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.

Overall, the report does nothing to instill confidence in economic growth.  Matter of fact, it’s started a new group of traders and investors fanning the fires of a double dip recession.  Bill Gross is now calling for unemployment to go over 10% in the coming months.  If there is a silver lining, you’ll find it in low Austin mortgage rates today, tomorrow, and well into the 3^rd quarter.

Adding to the feeding frenzy in treasuries are stories out of Hungary (bad debt jitters), rumors that French Bank Societe Generale has a book of undisclosed bad derivative positions, oil on or near the Florida coast in what is to be the worst oil spill in history, and the Euro hitting new four year lows.  Adding insult to injury, French Prime Minister Fillon is saying he saw only “good news” in parity between the Euro and the dollar.  He must have had a nip of the grape for breakfast.

Cutting to the chase, bonds, note, and mortgage backs are in rally mode, up a point of the 10 year and plus 12 to 14/32’s on MBS.  From an interest rate perspective, buying overnight and post employment report has taken the market above former resistance (119 21 futures/3.34% yield). Daily charts however, have yet to endorse the bullish move and must close above the 8 day moving average and resistance at the old high ( late May level).

Key for you to watch will be a close on cash 10 year notes of 3.26% or lower (currently at 3.24%).  Given a close that betters the 3.26% mark, the bulls will have their way with a new target of 3.09%.  A close at 3.27% or higher will most likely reverse the trend and send us into a consolidation trade.  We’ll try to make “cents” of it later today.

1)      Nonfarm Payrolls – Plus 513K

2)      Private Payrolls – Plus 190K (less census workers)

3)      Unemployment Rate – 9.8%

4)      Hourly Earnings – plus .1

5)      Average Hourly Workweek – 34.1 hours

Handicapping the May report has been tough.  The problem lies in just how many census workers were hired in May.  April hiring’s totaled 66K out of total jobs growth of 290K.  This month, analysts are looking for 323K, a number which we feel is understated given a couple of reliable reports already on the street.  Manufacturing surveys have been mixed, leading us to believe that any growth in this sector will be minimal.  Construction may have had a better month in adding to the payrolls but continuing that pattern as the year rolls on is somewhat in question.  Private sector services jobs may be the bright spot, adding about 200K in May.  Total it all up and we see an eye popping 600K Nonfarm Payroll number.

We also estimate that the census portion (new hires for temporary assignment) is 450K, making the net Private sector jobs growth print to be 150K.  ADP estimates for the private sector came in at plus 75K and as I mentioned earlier, the “street” consensus is at plus 190K.  Market reaction to the numbers will depend on how traders interpret the numbers.  High census worker gains will not blow up the bond market.  That number is an immediate subtraction.  The drill down number will be all about Private sector growth.  100K to 200k will not move the market much.  We believe that a print of 250K or more is needed to send yields to higher levels.  No one is looking for Private growth to be under 100K, except for ADP.  The unemployment number is another story.  We see census driven hiring to begin outpacing labor force entry, pulling the rate down to 9.7%.  The street is looking for 9.8%.  The improvement in this number could be the one that starts traders selling.

With yields near record lows and mortgage pricing at or near the best levels in some time, its fool’s gold not to lock in your Austin mortgage rates. If traders jump the sell side, we see the trade to be shallow, say .50 bps worsening to mortgage pricing as cross currents from around the globe will still be there to support fixed income products.  So what are others saying;

1)      Nomura – 425K at 9.7%

2)      Wells Fargo – 511K at 9.8%

3)      JP Morgan – 545K at 9.7%

4)      CIBC – 600k at 9.7%

5)      RBS – 625K at 9.8%

Looks like they have some smart dudes at CIBC.  Buckle up, the ride starts at 7:30 am cst tomorrow morning.

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.

It fits with the technical picture as well since we are now becoming over bought in the near term.  Overall, both global and stateside concerns will keep the market on edge and support lower mortgage rates.

