Market Open

The FNMA 30-YR 4.0% coupon opened +19 BP from previous close (Opening Price 98.781)

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.

Week in Review - Highlights for the Week Ending January 14, 2011

MONDAY, January 10th


Chain store sales grew 3.1% in December from December one year ago, a bit weaker than expected. December sales lagged expectations somewhat as severe weather moved in late during the month but they followed a very strong November. Taken together this was the best holiday shopping season since 2006.

TUESDAY, January 11th

The small business optimism index, as reported by the NFIB fell to 92.6 in January from a reading of 93.2 in December. The level of the index suggests that small businesses remain cautious amid continued uncertainty in economic conditions. In short, small businesses are still not hiring. But, details in the data do show that businesses are expecting hiring and sales to improve in coming months.

WEDNESDAY, January 12th

The MBA mortgage applications index increased 2.2% to 482.7% for the week ending January 7. The purchase index fell 3.7% during the week as the refinance index climbed 4.9%. Refinance activity is down 56.1% since early October as contract mortgage rates began to increase. Quantitative easing should help lower rates and revive refinance opportunities in the near term. Home buying is well below it tax credit fueled April level and is only modestly above its lowest levels of the past 15 years. Purchase activity will recover rapidly once prices bottom out and distressed properties have been worked through the market.

The Fed's round up of economic conditions in the twelve Federal Reserve Banking Districts, known as the beige book showed that economic activity improved in most areas of the country in late November and December. There was a pick-up in activity in most sectors with both commercial and residential real estate remaining the most obvious exceptions. The forecast has brightened though with most districts expecting hiring to increase in 2011 and with that, improvement in housing will follow.

THURSDAY, January 13th

The producer price index surged 1.1% in December compared to expectations for a 0.8% rise. Increases in food and energy prices, up 0.8% and 3.7% on the month respectively, pushed wholesale inflation higher. Excluding food and energy prices, the core PPI rose 0.2% and is now just 1.4% higher on the year. Prices at earlier stages of production remain quite high but because of slack in demand have not yet been passed through to finished goods.

The international trade deficit on goods and services narrowed slightly to $38.3 billion less than an expected shortfall of $40.7 billion. Nevertheless, the trade deficit is averaging around $41 billion over the past twelve months compared to an average trade gap of around $31 billion in 2009. The widening of the trade deficit is usually associated with a recovering domestic economy and stronger demand for imports.

Jobless claims jumped to 445k for the week ending January 8 from a level of 410k in the previous week. The outsized gain put claims at their highest level since October. Weather and holiday effects usually result in high volatility this time of year. The four-week average of 416,500 is more indicative of current trend in unemployment claims.

FRIDAY, January 14th

Retail sales rose 0.6% in December less than an expected 0.8% gain. With this month's gain, retails sales have just passed their pre-recession November 2007 peak. However, nearly one-third of the increase in spending was due to higher gasoline sales and higher gas prices. Consumers continue to shop despite sluggish labor and housing markets and tight credit. Real consumption added 1.67 points to Q3 GDP and will add even more in the fourth quarter.

The consumer price index rose 0.5% in December led by soaring energy prices. Even with this gain, consumer prices are just 1.4% above their year ago level. Excluding food and energy prices the core CPI rose 0.1% on the month and is up 0.6% on the year. Soft final demand and financial deleveraging are disinflationary so core consumer inflation should remain subdued over the next several quarters.

Fed Open Market Purchase Update

The Fed purchased 7.79 billion of 7-10 year bonds, but there were $19 billion offered by dealers. Still some dumping going on. Hopefully tomorrow is better.

It is preferable that we close above 99.60 and CRITICAL that we close above 99.50. The auction should cause as to go down and test that level.

The Sound of Teeth Gnashing

Disappointing week. There was reason to hope that the employment report would be brighter than it turned out to be. Weekly data on new claims for unemployment insurance had been improving, after all, suggesting that job seekers were finding more work than in the recent past. But the December report on the overall jobs picture was a two-punch attack on our optimism.

First, the unemployment rate fell from 9.8% to 9.4%. Superficially, that sounds rather good, and there’s a slim reed of a chance that it’s a little better than our first analyses say it is. We can fairly assume that the unemployment rate fell largely because the number of people actively seeking jobs declined. As you know, the unemployment rate is an attempted measurement of the workers seeking employment but not finding it. It excludes those who are technically not part of the work force because they have, for the moment at least, simply thrown in the towel and stopped looking for a job.
The unemployment rate is computed from an extensive telephone survey of private homes, in which someone asks whether there are people in the household looking for work who haven’t found work and whether there are people in the household who have work. The survey that discovers how many people were actually hired in the prior month, on the other hand, involves calls to businesses. This survey found that 103,000 people had been given a job (that is, there were 103,000 nonfarm payrolls created) in December.

These are, you can see, very different methods of measurement, one polling the public, the other polling businesses, and though they are remarkably accurate, all things considered, they would surely be subject to revision if we bothered to check on them carefully. So they give us thumbnails sketches of the employment situation.

As with any statistical analyses, everything depends on the interpreter of the numbers. We can get very excited about the fact that 1.1 million jobs were added in 2010, for example. But then we noticed that a total of 8.4 million jobs were lost over the course of the recession, and it becomes obvious that we’re not even running in place.

