Market Update

FNMA 30-YR 4.0%

Previous close 99.250
Opened Down 0.28bp @ 98.969

Key Economic Data:

EUR / USD 1.3442 Down 0.0031
USD / JPY 82.6450 Up 0.6258
GBP / USD 1.5952 Down 0.0044

OIL 89.28 Down 1.58
Gold 1,348.10 Down 22.10

Key Economic News:

Labor Market improvement intact
Better-than-expected data on claims for unemployment insurance suggest ongoing improvement in the US labor market.

Key Numbers:
Initial claims -37k to 404k in week ended Jan 15 vs. median forecast 420k.
Continuing claims -26k to 3.861 million in week ended Jan 8 vs. median forecast 3.985 million.

Main Points:
1. Initial claims fell sharply in the second week of the new year, suggesting that the surge reported for the preceding week was probably a processing payback for earlier low holiday-week reading. At 411,750, the four-week average nearly matched its low from two weeks ago. This latest figure applies to the reference week for January payroll survey.

2. The latest reading on continuing claims, for the week that ended January 8, was also much better than expected. Whereas previously most large moves have been partially reversed in the following week, in this instance the number of recipients fell further from a level that was revised only slightly higher. Meanwhile, the number of people receiving extended/emergency benefits changed little in the week that ended January 1.

10:00: Philadelphia Fed business index for Jan...steady as she goes? The December index was originally reported at +24.3 but was revised to +20.8 in the annual re calculation of seasonal factors. From this lower, but still robust, level, the median forecast is for no change.
Median forecast (of 54): +20.8, ranging from +12.5 to +25; last +20.8.

10:00: Existing home sales for Dec...another increase? Expectations tilt toward another gain in home sales in the wake of increases of 10.1% and 3.5% for October and November, respectively.
Median forecast (of 72): +4.1%, ranging from -3.9% to +8.3%; last +5.6%.

10:00: Index of leading indicators for Dec...back to the more moderate increases. After a big pop driven by the ISM's supplier index, the index of leading indicators should post a smaller, but still solid increase this month. The biggest positive this month comes from the yield curve (+0.33bp), with smaller contributions from claims (+14), stock prices (+13), the Michigan expectations index (+8), and housing permits (+5). Supplier deliveries and the real money stock are the only notable negatives, each worth just under 10bp.
Median forecast (of 57): +0.6%, ranging from +0.4% to +1.2%; last +1.1%.

16:30: Federal Reserve balance sheet...The balance sheet continues to increase in size, albeit at an uneven pace from week to week. It was $2.47trn in the week ending Wednesday, Jan 5. We expect it to reach $2.9trn by about mid-2011 on the assumption that the FOMC sticks with its plan to increase its holdings of longer-term assets by $600bn from November 2010 through mid-2011.

Advice:

With unemployment better than expected, and if the other news items come out as expected. I can see the market selling today.

I would lock today.