Friday, December 31, 2010

Market Snapshot by Sigma Research - Fridays Report

Friday, December 31, 2010
The final day of the year started with the bond and mortgage markets a little better and stock indexes lower. Trading volume will be very low with most traders and investors out until next year. There are no economic reports today, no Fed actions and nothing markets can look forward to other than squaring positions at year end. Although better this morning it is likely that by 2:00 this afternoon when the bond markets close the bond and mortgage markets won't be much changed from yesterday's closes. We suggest ignoring the trading today regardless of how it ends.

Take a look at the 4.0 FNMA Jan 30 yr coupon chart; the present price is braking above its 20 day moving average for the first time since Nov 8th; as we noted over the past couple of days technicals remain bearish but are improving. The bellwether 10 yr treasury at 9:00 sat at 3.33% (see below for 10:00 level) and is closing in on its 20 day average on the yield chart. While looking a little better the interest rate markets still have a bearish tone, we need the 10 yr to move under 3.25% to change the near term trend.

Although recent improvement in the bond and mortgage markets is very welcome, that volume is very thin keeps me from becoming too friendly to the rate markets now. We need to see improvement on more trading, that should begin on Monday with everyone back to doing real business. The overwhelming consensus now for 2011 is for the economy to continue to expand, we remain skeptical however. There are two key components to consider when adopting the bullish outlook; the housing sector and consumer spending, both raise serious questions. 2011 is not going to be good for housing, likely about the same as this year; consumer spending was better for the holidays but will consumers continue to increase spending in 2011-----a huge question and the defining issue for the economy in 2011. We won't have a good handle on that until we get a look at Jan economic data in Feb.

On Dec 31st 2009 the 10 yr note yield was 3.84%, today 3.35%. Mortgage rates in 2010 also fell 45 basis points. Looking for rate market improvement in Jan and possibly the first quarter, if we see that the mortgage markets will not fall back to the lows seen this fall prior to the beginning of Nov. 4.5% mortgage rates are likely the best we can expect unless the economic outlook changes dramatically. We are not as bullish about 2011 economic growth as most, if we are right the bond and mortgage markets should do better in the first half of the year. Look for continued volatility in the markets early next year.

Thursday, December 30, 2010

Market Snapshot by Sigma Research - Thursdays Report

Thursday, December 30, 2010
Treasuries and mortgage markets started weaker this morning after the strong rally yesterday on the solid 7 yr note auction. Tuesday prices crumbled on the weak 5 yr note auction, yesterday prices rallied; the result was prices ended the two days unchanged from Monday's closes. Huge swings with no direction. At 8:30 this morning weekly jobless claims were expected to be down about 5K, they fell 34K to 388K, the lowest weekly filings since July 2008. It was also the first time claims were below 400,000 since July 2008. Continuing claims however increased to 4.128 mil from 4.071 mil last week; the 4 wk average for claims declined 12.5K to 414K. The Labor Department revised the prior week’s figures to 422,000 from a previously reported 420,000. Those who’ve used up their traditional benefits and are now collecting emergency and extended payments decreased by about 151,500 to 4.53 million in the week ended Dec. 11.

Not much reaction to the claims data; the 10 yr note at 9:00 -5/32, mortgage prices at 9:00 -5/32 (.15 bp). The weekly claims included the Christmas week leaving one less day for unemployed to file. Also it is Dec and employers are less likely to fire workers. Markets are not moving much on the better report but it does add more to the outlook that 2011 will see better job growth and stronger economy.

At 9:30 the DJIA opened -9; like the bond market the equity market isn't biting on the decline in claims, waiting for the Chicago PM index.

At 9:45 the Dec Chicago purchasing mgrs index, expected at 61.0 frm 62.5, jumped to 68.6. All sub components were also strong; new orders index increased to 73.6 frm 67.2, employment component to 60.2 frm 56.3 and the prices pd component to 78.2 frm 70.7. The initial reaction put more selling in the rate markets, but not much, and bounced the DJIA up a little. With consensus building that 2011 will be a stronger year economically, the regional data adds more conviction to that outlook. Any reading over 50 indicates expansion, the higher the index, the stronger improvement.

The final scheduled economic report for 2010 hit at 10:00; Nov pending home sales. Nov sales were expected to decline 3.0% after a +10.4%; as reported sales increased 3.5%, yr/yr sales were down 5.0% frm Nov 2009. Another better report this morning.

Tomorrow the bond and mortgage markets will trade until 2:00 pm; not much expected with most traders out and no scheduled news.

Technically, the bond and mortgage markets remain bearish. To change that the 10 yr note needs a close below 3.25%. The past two weeks haven;t changed much from mid-Dec; techincals still bearish but a little better than two weeks ago. Be sensitive to the technicals, the embodiment of all participants is reflected in the price action. This morning markets looked at three economic reports that were better than estimates yet there has been very little reaction to them. The 10 yr and mortgages are trading lower but holding better than we would have expected given the volatility these days and more evidence that the economy is improving with inflation pressures edging higher with the prices pd report in the Chicago data this morning. Trade is thin again today in all financial markets; nothing now scheduled until next week.

Wednesday, December 29, 2010

Market Snapshot by Sigma Research - Wednesdays Report

Wednesday, December 29, 2010
There was no driving news overnight and there is no economic data today; the only thing of importance is the last of the three auctions at 1:00, $29B of 7 yr notes. Yesterday rate markets were slammed hard when the results of the 5 yr auction were released at 1:00, the demand was very weak with the rate up more than 4 basis points from where the WI trading was yesterday morning, and the very wide bidding range of 4.6 basis points. Doing auctions the last week of the year is always a problem with most large potential bidders done for the year. Recent Treasury auctions have been more touchy with investors of all types wanting more yield to continue to fund the US increasing budget deficits. The farther out the curve the more yield is required, today's 7 yr may be set up well however, given the spike up n rates yesterday. Although we may see a better auction, in the meantime there won't be any significant buying of treasuries (and mortgages) until the auction results are known at 1:00 pm.

The last two weeks of each year are walks on the wild side; always difficult to properly assess price action with volumes very thin that most times exaggerate movement. The big declines in prices for mortgages and treasuries yesterday were in my opinion reflective of a lack of volume-----or was it? That question won't be satisfactorily resolved until next week when we get back to business. That said, the underlying outlook remains bearish for interest rates with the consensus outlook for 2011 being a stronger economic growth year. Even though our 2011 outlook is not as glowing as most believe, as long as that is the so-called consensus interest rates will continue to find it an uphill climb for lower rates. China raised rates for the second time in three months, GDP growth is expected at 3.5% to 4.0% in 2011, the Fed is desirous of a higher inflation rate, and after strong Christmas spending by consumers many believe the consumer is back. Our take; the consumer isn't back, consumer spending will not meet current expectations, the housing sector will continue to be very soft through 2011 with more foreclosures.

