Market Update

FNMA 30-YR 4.5%

Previous close 100.310
Opened Down 0.22bp @ 100.094

Key Economic Data:

EUR / USD 1.3617 Down 0.0116
USD / JPY 83.0450 Up 0.6880
GBP / USD 1.6043 Down 0.0059

OIL 86.25 Down 0.46
Gold 1,354.10 Down 11.40

Key Economic News:

Sharp drop probably affected by weather
Initial claims fall sharply, but may be due al least in part to poor weather. Continuing claims continue to drift lower.

Key Numbers:
Initial claims -36k to 383k in week ended Feb 5 vs. median forecast 410k.
Continuing claims -47k to 3.888 million in week ended Jan 29 vs. median forecast 3.9 million.

Main Points:
1. Initial claims fell sharply in the first week of February, to the lowest level since early July 2008. Although we think the trend is improving, this figure must be discounted on account of poor weather, at least until confirmed by the next week's report. Recall that major snow and ice storm blanketed most of the country during the week.

2. Continuing claims are generally less affected by the weather, and the week to which the latest data refer also did not have as serious a disturbance in this regard. Hence, we're more inclined to see the roughly in-line reading as consistent with gradual improvement in the labor market. The number of people receiving benefits from extended and emergency programs rose by about 84k in the week ended Jan 22, undoing a similar decline from the preceding week.

10:00: Wholesale inventories for Dec...a moderate increase? These inventories are goods that are essentially in transit from factories or from the docks to final destinations such as retail outlets and are therefore difficult to forecast, and they have been quite volatile of late. The median increase is about one-half of what the Commerce Department assumed in its preliminary GDP estimate for the fourth quarter.
Median forecast (of 35): +0.7%, ranging from -0.4% to +1.8%; last -0.2%.

14:00: The US budget balance for Jan...better than a year ago, once corrected for calendar quirks. The CBO estimates that the US Treasury ran a $53bn deficit in January. This is $10bn larger than in January 2010, but $16bn smaller once special calendar effects are taken into account. This would bring the four-month fiscal year total to $242bn. , versus $431bn at the same point in FY 2010.
CBO -$53bn; median forecast (of 29): -$55bn, ranging from -$70bn to +$60.5bn; last (Jan 2010): -$42.6bn.

16:30: Federal reserve balance sheet...Last week the balance sheet expanded by nearly $26bn. It is closing in on $2.5trn, on its way to what we expect will be about a $2.9trn level by the time the asset purchase program is done in June.

Advice:

With unemployment slowly improving, even with the effects of bad weather. I expect the market to slip back below 100.00 again.

I would lock short term and long term today.