Earlier today, Personal Income/Spending hit the tape plus .4% and plus .2%, slightly better than economists had predicted yet not anything to write home about.  Construction Spending was another story, falling 1.2% versus the minus .5% many were looking for.  Cold weather and competition from a heavy inventory of distressed/foreclosure sales has done the trick once again.

The ISM Index (Manufacturing) surprised to the upside, putting it its best number since August 2004 (plus 3.5 points to 58.4).  Digging deeper into the numbers, most of the gains came from new orders as inventories need to be rebuilt.  The question now becomes, will buyers step up to take the newly produced goods off the shelf?  Time will tell.

President Obama’s projected budget sets a new record deficit (1.516 trillion in 2010) as the new budget looks to be 3.8 trillion.  Bailout costs for FNMA and FHLMC alone will be 153 billion.  Wow.

Technically, note, bond, and MBS structure are in neutral as follow through to the upside (rally) is not in the cards.  Bulls need the 8 day moving average (currently we’re sitting on it) at 3.65% to hold.  We expect that area to hang in there into tomorrow.  Traders will then make a move, one way or the other, on Wednesday and Thursday to hedge positions up for Friday’s Employment Report.  Tough one to handicap as predictions on Nonfarm Payrolls and the Unemployment Rate are all over the map.  Cautiously optimistic is the best we can come up with.

Nonfarm Payrolls were down only 11K, the Unemployment Rate fell to 10.0%, and last month’s job losses posting revisions lower by 79K set the table for a “Katie bar the door” bond selloff this morning.  Initial reaction punished the 10 year note lower by over 1 point, taking the yield as high as 3.52% (right into good support I might add).  Mortgage backs followed suit with worsening interest rates and pricing.

Stocks loved the news, even though the dollar strengthened, up as much as 140 points on the big board at one time.  First of all, the numbers seem a little too good to be true.  Even though the data supports improvement across the metrics, everyone that wants a job still doesn’t have one.  I don’t believe this is a one hit wonder, just a sigh of steady improvement that we’ll call “less worse” with the potential to move up positive jobs growth from 10 to 12 months to 4 to 5 months.  Stocks are going to lead us around by the nose.  Key measures point to S & P futures taking out and closing above 1117 on the chart.  We tested that range (just a touch above) and have now pulled back 1101.  That puts the Dow currently in negative territory (off a baker’s dozen).  The key here is to see if stocks can rally given a strengthening dollar.  Looked good early, not so good now.

The equity sea saw have helped to stabilize the bond market, cutting losses on the 10 year note by 6 to 7/32’s.  Mortgage backs have come back from the abyss as well, improving by about 4/32’s depending on the coupon.  Might have a change to see a little price improvement before the day’s gone.  From the technical mail bag, the selling today will force confirmation of a very good sell signal (that’s why you should take advantage of any rallies “should” they occur).  Next major support has been hit and has held (3.52% yield on the note) which also coincides with the 40 day moving average.

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.

1. Nonfarm Payrolls – Minus 220K  (July minus 247K)
2. Unemployment Rate – 9.5%  (July 9.4%)
3. Average Hourly Earnings – .2% change m/m  (July .2)
4. Average Work Week – 33.1 hours  (July 33.1)

On Wednesday, ADP estimated that Friday’s report would see 298K job losses, somewhat correcting the better than expected improvement in July.  As you may recall, last month the market expected job losses of 320k and the unemployment rate to jump to 9.6%.  Both surprised on the “better than expected” side.  Our bias is based on a number of factors, one of which is improvement in regional manufacturing evidenced in the New York Empire report, the Philly Fed Outlook Survey, and the Richmond Fed survey.  All have seen a nice improvement, especially the auto heavy regions, with respect to employment.  The not so bright side of our opinion is rooted in the construction sector and private services producing industries which are slipping on the employment front.  Weekly unemployment claims and continuing claims also play into our call, holding steady at high levels.  We see the tale of tape at minus 250K Nonfarm payrolls and the unemployment rate to print 9.6%.  Hourly Earnings and Average Work Week should come in as expected.  One standard deviation would put our miss at either minus 200K or minus 300K.  If we were ‘leaning”, we think minus 300K is a better bet.  Tough call though with all the inventory rebuild and cash for clunkers employment to factor in.  So what are others saying;

