With February in the rear view mirror, bonds, notes, and mortgage backs are starting the new week/month off on the defensive side. Although last week’s data (Housing, Consumer Confidence, etc.) did not paint a pretty picture of the economy, many are blaming the severe winter weather for skewing the numbers. To that bias, traders are looking for a soft payroll number on Friday, say job losses of 50K and a 9.9% Unemployment Rate.
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.