With the strong belief that the US will improve in 2011 inflation fears will continue to push rates up until evidence changes. Inflation in Germany, Europe’s largest economy, unexpectedly accelerated in December as prices surged in the final month of the year. The inflation rate increased to 1.9% from 1.6% in November. That’s the highest since October 2008. Economists expected an unchanged reading. Consumer prices jumped 1.2%, the biggest monthly gain since December 2002.

Tuesday, December 28, 2010

Market Snapshot by Sigma Research - Tuesdays Report

Tuesday, December 28, 2010


In very early trading this morning the rate markets were unchanged, but as the morning advanced some minor selling with the stock indexes pointing to a firmer opening. That said, this is holiday activity that has little substance with many traders still out until next Monday. London markets closed today for Boxing Day, Asian markets thin. I cannot wait for this week to end and we get back to real trading, it is difficult this time each year to make any intelligent assessments based on price action; its an annual two weeks of chop on thin trading. It takes a full complement of investors and traders to completely judge the temperament of all markets. While it is more difficult, nevertheless price movement is still movement and has to be considered. Putting some perspective on it, on Friday 12/17 the 10 yr note yield was 3.34%, 30 yr 4.0 FNMA Jan coupon price 98-23/32; at 9:00 am this morning the 10 yr rate was 3.34%, 30 yr 4.0 FNMA Jan coupon price 98-20/32.
The Johnson Redbook retail sales data for the week before Christmas jumped a strong 4.6% following 3.8% increase the week before. For the entire month of Dec the index increased 0.4% from Nov. Much better sales the last two weeks of Dec, consumers spent more than what was expected and adding to the view that the economy will have a strong year next year compared to this year.
At 9:00 the over-rated Case/Shiller Oct home price index; yes I believe it is over-rated by traders but it is what it is as "they" say. The index for the 20 city index was expected to be +0.1% as reported it fell 1.3%, Sept was revised from -0.5% to -0.8%. Yr/yr the 20 city price index was down 0.8% with forecasts of a decline of only 0.1%. As usual the report had no reaction in the financial markets (stock indexes or the rate markets).
At 10:00 the Dec Conference Board's consumer confidence index is a data point that has meat on the bone. The expectations were for the index to increase from 54.1 to 56.4; the index was lower at 52.5 frm revised 54.3 in Nov; the expectations outlook index fell to 71.9 frm 73.6 in Nov. Weaker but no initial reaction to the data.
At 9:55 the Richmond Fed business index, one of the Fed's regional measurements, increased to an all-time high at 25 frm 9 in Nov.
The Fed after two days of not buying treasuries is back today; buying issues dated between 06/30/13 - 11/30/14 totaling about $6 to $8B. Not a big deal and part of QE 2.
This afternoon Treasury will sell $35B of 5 yr notes; yesterday's 2 yr auction was well bid with its rate 2 basis points lower than what was expected on the when-issued trading yesterday morning.
Generally better retail sales and the surprising Richmond Fed index added more selling from the levels where prices were set earlier; the 30 yr mtg price at 9:30 -.16 bp at 10:05 -.34 bp). Lenders may already be thinking of re-pricing lower. Be alert.

Monday, December 27, 2010

Market Snapshot by Sigma Research - Mondays Report

Monday, December 27, 2010
The east coast hit by huge snow storms, the markets are thinner than normal for the last week of the year with delayed openings on some markets. Treasuries and mortgages opened weaker again this morning making it the third day with lower prices. There is nothing on the economic calendar today and not much data this week. The Treasury will auction $99B of notes this week beginning today with $35B of 2 yr notes, tomorrow $35B of 5 yr notes and Wednesday $29B of 7 yr notes. How strong the demand will dictate a lot of the trading this week, recent auctions have been slightly soft compared to stronger demand earlier this year. The markets have a four day week with all markets closed on Friday again.

The mortgage markets so far this morning are lower, weaker than treasury markets in terms of price declines. Still difficult to make much of the action with most large investors out of the markets through the remainder of the year; thin trading can exaggerate moves in either direction.

The People’s Bank of China boosted its key one-year lending and deposit rates by 25 basis points on Dec. 25 in what is likely too be a series of increases in 2011. That they did it on Christmas has some grousing about the timing. The reaction sent Europe's equity markets lower and the US stock market opening lower this morning. China is increasingly concerned about the increase in the inflation rate and over-heated economic growth. Most emerging-market stocks fell on speculation China’s central bank will accelerate increases in interest rates to slow the economy, after boosting borrowing costs for the second time since October. Most emerging-market stocks also fell on speculation China’s central bank will accelerate increases in interest rates to slow the economy, after boosting borrowing costs for the second time since October.

This Week's Economic Calendar:
Monday,
1:00 pm $35B 2 yr note auction
Tuesday;
9:00 am Case/Shiller Oct home price index
10:00 am Dec consumer confidence index (56.1 frm 54.1)
1:00 pm $35B 5 yr note auction
Wednesday;
1:00 pm $29B 7 yr note auction
Thursday;
8:30 am weekly jobless claims (-4K to 416K)
9:45 am Chicago purchasing mgrs index (61.5 frm 62.5)
10:00 am Nov pending home sales (-3.0% frm +10.4% in Oct)
Friday;
Markets closed; Happy New Year!

The auctions this week will likely keep rate markets from rallying; along with China's rate hike and investors mostly with closed books until next week, wide swings on unexpected news can occur. Early this morning the 10 yr note rate increased to 3.44% on the China rate hike but by 9:30 the 10 yr was unchanged from last Thursday at 3.40%. Mortgage markets soft and trading weaker than treasuries. The equity markets are weaker this morning, but so far there is no rotation to the bond market. The weather in NY has kept many from getting in on time, this afternoon activity may increase.

Thursday, December 23, 2010

Market Snapshot by Sigma Research - Thursdays Report

Thursday, December 23, 2010
Treasuries and mortgages opened a little weaker this morning. At 8:30 three data points; weekly jobless claims at 420K down 3K, last week's claims were revised up 3K to 423K. Nov durable goods orders expected down 0.6% were down 1.3% overall but taking transportation orders out durables were up 2.4%; Oct orders were revised to -3.1% frm -3.3%. Nov personal income expected up 0.2% increased 0.3%; spending expected up 0.5% was up 0.4%. The rate markets, already lower in price didn't move on the data; the 10 yr at 8:45 -6/32, 30 yr mtgs -7/32 (.22 bp), right where they traded prior to 8:30.

At 9:55 the U. of Michigan consumer sentiment index, expected at 74.5 from 74.2 hit at 74.5. The 12 month outlook index at 79 frm 77. expectations index at 67.5 frm 66.8. Overall another positive report for the economy but the index is volatile.

At 10:00 Nov new home sales expected up 6.5% were lower at +5.5% at 290K units against expectations of 300K. Oct sales revised lower to -10.7% from -8.1%. Based on present sales there is an 8.2 month supply compared to 8.8 months supply in Oct.

The U. of Michigan index put additional pressure on the bond and mortgage markets, prices dipped 5/32 (.15 bp) on 30 yr mtgs from where they traded at 9:30.