1. Nomura – minus 115K at 9.5%
2. Barclays – minus 200K at 9.5%
3. CIBC – minus 275K at 9.6%
4. Wells Fargo – minus 306K at 9.6%

What will this mean to our Austin mortgage rates and Austin mortgage pricing?  Any print below minus 200K will bring the stock bulls back and put us in the soup.  We could expect Austin mortgage pricing to worsen by at least .50 bps and more likely .75 bps.  Any print above minus 250K will firm bonds (improve mortgage pricing) but only by .25 bps or so.  Over 300K in jobs losses will send stocks south and improve our stuff by at least .50bps if not more and keep the daily trend structure in place for a move to 3.09% on the 10 year note.  The one thing that concerns me is that we are going into the number at strong resistance and very overbought conditions.  This puts the risk reward in favor of the bears or simply put, worsening Austin mortgage pricing.  As always, this number is a market mover and not for the faint at heart.

]]> http://www.maxleaman.com/marketupdate/what-will-this-mean-to-our-austin-mortgage-rates-and-austin-mortgage-pricing-as-always-this-number-is-a-market-mover-and-not-for-the-faint-at-heart/feed/ 0 http://www.maxleaman.com/marketupdate/better-than-expected-jobs-data-has-put-the-pinch-on-our-austin-mortgage-pricing/ http://www.maxleaman.com/marketupdate/better-than-expected-jobs-data-has-put-the-pinch-on-our-austin-mortgage-pricing/#comments Fri, 07 Aug 2009 23:31:25 +0000 Max Leaman Austin Mortgage http://maxleaman.com/marketupdate/?p=511 Continue reading →]]> Better than expected jobs data has put the pinch on our Austin mortgage pricing.  Nonfarm Payrolls fell 247K, less than the consensus estimates of -320K.  The Unemployment Rate, which everyone expected to be at least 9.6%, fell to 9.4%.  This was the first month that unemployment fell (9.5% to 9.4%) since April 2008.  May and June figures were also revised higher (less unemployed), adding salt to our mortgage banker wounds.  Still the number of long term unemployed rose to 5.0%, representing about 1/3^rd of all unemployed workers.  Education, Health Services, and Leisure/Hospitality Services gained jobs while Manufacturing and Construction lost fewer jobs than expected.  That was the difference between the consensus call and the “print”.  We would call this report “hopeful” with the current trend losing less as the economy recovers.

The rise in hourly earnings is also a tip off that the recovery is growing legs yet the recovery still has a long way to go.  We look for growth in the employment front sometime in early January 2010.  As we talked about yesterday, any number under consensus would not treat us kindly.  So is the case as the 10 year note is off 1 point to yield 3.86%.  Mortgage backs have felt the pain as well, off 24/32’s on the lower rates and 20/32’s on the premium priced coupons.  Stocks love the news, up 150 points on the big board.  From the technical front, 2’s, 5’s, and the 10 year note have pushed yields through their range highs which will keep price action in a bearish trend.

As we mentioned before, given the hand we’ve been dealt, expectations for a 4.0% 10 year note yield (as our next target) have a high probability.  We would expect this trade to develop early next week as the market sets up for 75 billion in new paper coming to auction (Quarterly Refunding).  All is not lost.  The consumer is not exactly on fire as most need a crow bar to remove their wallets and spend.  Housing is also a concern as rising interest rates will dampen buyer enthusiasm and lessen affordability.  Both will act to support our market and keep Austin mortgage rates in the low to middle 5’s.  Keep your guard up and your hopes high.