Nice day for note futures and mortgage pricing. That of course is if you are a bond bull. Short covering on better than average volume ruled the day with many large sized players buying cash and futures (treasuries).
The news rallied European bonds and has given a lift to treasuries and MBS, pushing the 10 year note above the 21 day moving average. If we can hold these levels, the chart will turn to neutral from bearish and should work its way into better mortgage pricing.
It was reported last week that Pending Home Sales (contracts on existing homes) fell 16% in November, not at all surprising since buyers expected the $8,000 tax credit to expire at the end of October. This artificially boosted contract signings for August-October and artificially depressed them for November. Still, November pending sales were higher than at any time from mid-2007 to mid-2009.
Given that the spread between 2’s/10’s and 2’s/30’s are at historic wides, odds favor a little improvement in pricing once the auctions are out of the way.
The U.S. economy lost 85K jobs in December, bringing the total to 7.6 million since the recession started in December 2007. Back month revisions also come into play as October job losses increased 16K while November’s posting improved by 15k. The November number now stands at plus 4K, the first positive employment growth two years.
Over the last few weeks, many economists have been raising their forecasts for economic growth in 2010. The economic data released this week generally did not support this outlook, however, producing some daily volatility. As a result of the weaker than expected data, mortgage rates ended the week a little lower.
What will the effect on mortgage rates be? Given that the market has build in a positive jobs bias, anything that is 0 to 50K in jobs growth will not create a strong selloff. The bias will be for worsening pricing but not substantially so. This is because the market has already sold off in anticipation.
Since we priced near unchanged, chances of a worsening price are not if but when. Despite a firm close above the 8 day moving average, selling is threatening revive the bear trend. Very tricky market.
Given that fact that we closed above the 8 day, many bearish signals (ADX, Trend Intensity, etc.) have been neutralized, crippling the bears and reducing the probability of continued bearish trending. In other words, the light we were seeing “is” the end of the tunnel which should produce better mortgage pricing into Friday’s Employment release (7:30 am cst).
What needs to happen to solidify a recovery is an expansion or long term investment, consumer spending, and lowering the unemployment rate. If not, we could see another economic dip. If the Fed steps in too quickly to raise rates, given my last statement, we could see a repeat of what happened in 1937 when the Roosevelt administration prematurely bumps rates.
