Market Update

FNMA 30-YR 4.0%

Previous close 98.470
Opened Down 0.25bp @ 98.219

Key Economic Data:

EUR / USD  1.3687  Down  0.0133
USD / JPY  81.7590  Up  0.2113
GBP / USD  1.6189  Down  0.0002

OIL  91.15  Up  0.29
Gold  1,336.30  Down  4.20

Key Economic News:

Solid productivity growth; Jobless claims down

Data modestly better than expected across the board as jobless claims revert to lower levels while productivity growth posts a solid advance in Q4.

Key Numbers:
Nonfarm productivity +2.6% annualized in Q4 vs. consensus +2.0%.
Unit labor costs -0.6% annualized in Q4 vs. -1.0% consensus +0.2%.
Initial jobless claims 415,000 in week of Jan 29 vs. consensus 420,000.
Continuing claims 3.925m vs. consensus 3.95m.

Main Points:
1. Nonfarm productivity turned in another good showing, rising 2.6% annualized in the fourth quarter (+1.7% yoy). With labor compensation posting only modest gains, unit labor costs fell in Q4. Unit labor costs have fallen 6 of the past 8 quarters, consistent with the sharp increase in corporate profit margins over this period.

2. Jobless claims moved down to 415,000 in the week of January 29, reversing most of the prior week's increase. Even so, the four-week moving average of new claims is now 431,000, somewhat above its low of 411,000 at the end of 2010. The Labor Department indicated that the drop in claims was concentrated in states that saw storm-related increases the prior week, so we are inclined to take the recent numbers more as evidence of inclement weather than any change in the underlying trend.

3. Continuing claims fell to 3.925 million while the number of people receiving extended benefits fell by 68,000 to 4.55m.

10:00: ISM nonmfg index for Jan...will it improve? Its manufacturing counterpart was exceptionally strong this month. Ahead of tomorrow's payroll report, the employment index will be of particular interest, given generally encouraging labor market data.

Median forecast (of 73): 57.1, ranging from 54.5 to 62; last 57.1.

10:00: Factory orders for Dec....a small setback? The durable goods portion of this report is already known and was down 2.5% in December, hence forecasts for a decline in the overall orders measure.

Median forecast (of 67): -0.5%, ranging from -1.5% to +2.0%; last +0.7%.

13:00: Federal Reserve Chairman Ben Bernanke speaks...at the National Press Club. With the last Fed statement making clear that QE2 is essentially on autopilot at this stage, markets will likely focus on any differences in tone with respect to the economic outlook and any hints about the likely procedure and timing for winding down the asset purchase program.

16:30: Federal Reserve balance sheet...With QE2 underway, the Fed's balance sheet remains in expansion mode through midyear.

Advice:

My position on MBS stays neutral today.