Rounding out the day, at 11:00 Treasury will announce the details for next week's auctions; dealers are expecting the total of $99B unchanged from last month, $35B of 2 yr notes on Monday, $35B of 5 yr notes Tuesday, and $29B of 7 yr notes on Wednesday.

Based on prices at 10:05 this morning 30 yr mtgs this week are 3/32 (.09 bp) frm last Friday's close. The 10 yr note yield increased 5 basis points from last Friday's close.

Wednesday, December 22, 2010

Market Snapshot by Sigma Research - Wednesdays Report

Wednesday, December 22, 2010
Prior to 8:30 the interest rate markets were a little weaker; Q3 final GDP was released at 8:30 and wasn't as strong as forecasts. Q3 GDP at +2.6% was revised from +2.5% on the advance report last month, estimates were for the revision to increase to +2.8%. The 10 yr and mortgages still traded a little soft by 9:00 but off the worst levels at 8:25 this morning. Recapping; Q1 GDP +3.7%, Q2 +1.7%. Q3 personal consumption expenditures fell from +2.8% on the advance to +2.4%. At a 2.4% pace last quarter it was the fastest since the first three months of 2007. Spending added 1.67% points to GDP from July through September. Inflation is also lower than the policy makers’ long-term forecast. The Fed’s preferred price gauge, which is tied to consumer spending and strips out food and energy costs, rose at a 0.5% annual pace, the slowest since record-keeping began in 1959. We know the Fed wants inflation up to its normal target at +2.0% annually, that isn't happening becomes an increasing concern that the US economy may slip into deflation if economic improvement in 2011 isn't stronger.

A word on inflation, we agree with Rick Santelli on CNBC; that the government excludes food and energy from its inflation gauge may have been working in the past but now with commodity prices and energy prices increasing as demand outpaces supply globally, excluding those components may be mis-leading. If included in inflation the level would be slightly above 2.0%. What's more, with the costs of food and energy increasing ($3.00+ for gas and food prices increasing) consumer discretionary spending may be negatively impacted. Regardless, economists and analysts insist that those components be removed to get a truer measure of inflation, based mostly on the volatility in the two components.

Early this morning the weekly MBA mortgage applications for last week took a big tumble; the overall index at -18.6%, the purchase index -2.5% but the re-finance index fell 24.6%. In a way not surprising with the recent spike in rates and this time of the year when home sales and re-financings normally tapper off. It isn't news that re financing has accounted for about 80% of all mortgages in 2010, unless interest rates fall back that percentage is certainly going to decline.

At 9:30 mortgage prices -2/32 (.06 bp), the 10 yr note -2/32 at 3.31% unch. The DJIA opened +3. Financial markets working on thin volume through the remainder of the year.

At 10:00 Nov existing home sales, expected up 6.6% to 6.8%, increased 5.6% to 4.68 mil unit annualized; sales down 27.9 yr/yr, median sales price $170,600.00. Single family sales up 6.7% while condo sales -2.0%. Inventory levels surprisingly down 4.0% with a 9.5 month supply based on Nov sales pace. Overall a weaker report but there was no initial reaction to the data in the bond market. At 10:05 mortgage prices -6/32 (.18 bp) and -4/32 (.12 bp) frm 9:30.

Volatility marks the trading over the past few days; today no different with big swings in prices on any buying or selling. It doesn't take much to move mortgage prices as we saw yesterday in the afternoon when prices increased on some MBS buying in markets razor thin. Expect the same today. Still a bearish outlook as long as the outlook for economic improvement in 2011 dominates as it is now with investors and traders. We believe investors are going to be disappointed with 2011 growth, but right now we will not fight the tape, have to respect what the consensus is until it changes.

Tuesday, December 21, 2010

Market Snapshot by Sigma Research - Tuesdays Report

Tuesday, December 21, 2010
Starting today as it did yesterday, the 10 yr note at 9:00 up 8/32, mortgages +2/32 (.06 bp) frm yesterday's closes. Yesterday morning the mortgage markets showed nice price gains until about 2:00 when prices backed off and lenders re-priced lower; by the end of the day mortgage prices and all treasury prices across the curve were unchanged from last Friday. Year end market noise, as we noted trading from now until the end of the year will be on very thin volume contributing to wide swings at times.

At 9:30 the DJIA opened +30; the 10 yr note +5/32 3.32% -2 bp and mortgage prices +3/32 (.09 bp) frm yesterday's close.

Today like yesterday, no economic data and no speeches from Fed officials. Markets will likely not change much by the time the day ends. The stock market opened better but like the rate markets equities will likely end relatively close to yesterday's close. In order to see any significant moves the markets will need fresh news, so far there really isn't anything new to chew on.

Tomorrow the final read on Q3 GDP is expected to increase to +2.8% growth from 2.5% reported in the advance data last month. Also tomorrow Nov existing home sales are expected to have increased 6.8% to 4.75 mil units annualized frm Oct's decline of 2.2%, a solid increase if it actually occurs and another evidential data point suggesting a better economic outlook. It matters little that housing is in recession and there isn't much help coming next year, what matters to markets is that it is better. The outlook for 2011 hasn't changed, the year is widely expected to show more growth. The outlook for interest rates is for somewhat higher rates as long as the optimism continues.

Monday, December 20, 2010

Market Snapshot By Sigma Research - Mondays Report

Monday, December 20, 2010
Starting better again today as short-covering drives rates back down. The 10 yr note hit a high at 3.60%, at 9:00 this morning it was at 3.28%. It took a lot longer than we expected but finally the oversold market is doing what it should given the technical factors. No data today or tomorrow; Wednesday and Thursday do have key reports. Trading this week should be light with not much change, the large institutional investors and mutual funds have closed books for the end of the year and normally don't like to do much until the new year.

This week's economic calendar:
Wednesday;
8:30 am Q3 final GDP (+2.7% frm +2.5%)
10:00 am Nov existing home sales (+4.8% to 4.65 mil units annualized)
FHFA Oct home price index (N/A)
Thursday;
8:30 am weekly jobless claims (+4K to 424K; continuing claims 4.075 mil frm 4.135 mil)
Nov personal income and spending (income +0.2%, spending +0.5%: personal consumption index +0.1%)
Nov durable goods orders (-1.0%; ex transportation orders +1.0%)
9:55 am U. of Michigan consumer sentiment index (75.0 frm 74.2)
10:00 am Nov new home sales (+6.6% to 303K units)

The current bounce in prices (lower rates) should not be taken lightly; suggest taking advantage of it and get deals nailed down that were caught in the spike up in rates. The outlook continues to be negative for interest rates; as long as markets are expecting a strong economic improvement in 2011 as they do now, lower rates are not likely. As we see it now, the 10 yr note may decline to 3.17% where it will likely meet resistance; presently the 10 yr is trading at 3.28%. If the 10 does make it to 3.17% mortgage rates will also decline by 10 more basis points. Thin markets over the next two weeks have the potential of becoming choppy and volatile, doesn't take a big trade to move the markets.

