Meant to post this yesterday.
For the most part, today has been all about squaring positions before tomorrow’s all important Employment Report. The tight range, back and forth price action, has been with us all day. Mortgage backs started in the hole, down 3/32’s early this morning but now are down 8/32’s. Wishy washy trade with a bearish bias. A worsening price change for .125% is a layup. Most of the bearish bias has come from “whisper numbers” on tomorrow’s data printing on the positive side. My number happens to follow suit, looking for a plus 20k jobs growth.
Stocks have traded much in the same fashion, printing on both sides of unchanged as we enter the last hour of trading. Tomorrow’s jobs report is big from at least two perspectives. One is that it is the first high profile piece of data in the new year. Two, it is given an overweight as to the direction of the economy. No jobs, no growth while the flip side projects just the opposite. No matter what your bias, be careful with this market as this number creates high anxiety and volatility. For the record, here’s what the market is expecting for tomorrow;
1) Nonfarm payroll – Minus 8K jobs
2) Unemployment Rate – 10.1%
3) Hourly Earning – Plus .2% month on month change
4) Average Work Week – 33.2 hours
While the ADP report (yesterday) predicted job losses of 84K, most traders are looking for a number on either side of unchanged. Our bias is based upon the weekly unemployment reports that are used in the reporting cycle (for the monthly number). Average drop has been 20%. The next factor has been a steady improvement in private sector service jobs. Last month’s gain in this sector was 51K, the first improvement since November 2007. We believe it will surprise on the upside again. Manufacturing and Construction will continue to be the dogs, shedding another 80K jobs combined. We expect the Government to add about 10K and see the 2% gain in temporary workers shifting into full time, permanent employment. Add it all up and our call is plus 20K. We agree that the unemployment rate bumps up just a bit to 10.1%. What others are saying;
1) UBS – Minus 35K at 10.2%
2) Credit Suisse – Plus 10K at 10.2%
3) RBS – Plus 25K at 10.1%
4) JP Morgan – Plus 40K at 10.0%
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. The surprise trade would be for a number closer to ADP’s, say minus 50K or higher. This would give us a nice little snap back rally, probably good for ½ point in mortgage pricing. Given that we are near good support technically (3.88% versus 3.83% current) and the set up (risk reward) favors MBS being down slightly worst case, savvy borrowers may want to not lock going into this number. On the other hand, this one is tough to handicap and by using the float down option offered by PrimeLending, everyone wins. Please call Max Leaman with questions about the float down option for your interest rate: (512) 293-1239.