing Index rounded out this week’s data, disappointing the economic bulls as it fell to 51.1.  Market reaction to all of the above was fast and furious with bonds, notes, and mortgage backs all taking it on the chin.  Stock futures rallied 10 points on the news.  Since then, the dust has settled.  Currently, the 10 year note is off 21/32’s, mortgage backs off 14/32’s and 10/32’s, and stocks are plus 55 on the big board.  Valuations seem about right as both bonds and stocks have come off their extremes.

I believe what you are seeing is a shift in market sentiment, one that will make stock traders feel better about taking on equity risk (buying stocks) while bond traders are feeling as if it’s time to lighten up fixed income ownership (selling bonds, notes, and mortgage backs) as risk premium is taken out of the market.  For Austin mortgage borrowers, this means we should see steady to higher interest rates going forward with intermittent rallies on bad economic data.

We’re not looking for a major shift in pricing or a new, long term bearish trend developing as the economy may be holding its own but still is weak.  Remember, we LOST 54K jobs.  That is not the making of a robust economy but it is better than we expected.  Technically, the chart fits our fundamental bias.  Daily trend signals will turn bearish after today’s close.  Divergences are all over the chart, most of which have now turned neutral to bearish.  What most likely will occur is the creation of a new trading range.  One with 2.75% as support and 2.50% as resistance (10 year note).  Chopping trading and mortgage pricing could be with us into the 4^th quarter given the good news/bad news we will see within economic data releases.

This is a time for Austin mortgage borrowers to be careful.  Take advantage of any rally the market gives you and get on the bus before it leaves the station.  Glad to see that the Carolinas didn’t fall into the ocean last night.  Take care on the east coast.

Today, the Treasury will auction 30-year bonds and tomorrow’s economic calendar includes numerous interesting numbers including April retail sales, production & utilization, and the Univ of Michigan consumer confidence index.  With the weekly auctions about to be complete, the market appears to be getting its familiar lift.  We saw a quick push on the 10yr note back above the 8 day moving average at 119-005 after dipping below that measure overnight.  The market has not closed below the 8 day moving average since April 26^th.  Also in that area is the midpoint of yesterday’s range trade at 119-015.  A close above both levels today would boost the buy signals on daily charts that have suffered with the drop from last week’s high.  The 10yr is currently trading up 8s at a 3.541yld (118-305 on futures), along with mtg backs up 6.

Looking at last week’s rally, most of the trade was on short covering which means that traders were not initiating new long positions (expecting the market to continue to rally).  We buy that argument and if correct, we would suggest that you “buy the rumor, sell the news”.  In English, this means that mortgage pricing should remain relatively stable for most of the week and then worsen post Unemployment Report data on Friday.  To be honest, the market is so volatile that any headline seems to lead us up or down by the nose.

Earlier today, Personal Income rose .1% while Spending rose .5%.  PI came in on the low side of estimates and PS was right on the screws.  Construction Spending was also on the docket, down .5%, in line with economist’s expectations.  Private and Public construction both fell while the Federal Government’s construction rose to an all time high of 30.7 billion.  Go figure.

Last up was the ISM report (Institute of Supply Management Manufacturing Index) which fell 1.9 points to 56.5.  The decline came from a drop in new orders and production.  Given the data, we would expect to see at least 15K in manufacturing layoffs in this Friday’s report.  Since this is the first day of March, it also means it’s the last month for the Fed to buy mortgage backed securities. The removal of this stimulus brings the question of “how much of the news is priced in”.  Fed Vice Chairman Donald Kohn said that any increase in rates is likely to be “modest” but added “that judgment is subject to considerable uncertainty”.  Thanks for the advice!

To be sure, we would advise a defensive bias for those clients locking an interest rate this month.  While a number of guru’s are talking about mortgage rates (by year end) being 5.75% to 6.25%, this month will be more critical that most. Someone will need to pick up where the Fed leaves off so be cautious.