Looking to next week, Treasury will be back borrowing; Monday 2 yr note, Tuesday 5 yr note and Wednesday 7 yr note.

The stock market opened better this morning, the dollar a little better but relatively unchanged.

Friday, December 17, 2010

Market Snapshot By Sigma Research - Fridays Report

Friday, December 17, 2010

Treasuries and mortgages opened stronger today after the nice rebound yesterday afternoon; short-covering long overdue but no real new investor buying. The bearish trend won't be easily reversed however, markets are totally convinced at the moment that 2011 economic growth will be much better than expected just two months ago. The tax cut extensions and cut in social security contribution along with other benefits that are expected to increase consumer spending have gripped markets that next year will see GDP growth of 4.0% and unemployment dropping 1.0% by the end of the year. Meantime don't overlook the Fed's desire to increase the level of inflation; the combo of the two elements along with less worries over Europe's debt problems have merged to push interest rates higher.

The 10 yr note at 8:30 +12/32 at 3.40%, mortgage prices +12/32 (.37 bp) frm yesterday's closes. By 9:30 both markets were holding; still can't completely accept a rebound even with the markets extremely oversold in the neat term. That said, always a good thing when prices are improving.

The only scheduled data today; Nov leading economic indicators, expected to have increased 1.2%, right on +1.1%. Oct revised from +0.5% to +0.4%; no market reaction to the report.

The Obama/Republican tax cut package is headed for Obama's desk for signing. Dems in the House reluctantly when along with the bill, Dems don't want tax cuts for the wealthy and and increase in estate taxes but no longer have the power to get their way. Obama will sign the measure into law later today. Enough Democrats voted with House Republicans to accept the deal that Obama negotiated with congressional Republicans who gained scores of seats in last month’s election. Republicans said the bill would provide certainty about tax rates and would create jobs. Majorities of both parties supported the bill. Voting in favor were 139 Democrats and 138 Republicans, while 112 Democrats and 36 Republicans voted against it. Eight lawmakers didn’t vote.

Large investors, those that can and do move markets are closing out their books now for this year. The rest of the year will be on lighter and lighter volume; at times low volume will distort markets. The interest rate markets will likely be choppy with slightly better pricing but any improvements will not change the bearish outlook for interest rates. As long as markets lock into the view that the economy will grow in 2011 and there is no need for safety buying the bond and mortgage markets will not decline in rates very much. We hold our longer outlook that the markets are over-estimating the economic bounce in 2011, we do not believe 2011 GDP will be 4.0% as markets currently believe; that said, our opinion is the minority, we have to respect the market as it is and all signs now point to increasing economic activity and an increase in the levels of inflation. not the makings for any strong rally in the bond and mortgage markets.

Today trading will be on thin volume again; next week it will really thin out. The rest of the year should be quiet as it normally is the last two weeks of the year. Looking for more improvement in mortgage prices but not a lot; take advantage of the improvements; interest rates will not decline much. Any improvement is technical rather than fundamental.

Market Snapshot By Sigma Research - Thursdays Report

Thursday, December 16, 2010
Once again this morning the bond and mortgage markets tried to improve but by 9:00 all the early gains were gone. Yesterday after the 4:30 report was sent out mortgage prices took additional hits, falling 100 basis points on the day. At 9:30 mortgages were unchanged and the 10 yr note held a 7/32 price gain at 3.51% -2 bp.

At 8:30 this morning weekly jobless claims were reported down 3K to 420K, claims were expected to have increased about 4K. Continuing claims increased to 4.135 mil frm 4.113 mil the previous week. Although better than expected the changes from the previous week were nominal. Nov housing starts were expected up 4.8%, as reported starts increased 3.9% to 555K units. Nov building permits were expected up 2.5%, they fell 4.0% to 530K units. Although less than forecasts the increase in starts is the first since August. Probably not necessary to reprise it but the housing markets remain in depression and will not rebound much in 2011.

At 10:00 the Dec Philadelphia Fed business index, expected at 16.0 frm 22.5 in Nov, jumped to 24.3; the new orders sub component at 14.6 frm 10.4, prices pd index at 51.2 frm 34.0 and the employment component at 5.1 frm 13.3. The initial reaction to the release sent the 10 yr note back to unchanged but mortgage prices were not much changed from the pre-release. Any index reading over zero is considered expansion, under zero contraction. At 10:05 mortgage prices were 6/32 (.18 bp) better than we marked at 9:30.

Markets remain completely confused by the Fed; Bernanke has said more than a few times the Fed's $600B QE 2 was necessary to keep interest rates from increasing. It isn't news that the opposite has occurred, rates have increased over 100 basis points in rates since the Fed announced the treasury buying. The Fed is wasting money buying treasuries as rates increase; its Treasury portfolio is losing money with everyday that passes. On the economy the Fed and markets appear to be on very different paths; the Fed's FOMC statement Tuesday called the economic outlook questionable, growing but maybe unsustainable, growing too slowly. On the other side the equity markets and the bond market are waging heavily that 2011 will see strong economic growth; many economists are now forecasting 4.0% GDP growth. Meanwhile the Fed has gone silent, Bernanke and other Fed officials refrain from outwardly explaining why the difference in views; likely the Fed is confused. The Fed is out of step with the private sector outlook, that doesn't happen very often as markets mostly buy in to what the Fed is saying.

Who is right about the outlook? The equity markets or the bond market pushing interest rates higher daily? The private consensus among most analysts and economists that 2011 will see lower unemployment and stronger growth is based solely on the legislation currently moving through Congress; tax rates unchanged, a cut in payroll taxes of 2.0% that will put more cash in the pockets of consumers and other incentives. The bet now is that consumers will increase spending based on the legislation. Consumer spending remains luke warm at best, consumer credit is declining as many believe that saving is now the prudent course. The main wealth for most people is their home, that wealth has almost vanished; the outlook for housing in 2011 is not good. Why then is the outlook for next year so strong? Wishful thinking in our view.

I know it is redundant but it is the case; the bond and mortgage markets are very oversold based on traditional momentum oscillators. It is unusual that we are not getting a rebound by now, but no one should fight the trend no matter how overdone the move has been.