Regarding the December data, Sara Murphy of The Wall Street Journal says, “Much faster employment and enduring job gains—on the order of 200,000 a month—are needed for lasting improvement.” We didn’t come near that figure in the past year.

Still, the “green shoots”—bits of data that have been suggesting a strengthening of our economy—have led many of us to expect better jobs figures and, indeed, better figures for real estate sales.

Consider: The National Association of Realtors? keeps track of how many new real estate purchase contracts are signed in a given money. In October, the number of new contracts climbed by over 10%—the largest monthly increase since these numbers have been collected. In November, the number of new contracts, as against those initiated in October, rose by an additional 3.5%, which I have been inclined to see as a confirmation of the October jump.

This created the hope that mortgage applications would rise at the end of December. More financing, after all, is generally needed to complete the larger number of transactions contracted for in October and November. Applications were up 3.5% in the second-to-last week of December, but the purchase money index was actually down in the week ending December 31 by 0.8%.

These figures are nearly impossible to interpret meaningfully. We’ll just have to hang in there and wait for something like a trend to emerge. Meantime, note that mortgage rates have flattened a bit, with the HSH composite rate (including 30-year jumbos) up 7 basis points, and at 4.77%. (It’s worth remembering that rates were a good deal higher at the beginning of 2010, by the way. We still have very attractive financing to work with.)
by: Bill Fisher

Market Update

FNMA 30-YR 4.0%

Previous close 99.530
Opened Up 0.16bp @ 99.688

Key Economic Data:

EUR / USD 1.2928 Up 0.0021
USD / JPY 83.0050 Down 0.1418
GBP / USD 1.5548 Up 0.0000

OIL 88.81 Up 0.78
Gold 1,371.00 Up 2.10

Key Economic News:

No news items

Advice:

Will we break the 100.00 mark today?

Float with caution.

Week in Review

The economy is doing better. Everybody knows that. But, same-old, same-old, is the improvement the long-awaited self-sustaining recovery?

The actual, hard data, and the bond market say "Uh-uh." The 10-year T-note is on track today for the lowest closing yield since mid-December, trying to break 3.32%, and low-fee mortgages are sliding near 4.75%.

December payrolls were forecast to gain 150,000-290,000 jobs, and reality clunked in at 103,000. Of that, 36,000 were in health care, the only sector of the economy to gain jobs every month of the Great Recession, a sector that we cannot possibly afford; and another 47,000 in "leisure and hospitality," more than half of that in the subcategory "food and drink." Under these circumstances, booze is a reasonable plan.

The Fed released the minutes of its December meeting. After five pages of "modest improvement" recitation, the minutes say "The staff's outlook for real economic activity over the medium term was little changed." Next paragraph: "The underlying rate of consumer price inflation... was lower than the staff expected." Deflation is still the worry. (If you read these things, focus on the staff's commentary, not the "participants'" -- low-horsepower regional-Fed presidents.)

A true economic turn always triggers upward retrospective revisions of payrolls; we learn in the rear-view that we were doing better than we thought. However, today's report found only an additional 72,000 jobs in Oct-Nov combined. Further, the center of economic improvement in fall was manufacturing, but the December making-things payroll gain was a measly 10,000 jobs. That says that demand can be fulfilled by existing capacity, and/or businesses doubt the depth of future demand.

That absence of employment pull-through is still odd, especially as the twin ISM survey indices continued to run upward in December: manufacturing to 57.0 and services to 57.1 (that the best in four years). Note that these surveys measure better/worse, not level of activity. Hence a theory alternate to self-sustaining recovery: the red-hot economies in Northern Europe and China have lifted demand a little everywhere, but their overheating is temporary.

The European heat is more temporary than China's. A euro hugely too strong for Club Med is equally undervalued for hyper-productive Germany (supercharging its exports), and that instability grew today. Many in Europe hope that the European Central Bank will buy Club Med bonds and hold things together open-ended; today its Chairman, Trichet, said the ECB "Cannot substitute for government responsibility... We should be inflexible in applying sanctions if rules are breached." If Germany intends to inflict Wagnerian twilight and indentured servitude on Club Med, the euro has had it, and so it traded today: the euro is under $1.30 for the first time since last summer's crisis, and Club Med 10-year bond yields jumped to new highs: Spain 5.47%, Italy 4.82%, Portugal 7.14%, Ireland over 9%, and Greece pushing 13%. Priced for euro-departure. One way to bet on a new Deutschemark, which would soar on euro breakup: buy the German 10-year, demand now pushing its yield down to 2.90%. Euro distress is helpful to Treasurys and mortgages, objects of flight to quality.

I continue to believe that political stars have aligned behind a deficit Big Fix, both parties now afraid of their constituents. The most recent developments: a speech to Congress by Perfesser Bernanke today, describing the structural deficit in a voice the sound of a door closing on a stone tomb. Second, never underestimate signals on the front page of the New York Times.

You pick the real story: "One of psychology's most respected journals" has published a paper describing strong evidence for extra-sensory perception. Or, second: Andrew Cuomo, certified Leftie and new Governor of New York: "We need radical reform. And we need it now. New York has no future as the tax capital of the nation."
Both stories ran on A-1.