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.”

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.

Tomorrow will be “the day” as the monster Employment Report for August will be released (7:30 am cst).  Not only is it the highest profile report of the month, but given the mixed economic data and volatile trading of late, everyone will be focused like a laser on this one.  I would not be surprised to see a 250 to 300 point swing on the Dow tomorrow.  Trouble is, which way?  Tactical bias points to soft numbers, something in the neighborhood of minus 100K jobs and the unemployment rate to print 9.7%.

Today’s trade is a continuation of yesterday’s selling, albeit at a slower pace.  10 year note off 11/32’s, mortgage backs off 11/32’s in low note rate conventional, and stocks up a few points on the day.  Expect the day to be one of “squaring up” for traders in both bonds and stocks, with not much movement seen from current levels.  Best bet for Austin mortgage borrowers is to lock in their interest rate.  It just makes cents (and dollars too).

In the household survey, the Unemployment Rate held steady at 9.5%.  However, that does not reflect the true story in the underlying numbers.  July saw -159k jobs lost according to the survey and, more alarming, a loss of -570k full-time positions.  The one strong figure was the addition of +287k part-time positions. The only positive take-away from today’s employment report seems to be an increase in Average Hours Worked from 34.1 to 34.2.  This is typically a leading indicator for improvement in employment as companies work their existing employees more before finally turning to hiring new employees.   The uptick puts a little more pressure on employers to hire, but is unlikely to increase significantly before it rises from the current 34.2 hours to the pre-recession norm of around 34.6.  The bottom line is that today’s report does nothing to encourage the markets that employment is in fact improving at a faster pace.  It is acknowledged that the labor market is not bleeding jobs at this time but the pace of growth needs to pick up to +200k to +300k to represent a change in the unemployment situation in the U.S.

Bulls have now been able to push 10 year notes to a new low for the rally that has been underway for the past few months.

Have a great weekend!

1)      Non-farm Payroll – Minus 150K jobs

2)      Private Payroll – Plus 110K jobs

3)      Unemployment Rate – 9.8%

4)      Average Hourly Earnings – plus .1

5)      Average Workweek – 32.4 hours

Our bias if for the headline number of minus 110K, a touch better than expectations.  We are spot on with the 9.8% rate, feeling that at a minimum we’ll see that number (maybe 9.9%).  Private sector jobs are too speculative for our blood so we’ll go with the flow on that one (plus 110K).  Overall, the numbers are not expected to show any recovery what so ever on the employment front.  With respect to Austin mortgage rates and pricing, we see little change unless the prints are major outliers, say -200K or plus 100K (Non-farm).  Either one of those would start a major move.  Odds are good that pricing will be pretty close to where it is right now in 24 hours.  That said, this is the highest profile piece of economic data we see.  It can be a major market mover.  Unless you have loaded dice, best bet is to lock in your Austin mortgage rates and get a good night’s sleep.  Here’s what others are saying;

1)      UBS – Minus 150K and 9.7%

2)      Wells Fargo – Minus 100K and 9.7%

3)      JP Morgan – Minus 90K and 9.8%

4)      Moody’s – Minus 150K and 9.8%

Buckle up.  This ride takes off at 7:30 am cst tomorrow morning.

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.

The May Employment report revealed the largest monthly increase in jobs since March 2000, but nearly all of the gains came from the hiring of temporary census workers. Without the census workers, the data fell short of expectations. A total of 431K jobs were added in May, below the consensus forecast of 500K. 411K jobs came from census hiring, leaving a net gain of just 20K jobs when those workers are excluded. The Unemployment Rate dropped to 9.7% from 9.9% in April, but this was mostly due to people dropping out of the labor force. Investors had expected stronger results from private sector job growth, and the stock market fell after the news. Weak labor market figures generally lead to lower inflation and are favorable for mortgage markets.

The news from the housing sector was more positive. April Pending Home Sales rose 6% from March, which was stronger than expected, to the highest level since October 2009. Pending sales are a leading indicator of future housing market activity. The April 30 expiration of the homebuyer tax credit likely pulled some pending sales forward which otherwise might have taken place later in the year. The benefits, though, of extremely low mortgage rates and very affordable home prices are in place to promote home buying activity even without the homebuyer tax credit.

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.

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.

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.