Wednesday, December 15, 2010

Market Snapshot By Sigma Research - Wednesdays Report

Wednesday, December 15, 2010


In Asia last night more US treasury selling, by the time Europe opened a little buying. By 8:00 this morning the 10 yr note was better by 12/32 and mortgage prices were up 12/32 (.37 bp). At 8:30 two data points; Nov consumer price index was right on, up 0.1% overall and +0.1% with food and energy removed, yr/yr overall +1.1%, yr/yr core +0.8%. The NY Fed Empire State manufacturing index jumped from -11.14 in Nov to +10.57 with estimates of an increase of 3.0; new orders jumped to 2.60 frm -24.38, employment component at -3.41 frm +9.09. The past two two months the NY manufacturing reports have been so volatile we don't give it much attention; any index over zero is considered growth, under zero contraction. Some immediate selling on the data but by 9:00 treasuries and mortgages were holding better.
At 9:15 Nov industrial production expected up 0.3%, increased 0.4%. Nov factory usage increased to 75.2% the highest utilization in almost two years. Economic data continues to exceed forecasts.
At 10:00 the Dec NAHB housing market index was expected at 17 frm 16 in Nov; was unchanged at 16. That it wasn't better has added a little increase in prices of treasuries and mortgages.
Yesterday the 10 yr note hit 3.50% briefly before backing down to close at 3.46%, mortgage prices were slammed again yesterday, down 39/32 (-128 bp). Mortgage rates have increased 100 basis points over the past four weeks. Interest rates climbing as rapidly as they have is confirmation that the end of inordinate low rates is over. Markets are increasingly more optimistic that 2011 economic growth will be stronger than what had been expected. Expectations until a couple of weeks ago were for GDP growth in 2011 to be 3.0%, now the consensus is for growth to be at 4.0% and a decline in the unemployment rate from the present 9.8% to 8.7% by the end of 2011. The extension of the Bush tax cuts, the 2.0% cut in workers contribution to social security will put more cash in consumers' pockets. Also driving rates higher, the end of safety moves generated by issues in Europe and in the US and Congress's unwillingness to cut federal spending. The $858B tax cut bill now moving through Congress is yet one more Christmas tree filled with earmarks (pork), politicians can't do anything that doesn't end up in more unnecessary spending. The fiscal budget bill also moving through Congress is hung with earmarks driven by Democrats and with not a lot of strong resistance from Republicans. Investors in fixed income are not willing to hold low rate treasuries with the deficit increasing, inflation concerns, and a better economic outlook.
The MBA today released its Weekly Mortgage Applications Survey for the week ending December 10, 2010. The Market Composite Index, a measure of mortgage loan application volume, decreased 2.3% on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index decreased 2.7% compared with the previous week. The Refinance Index decreased 0.7% from the previous week. This is the fifth straight weekly decline for the Refinance Index. The seasonally adjusted Purchase Index decreased 5.0% from one week earlier. The unadjusted Purchase Index decreased 8.6% compared with the previous week and was 16.6% lower than the same week one year ago. The four week moving average for the seasonally adjusted Market Index is down 4.7%. The four week moving average is up 2.6% for the seasonally adjusted Purchase Index, while this average is down 6.8% for the Refinance Index. The refinance share of mortgage activity increased to 76.7% of total applications from 75.2% the previous week. The average contract interest rate for 30-year fixed-rate mortgages increased to 4.84% from 4.66%, with points increasing to 1.34 from 0.94 (including the origination fee) for 80% loans. This is the highest 30-year fixed-rate observed in the survey since the beginning of May 2010. The average contract interest rate for 15-year fixed-rate mortgages increased to 4.21% from 3.98%, with points increasing to 1.28 from 0.97 (including the origination fee) for 80% loans. This is the highest 15-year fixed-rate observed in the survey since the beginning of June 2010.
So far so good today; the bond and mortgage markets are holding slight gains after the 10 yr note touched 3.50% yesterday. Will it hold for now? Hard to say, the market has resisted any attempt to rally on short-covering even though it remains extremely oversold technically. Any improvement in rate however will not be much given the underlying fundamentals of the increasing economic outlook for 2011. End of yr selling that usually occurs in Dec may not be over. It is highly unlikely that any rebound will be sufficient enough to change the bearish trend.

Tuesday, December 14, 2010

Market Snapshot By Sigma Research - Tuesdays Report

Tuesday, December 14, 2010
A little choppy very early this morning; the bond and mortgage markets started a little lower in price, took a quick hit on 8:30 data then just as quickly rebounded to sit lose to unchanged by 9:00 am. The bellwether 10 yr note at 9:00 traded weaker, -11/32 at 3.32% +4 bp (see below for 10:00 prices).

Two key data releases at 8:30; Nov retail sales were stronger than expected, up 0.8% overall and up 1.2% when auto sales are removed. Oct retail sales were revised from +1.2% to +1.7%. Retail sales strong adds to the view that the consumer is beginning to spend more. Pulling against that; early this morning Best Buy came with its earnings that were substantially lower than expected sending its stock price reeling. Also at 8:30 Nov producer price index; it was stronger than expected and added more concern that inflation levels may be increasing. Overall PPI +0.8% and without food and energy +0.3%; yr/yr overall PPI +3.5% less than in Oct, ex food and energy +1.2% yr/yr.

Treasuries remain soft this morning but mortgage prices have managed to trade better. Both markets very oversold as we have been saying for days. Likely the markets will be relatively quiet this morning and into early afternoon prior to the FOMC policy statement at 2:15. Treasuries being pressured a little on the higher PPI, continuing to worry that inflation may be increasing. The more fundamental inflation gauge is due out tomorrow when Nov consumer price index is released. Nov retail sales were also better than expected adding to pressure in the rate markets.

At 10:00 Oct business inventories increased 0.7%, less than the 1.1% expected; sales were up 1.4% with an inventory to sales ration at 1.27 months from 1.28 months in Sept. The initial reaction added more pressure on the 10 yr note and mortgage prices slipped a little.

Confidence among U.S. small businesses rose in November to the highest level since the recession began three years ago as more companies projected the economy and sales will improve, a private survey found. The National Federation of Independent Business’s optimism index increased to 93.2, the highest since December 2007, from an October reading of 91.7. “It was encouraging to see substantial improvement in expectations for economic performance, critical if spending and hiring are to elevate beyond survival and replacement levels,” William Dunkelberg, the group’s chief economist, said in a statement. “Plans to hire, make capital outlays and invest in inventories all rose, albeit from historically low levels.”

Not much is expected from the FOMC meeting today; the Fed isn't about to add to the $600B stimulus at this time, and very likely will face serious resistance next year from the Republican controlled Congress. There are a few key members that want to change the Fed's role and remove its mandate for full employment leaving the Fed's only mandate to control inflation. The present $600B QE 2 has not measured up to what Bernanke wanted, lower interest rates, increasing criticism from Congress and within the Fed itself will likely handcuff Bernanke unless the economy rolls over. Bernanke has said he is concerned that the present recovery may not be "self-sustaining". The point of QE 2 was to reduce interest rates; so far it has failed, the 10 yr note and mortgages since the Nov 3rd announcement of QE 2 have increased 80 basis points. Instead of lowering rates the move increased the view the economy would recover more rapidly and inflation concerns have increased sending rates higher.

Monday, December 13, 2010

Market Snapshot By Sigma Research - Mondays Report

Monday, December 13, 2010
Started lower again today; the 10 yr note overnight it 3.39% +7 bp from Friday's close, a little improvement by 9:00, at 3.36%. Mortgage prices at 9:00 down 6/32 (.18 bp) frm Friday's close. Looks more and more likely that the 10 yr may eventually drive to 3.50%. The exit from fixed income investments at those low yields is not over although we believe the near term remains excessively overdone. Still looking for a bounce but it is clear now that to see that it is going to take some kind of disappointment in the economic data being reported this week, meanwhile the trend is firmly higher for rates and it is not appropriate to bet on when a bounce will occur.