Technically, the stall below the tough resistance level tested last week has created a neutral, inside day.  Important point here is that it is not a reversal, only a stall which is corrective in nature.  To get this market moving to the upside (rally) again, the 10 year note will need to close at or below 3.59%.  Currently, we are trading a 3.62% yield, off 8/32’s on the day.  Mortgage backs are off 5/32’s and stocks are plus 81 on the big board.

The Unemployment Rate remained at 10.0%.  Manufacturing and Construction took the brunt of the job losses for a combined total of 80K.  Health care and the Private Service sector were the silver lining with positive job growth.  The “miss” for most analysis’s came via job losses in the Government and goods producing sectors.  One of the most disturbing figures is that 589K people quit looking for work, pushing that total to 1.85 million in just 4 months. While the report is “less bad”, it’s still not good.

Pre-release, the 10 year note and mortgage backs were off 7/32’s.  On the print, MBS rallied, showing levels that were plus 5/32’s (net improvement of 12/32’s).  The rally was short lived with current levels near unchanged.  Stocks took the news in stride, selling off on at the open but clawing their way back as we speak (currently down 27 points on the Dow).  With the Employment report much worse than expected, we see the underpinning of support for the bond market.

Mortgage pricing should at least hold its own but will continue to be volatile.  Reason being is due to the volatility in the yield curve.  Jaw boning from the Dem’s about another round of stimulus or a jobs package will continue to put pressure on the long end of the curve.  Tax and spend is not our friend.  At the front end of the yield curve, the Fed is firmly anchored at 0% and given continued high unemployment, cheap money from the Fed is here to stay.

What we need is private sector jobs growth to the tune of 250K per month.  Until we see that, expect the economy to waffle around with so many cross currents you’ll feel like you’re in a dodge ball game.   Technically, our charts are net positive for steady to lower mortgage pricing as neither side of the market (bull or bear) has strong signals.  Oversold conditions and neutral ADX, combined with support holding at the 8 day moving average gives us a fighting chance.  Hang in there it will get better.

On a side note, after the close yesterday, B of A announced plans (including governmental approval) to repay TARP via a combination of asset sales and capital raises. Gold is currently still trading over $1200 while the dollar is weak and volatile.  Jobless claims were released this morning.  Better than expected, initial claims dropped to a print of 457k for the Nov 28th week from a downward revised 462k the week before.  This was the fifth consecutive weekly decline.  Continuing claims rose slightly to 5.47mln in the week ending Nov 21st, breaking the 10 week streak of consecutive declines.  ISM non-manufacturing index just hit the tape posting a print of 48.7 for Nov vs. 50.6 in Oct.  The number came in below expectations of a 51+ print. Selling late afternoon and overnight has now taken the market below the 8-day moving average, 119-055, for the first time since late October.  The market dipped below that average a couple of times last month, but each instance was quickly rejected.

Bears show more poise this time because of strong new sell signals on daily oscillators…..same signals that occurred at very overbought readings yesterday.  Mortgage pricing is trying to work its way back from the lows of the early morning trade.  We are not out of the woods yet, although I wouldn’t expect this trade session today to be very volatile facing tomorrow morning’s  Employment report.  From what we are seeing, the estimates are anywhere’s from 100k to 130k job losses vs the 190k number from the previous report.   I am leaning more towards the -110k mark at this point.  Expectations are for the unemployment rate to stay at the 10.2% previous month number, as well as avg hourly earnings and  avg work week numbers to stay the same as well.

This morning, the ADP payroll report came in as-expected, forecasting a 203,000 payroll drop for October. The ADP figures included a 117k drop in goods-producing jobs and an 86k drop in service-producing jobs.  ADP also is expecting a drop of 65k of manufacturing jobs.  Current estimates for Friday’s Labor Department report are calling for 175,000 in job losses and an unemployment rate of 9.9%.  The Treasury Dept announced today that it would auction a record $81billion in new securities.  November offerings will be comprised of a 3yr note auction in the amount of $40 billion, a 10-yr note auction in the amount of $25 billion, and a 30-yr bond auction in the amount of $16 billion.  These offerings are expected to help refund about $38.5 billion in privately held securities and to raise approximately $42.5 billion.  The Treasury has also decided to move all regular scheduled auction releases to 11:30am.  The last release this morning was the ISM non-manufacturing index which fell .3 percentage points in October to 50.6 from 50.9 in September.

