March 4, 2009

This morning’s ADP Employment Report, our first blush at what is expected on Friday morning, hit the tape with job losses of 697K.  Market expectations as of this moment, peg the number at minus 630K.  As always, the ADP report has been known to have very little correlation to the actual government report.  Part of this is methodology and the other part due to the fact that they (ADP) only factors in private sector jobs, excluding changes in the government’s payroll.  Just the same, the number is mind boggling.  Very early today, China announced another stimulus package (due out tomorrow) and reaffirmed its expectations for 6% grow in 2009.  Add that to another dozen foreign countries where markets are up over 10% from the November 2008 lows and it gives a ray of hope that global economies are on the mend or at least near a bottom.

Now, if our fearless leaders would lay off the bank bashing, etc., maybe a little optimism will come our way.  Just released, the Fed’s Beige Book sites economic activity in 10 of the 12 districts suffered deterioration.  Sharp declines in manufacturing and services were accompanied by wide spread job losses.  Two districts, reported that their regions held their own but remained weak.  They are represented by the “Dirty Birds” (Philadelphia) and “Da Bears” (Chicago).  Stocks loved the news and followed the lead of our Asian trading partners, taking the market higher right out of the gate.  Currently, the Dow is plus 159 and S & P futures are above the crucial level of 700 (711.91).  Mortgage backs and the 10 year note took a dip on the open, more so on what we see a pre-emptive Non-Farm Payroll Selling (Friday at 7:30 am cst) and a little pressure from strong stocks.  The pre-emptive selling goes like this.  Markets are looking for very bad numbers (minus 630-700K).  Markets have also rallied nicely over the past few days, banging up against good overhead resistance.  Given their place on the chart , the numbers would need to be very ugly to force additional buying.  If the numbers come in at expectations or below minus 600K, bond and MBS traders will turn sellers and the beginning of a bear market rally will occur in stocks.  Bottom line, the risk reward is to be neutral to short interest rate risk into the Payroll number.

Currently, the 10 year note is down 16/32’s (yield 2.99%) and mortgage backs are down 2/32’s.