No economic releases today but the rest of the week has a lot to consider. Today the FOMC meeting begins with the statement coming tomorrow afternoon at 2:15. No supply this week from Treasury; today the Fed is scheduled to buy Treasuries dated 06/30/16 - 11/30/17. China did not increase interest rates as many were fearful they would. Inflation fears are one of the reasons we are seeing rates increase, China is making efforts to slow their inflation rate which is now at 6.0%, that and the Fed's desire to get the US inflation higher is dealing a blow to US rates. Inflation fears and the increasingly better economic outlook with tax cuts, payroll tax cuts, tuition credits and the extension of emergency unemployment benefits are combining to paint a smiley face on the economic future. A huge leap of faith, nevertheless it is what investors are increasingly expecting. The Senate is sure to pass the bill put together by Obama and Republicans, the House however is fighting it with many Democrats resisting the plan because it keeps the tax cuts for "the wealthy". Over the weekend the House was decorating the Tree, and not the National Christmas Tree, adding pork to the bill to bribe some of the dissenters. Subsidies for ethanol, wind farms and a few other ornaments; it isn't possible for Congress to pass a bill on its merits without hanging pork on it.

This Week's Economic Calendar:
Tuesday;
8:30 am Nov PPI (+0.5%, ex food and energy +0.2%)
Nov retail sales (+0.5%, ex auto sales +0.6%)
10:00 am Oct business inventories (+1.1%)
2:15 pm FOMC policy statement
Wednesday;
7:00 am weekly MBA mortgage applications
8:30 am Nov CPI (+0.2%, ex food and energy +0.1%)
Dec NY Empire State manufacturing index (+3.0 frm -11.14 in Nov)
9:15 am Nov industrial production (+0.3%)
Nov capacity utilization (75.0% frm 74.8%)
10:00 am Dec NAHB housing market index (17 frm 16 in Nov)
Thursday;
8:30 am weekly jobless claims (+4K to 425K; continuing claims 4.078 mil frm 4.086 mil)
Nov housing starts (+4.8% to 545K annualized)
Nov building permits (+2.5% to 558K annualized)
Q3 current account (-$125.3B)
10:00 am Dec Philadelphia Fed business index (12.5 frm 22.5)
Friday;
10:00 am Nov leading economic indicators (+1.2% frm +0.5% in Oct)

Core Logic out this morning saying the number of U.S. homes worth less than the debt owed on them dropped in the third quarter, largely because of mounting foreclosures rather than a rise in property values. 10.8 million homes, or 22.5% of those with mortgages, were “underwater” as of Sept. 30, the Santa Ana, California-based real estate information company said in a report today. That was down from 11 million, or 23%, at the end of June, the third straight quarterly decline. Falling property values and unemployment near 10% have spurred a surge in foreclosures. The number of homes offered in foreclosure auctions averaged 110,000 a month in the third quarter compared with about 98,000 in the same period a year earlier, said Mark Fleming, CoreLogic’s chief economist. “There are two ways to reduce negative equity,” Fleming said in a telephone interview today. “Price appreciation or disposition, which means people getting taken out of their homes. At the moment, there’s more disposition.” A further decline in prices threatens to increase the number of homeowners with negative equity, Fleming said. U.S. home values will probably drop $1.7 trillion this year after rising foreclosures and the expiration of buyer tax credits that boosted demand early in the year, Zillow Inc. said Dec. 9. More than $1 trillion of the drop came in the second half, according to Zillow, a Seattle-based real estate data company. (Bloomberg)

Sunday, December 12, 2010

Weekly Summary for Week Ending Dec 12

Sunday, December 12, 2010
This Week; interest rate markets will start at their highest yields since the huge sell-off began three weeks ago. Last week there was no real economic measurements, this week the economic calendar has a number of data points that will get close attention; two inflation gauges (PPI and CPI), two regional Fed economic indexes (NY and Philadelphia Fed indexes), housing starts and permits for Nov (both expected to be stronger). The elephant however is the FOMC meeting on Tuesday; the statement will be critical after the recent increase in rates, will the FOMC try to jaw bone the rate markets to slow the climb?

Interest rates, after all the recent hand wringing on the quick jumps in rates, are still historically low as we have reminded more than a few times. Everyone should try and keep the increase in rates in some wider perspective. Interest rates were destined to increase, it was not logical that rates could stay as low as they were prior to Nov 4th when rates started their ascent. Rates are increasing across the globe as the economic outlook improves. China is helping add inflation concerns in the US bond markets; its rate is at 6.0% with increasing talk China may raise their rates. Here in the US the Fed has made it very clear it wants the US inflation rate higher, mix in the expanding US deficits and there are plenty of solid reasons why interest rates have increased. How much higher? Likely they will continue to increase but not at the swift pace we have now. The bond market this week should do somewhat better as long as it gets a positive trigger from the economic releases.

Saturday, December 11, 2010

Market Snapshot By Sigma Research - Dec 6 - Dec 10

Monday, December 06, 2010

A nice start this morning; the rate markets improving on Bernanke's comments last night on 60 Minutes. He said the Fed would do more QE if necessary, said the unemployment rate would likely stay high for four to five years before unemployment falls to 5.0%, said the Fed isn't concerned that their desire to increase inflation would set off a climb in inflation above where he wants it (2.0%). Bernanke focused on how close the US is to deflation--prices have been declining for months, that in his view it is something to avoid at all costs. Markets recently have been spooked by concerns inflation would become embedded in the economy and that the Fed may not be able to move fast enough to stop it; Bernanke reminded that he could raise short term interest rates in "15 minutes" if and when necessary. His remarks that unemployment would remain high for years, that the Fed would do more if necessary to keep rates low is rallying the oversold bond and mortgage markets this morning. The purchase of more government bonds than planned is “certainly possible,” Bernanke said “It depends on the efficacy of the program” and the outlook for inflation and the economy.

On the political front; over the weekend Congress and the Administration are coming closer to extending the Bush tax credits for all income levels for two more years. The Administration wants unemployment insurance extended, Congress appears likely to go along with it. If not, 2 million will lose unemployment this month and 7 million over the next six months.

There are very few economic releases this week that markets can focus on; Oct consumer credit, weekly jobless claims, and the U. of Michigan consumer sentiment is about all there is. The week will be focusing on Treasury auctions, $66B of 3s, 10s and 30s Tuesday through Thursday.