Economists were expecting the index to rise to 51.5.  The slight drop earlier this morning was stalling near the center of activity since the October low at 117-28, but has now gained a little strength trading back up above the 118-00 mark.  Daily and weekly charts do not give much endorsement to the downside, although hourly studies still remain bearish.  Resistance at intraday averages, now at 118-04/10, must limit the upside for the bearish signals to continue.  Stocks are a rockin, up 136 points on the big board, while mortgages trade quietly unchanged.

Weekly Claims dropped 1K to 530K and Continuing Claims fell a staggering 148K to 5.797 million.  The number to focus on here is the Weekly Claims, still maintaining a 500K plus per week average layoff run rate.  This is 500,000 people per week losing their jobs.  Not the makings of a healthy consumer.  Wouldn’t it nice if the White House would move this to the front burner.  Instead we have the Treasury Secretary testifying on Capitol Hill, endorsing Barney Frank’s bill for “a strong framework for achieving a safer, more stable financial system.”  Trouble is they want to give the Treasury Secretary the power to approve or not to approve the Fed’s decisions on systemic risk.  Sounds a little too political for me.

All of the above has put a little volatility back into the market.  Currently, the 10 year note is down 20/32’s (yield 3.49%), MBS down 6/32’s, and stocks up 75 points on the big board.  Stocks will hold the key as to where Austin mortgage rates go next.  The current pattern (stocks) has been for sellers to lean on the market when it rallies (5 out of the last 7 days).  We will want to watch the late afternoon trade (from 2:00 to 3:00 cst) to see if they can hold today’s gains.  Failure to do so will improve mortgage pricing while a positive close, especially 50 points or more, will put additional pressure on our stuff.

Technically, the selling today has pushed hourly charts into new sell signals (bearish) yet daily time frames remain neutral.  Overall, the charts point to another ½ point of weakness on the 10 year note but will take a back seat to the stock market trade.  We also have 31 billion of 7 year notes on the auction block.  We’re expecting this to go off without a hitch.

I’d like to wish you a frightening day tomorrow and the best sugar high Halloween ever.

So much for the quiet day.  Stocks have caught a bid, currently up 80 points on the Dow.  Seems as though equity traders have focused on the declining job losses over the last 8 months more than the 9.7% headline number that will hit the papers tomorrow.  Positive stock market action in front of a long weekend is common place.  Reason being is that being long (owning stock) has a finite loss (only what you paid) in the event you’re wrong.  Shorting the market (selling) has no limit to the losses in the event the market rallies next Tuesday.  Volume is also a factor as the lack of it tends to create a volatile trading environment.  Cooler heads should prevail next week so don’t read too much into the worsening pricing.

Nonfarm payrolls fell 216K, Unemployment rate jumps to 9.7%, and both June and July job losses were revised higher.  At best, the report is “mixed” with optimists looking at the downward slope of job losses over the past 8 months and “realists” looking at the 9.7% unemployment rate and negative job growth as a continued drag on the consumer and GDP.  Jobs were lost in all sectors except education and health care services, which added 52K.  We missed our boggy due to less job losses in service sector employment (expected 100K/actual 80K) and construction (expected 75K/actual 65K).  Hey, at least we were closer than Normura.

Reaction to the data was fast and furious post release, with wild swings in both bonds and stocks.  Since the dust settled, the 10 year note is off 10/32’s (yield 3.37&), mortgage backs off 1/32^nd, and stocks up a nickel.  Pretty quiet on the western front.  With the long weekend approaching, traders will have one foot out the door by noon.  High probability that your capital markets group will too, thinking more about marinating the ice cubes than what’s on the screen.  We expect, or are hoping for, a quiet, steady trading day as well.  Next week the action will pick up as kids across the country head to school and first flight traders go back to work.  For now, let’s call the market neutral with a slightly bullish bias for Austin mortgage pricing.