This Week's Economic Calendar:
Tuesday;
1:00 pm $32B 3 yr note auction
3:00 pm Oct consumer credit (-$2.3B)
Wednesday;
7:00 am weekly MBA mortgage applications
1:00 pm $21B 10 yr note auction
Thursday;
8:30 am weekly jobless claims -6K to 430K
10:00 am Oct wholesale inventories (+0.8%)
1:00 pm $13B 30 yr bond auction
Friday;
8:30 am Oct trade balance (-$44.4B)
Nov import and export prices (N/A)
9:55 am U. of Michigan mid-month consumer sentiment index (72.5 frm 71.7)
2:00 pm Nov Treasury budget (-$134B)

We have been increasingly bearish on US interest rates in the past couple of weeks. Are we too bearish? Comments from Bernanke last night that unemployment will stay very high for years and that the Fed will do more easing if necessary may change the longer outlook for rates. That said, at the moment the bond and mortgage markets remain bearish, we still hold that mortgage rates won't decline much over the next few weeks but our take away from Bernanke on 60 Minutes is that he remains very concerned the US economy is hanging by a thread now. He has taken a lot of criticism recently for QE 2 but isn't waffling one bit, convinced the economy is going to struggle with housing markets in depression and continued high unemployment. Over the past three weeks interest rates have shot higher very quickly as investors jettisoned fixed income investments in favor of equities; Bernanke's comments have shaken the bearish outlook for interest rates for now.

Tuesday, December 07, 2010

It was one and out on the rally yesterday; this morning the bond and mortgage markets have no follow-through frm yesterday and the increased volatility remains. At 9:00 the 10 yr note -26/32 at 3.02% +8 bp and mortgage prices -12/32 (.37 bp) after yesterday's .69 basis point increase (see below for 10:00 levels). Over night the Pres and Congressional leaders apparently agreed to extend the Bush tax cuts for two years for all income levels, continue the emergency unemployment payments that are expiring for another year, extend a college tuition tax credit, add back the inheritance tax and cut the payroll tax by 2.0% for 2011. The agreement, if actually passed by the Congress, will increase the deficit by an estimated $700B. The equity market is rallying and the bond market getting hit; that the deficit will increase by $700B is a death knell in the bond and mortgage markets for lower interest rates, in the minds of many it clearly shows that Washington is still paying only lip service to deficit reduction. That is the knee jerk reaction and in an already bearish rate market it doesn't take much to add selling of fixed income investments.

The overnight agreement is a two headed monster for the interest rate markets; it is seen as a boost to the recovery and adding to the deficit. The stock market is opening strong on the news, anticipating that in the end it will be passed by the House and Senate with not much change frm what the Administration and Republicans agreed last night. Already bearish, the plan is nailing the rate markets again, taking the 10 yr note to new a new high yield at 3.06% at 9:15 this morning. The initial belief driving markets is that the plan will increase consumer spending; a stretch in our opinion but that is the driver this morning.

Over two days now the bond market has been twisted by news; Bernanke on 60 Minutes saying the Fed would add more stimulus if necessary to keep rates low, that helped yesterday's best rate market rally in three weeks. Today the news that Republicans and Obama are moving toward adding another $700B to the exploding deficit have yanked the rug from under the bond market and ended the short-covering rally that tried to start yesterday. Later this week the weekly claims for unemployment has been ratcheted up from -6K to -11K, more concern for the bond market.

The Fed will purchase $6B to $8B of securities maturing from December 2014 to May 2016 today.

Also hitting the bond market this morning, talk out of China is that it is about ready to increase interest rates.

At 1:00 this afternoon Treasury will auction $32b of 3 yr notes to begin three days of borrowing. Tomorrow $21B of 10 yr notes that will be closely monitored for demand and Thursday $13B of 30 yr bonds. The 10 yr and 30 yr are re-opens from last months 10 and 30 yr; usually foreign investors are not as aggressive in buying re-opens but the rates for the 10 and 30 have increased about 40 basis points since last month's auctions.

At 3:00 this afternoon Oct consumer credit is expected to have declined $2.3B; markets don't get too interested in it but we do, consumer credit has been falling for a year as consumers clean up their balance sheets, declining credit is good n the long run, not so positive in the short run however.

Well we tried floating yesterday based on oversold technicals and Bernanke's comments Sunday eve on 60 Minutes. Today with talk that tax cuts will be extended and the payroll tax cuts that will add $700B to the deficit, the Bernanke affect is history with rates back to their worst levels. Mortgage prices improved 0.72 bp, this morning down 0.44 bp; the 10 yr note yield yesterday declined 7 basis points, this morning +11 bp. Uncertainty equals volatility, currently there is a lot of it.


Wednesday, December 08, 2010

More heavy selling this morning after rates continued to increase yesterday. Yesterday the 10 yr and mortgage rates jumped 20 basis points and mortgages up 15 basis points. Nothing directly new overnight; interest rates are increasing ion Europe, in Japan and China with the US leading the way higher. Some of the recent increases in rates is likely tied to year end adjustments by investors but the majority of it seems to have eluded analysts and economists. Very unusual that there seems to be no one stepping up to try and put some reasoning behind the spike in rates. It is as if it is happening with shock and awe, no consensus or any particular explanation.

The increase in rates recently, in our opinion, is a final capitulation that interest rates had declined to unsustainable levels. Driven now by attention turning to central banks and countries in Europe that are teetering on defaults. In the US markets see the Fed's $600B QE 2 as a waste of money; the Fed's rationale is and was totally wrong. The Fed's balance sheet has ballooned to over $2T and approaching $3T as Bernanke tries to help the economy grow; it hasn't worked and won't work. Bernanke appears to have made a huge mis-calculation that buying $600B of treasuries would lower interest rates, since Nov 4th when the QE was put in place the 10 yr note has increased 72 basis points and mortgage rates up about the same. Last week alone 30 yr mtg rates increased 10 basis points and are 100 basis points higher than the lows six weeks ago. The markets are saying enough.

The most recent blow to the bond markets; Obama and Republicans adding another $700B to the US budget deficit by planning to cut payroll taxes by 2.0% next year. On the surface it sounds good, more money in the pockets of consumers to spend and lift the economy out of its very anemic growth. No one wants the economy to stall but adding more to the deficit is telling the world the US is still not close to being serious in dealing with US budget deficits. The end of the line of giving the US a pass on exploding deficit spending appears to have arrived.

The MBA today released its Weekly Mortgage Applications Survey for the week ending December 3, 2010. The Market Composite Index, a measure of mortgage loan application volume, decreased 0.9% on a seasonally adjusted basis from one week earlier. The Refinance Index decreased 1.4% from the previous week. This is the fourth weekly decrease for the Refinance Index which reached its lowest level since June 2010. The seasonally adjusted Purchase Index increased 1.8% from one week earlier. This is the third weekly increase for the Purchase Index which reached its highest level since early May 2010. The four week moving average for the seasonally adjusted Market Index is down 8.0%. The four week moving average is up 2.8% for the seasonally adjusted Purchase Index, while this average is down 10.9% for the Refinance Index. The refinance share of mortgage activity increased to 75.2% of total applications from 74.9% the previous week. The average contract interest rate for 30-year fixed-rate mortgages increased to 4.66% from 4.56%, with points decreasing to 0.95 from 0.96 (including the origination fee) for 80% loans. The average contract interest rate increased for the fourth consecutive week and is at the highest level since July 2010. The average contract interest rate for 15-year fixed-rate mortgages increased to 3.98% from 3.91%, with points increasing to 0.97 from 0.88 (including the origination fee) for 80% loans. The average contract interest rate increased for the second week in a row and is at the highest level since early September 2010.

At 1:00 this afternoon Treasury will auction $21B of 10 yr notes; yesterday the 3 yr was considered OK overall but it didn't meet the demand that many were expecting, adding a little to the strong sell off yesterday on the 10 yr.

Thursday, December 09, 2010

Finally, a little improvement to start the day. The 10 yr at 8:15 +8/32 at 3.24% after completing a 50% retracement from the recent low to the recent high. Technically the market is poised to bounce, it is extremely oversold after the huge and rapid climb in rates over the past three weeks. If we are correct we expect the 10 yr and mortgages are going to improve for next few days, however any improvement won't likely change the longer bearish outlook. To accomplish that the 10 yr note would have to decline below 3.00% and trade below its 20 day moving average.

At 8:30 this morning weekly jobless claims were a little better than expected, down 17K to 421K against forecasts of a decline of 11K. Continuing claims fell to 4.09 mil from 4.28 mil last week. The continuing claims figure does not include the number of workers receiving extended benefits under federal programs. The bond and mortgage markets took the better claims in stride and didn't see any selling; in fact the markets improved a few clicks. A few days ago the improvement in claims would have added to selling. That selling was absent is some evidence that the recent pounding may be over for now. The employment situation is stabilizing, a good thing but employers remain generally unwilling to hire in any significant way.

The Senate is moving to vote for the Obama/Republican plan to extend tax cuts for two more years, cut the payroll tax by 2.0% and add more stimulus to small businesses. It is almost a certainty that the Senate will pass it, and the House will go along, but Democrats do not like it. Politically it will be a Republican plan that Democrats will use against them on issues of deficit reduction talks in the next Congress. It never ends, politicians cannot get over themselves to work together; the divide is too wide and deep.

By 9:15 this morning the bond and mortgage markets have settled down with little changes in prices; as noted the markets are overdue to retrace some of the strong selling but to see strong movement it will take more than a technically oversold market. Investors will likely require higher rates over the next six months to keep funding the expanding budget deficits. Although there is consensus that the economy is recovering, the pace is too slow. The tax cut extension won't change much in the economy, consumers will continue to be cautious. The 2.0% cut on payroll tax will put money in the hands of consumers but unlikely to be noticed much. One plus in all the spending, there will be no $250.00 checks sent to those on social security, it would have been a waste and accomplish very little just as it was a couple of years ago. That the economy will just muddle along in 2011 will keep interest rates comparatively low next year, but likely higher than they are now.

At 10:00 Oct wholesale inventories were up 1.9% twice what was expected, final sales up 2.2% also stronger than thought. Treasuries and mortgages dropped a click (1/32).

The only thing left today is the $13B 30 yr bond auction at 1:00; nothing else on the schedule.

Take advantage of any price gains over the next few days; the bond and mortgage markets will remain bearish and subject to continued selling. Next week will provide fresh economic data and the FOMC meeting is next Tuesday. By 10:00 this morning mortgage prices are already down 4/32 (.12 bp) frm where they sat at 9:30.

Friday, December 10, 2010

Still more selling this morning in the rate markets; yesterday we got a little support but as is the case recently it doesn't last. This morning the news is out from China that it has raised bank reserve requirements in preparation for a possible rate increase. China's inflation rate is expanding and Chinese officials are working to slow down growth and cap inflation; that feeds to the US with increasing concerns here that our inflation rate may increase. Normally it wouldn't be that big of a problem with inflation at very low levels, but with interest rates so low any potential increase in the perception that inflation may increase will push rates higher.

At 8:30 this morning Nov import prices jumped 1.3% and exp[ort prices up 3.2%; adding more concern that inflation may be actually getting a footing. The Fed as we know wants inflation up to the Feds norm at 2.0%, currently at 0.8%. The Oct US trade deficit was $38.71B, lower than $44.4B expected and the lowest in nine months. Exports hit a two year high adding to the view the economic recovery may be increasing. PIMCO, which manages the world’s biggest bond fund, is raising its forecast for U.S. growth next year as policy makers pump a “massive amount” of stimulus into the economy, Chief Executive Officer Mohamed El- Erian said.

Congress is working on the Obama/Republican tax cut extension and cutting the payroll taxes by 2.0% next year; eventually it is expected to pass. The bond market's take is that it will increase consumer spending with the average of $1,000.00 per family additional income from the cut in payroll taxes. Presently social security and Medicare take 6.2% from employees and 6.2% from employers; the cut of 2.0% will benefit workers but employers will still pay 6.2%, workers 4.2% in 2011. For the first time since 1989, workers and companies would pay different rates for these taxes.

At 9:55 the U. of Michigan consumer sentiment index was expected to have increased to 72.5 frm 71.6; it jumped to 74.2; the 12 month out expectations index increased to 66.8 frm 64.8 and the 12 month inflation outlook was at 2.9%. The sentiment index is the third strongest since the beginning of 2008. Markets took the better data in stride and didn't worsen more than they already were prior to the report.

The bond and mortgage markets still refuse to retrace any of the swift increases in rates, even with oscillators in very oversold levels. The fact we are not seeing any profit-taking by traders suggests rates may still have more to go before markets are considered overdone on a momentary timeframe. The 10 yr note hit a high yield of 3.35% on Wednesday then backed off to 3.22% at the close yesterday; this morning back to 3.27% and mortgage prices giving back the gains seen yesterday. Still ore increases to come? Next week the economic calendar is full of measurements, likely the data will answer the question in the near term; however, in 2011 we expect rates will continue to increase as the economy improves and inflation fears increase.

Market Snapshot By Sigma Research -

Wednesday, December 01, 2010

A strong sell-off this morning in the bond and mortgage markets; the 10 yr note rate jumped to 2.29% +12 bp and mortgage prices hammered down 21/32 (.66 bp) frm yesterday's generally unchanged closes. The three day rally in US rates fueled by increased fears of expanding debt contagion in Europe pushed rates down, overnight though there were comments from Jean Claude Trichet the head of the ECB that have been seen as encouraging that leaders in Europe will face the sovereign debt issues with more urgency than has been the case. Trichet told lawmakers yesterday that he didn’t believe that financial stability in the euro zone “could really be called into question,” stoking speculation policy makers meeting tomorrow may indicate their willingness to curb the spread of the region’s debt crisis. As we have noted previously, it is a moving target with more moves than OJ Simpson; bottom line however is that the EU and ECB have to step it up, and it appears they will do that----at least at the moment. Some thinking that the ECB may do a Bernanke QE to "save" counties like Spain and Portugal; buying their notes and bonds.

Also slamming US rate markets this morning; China's manufacturing data was reported stronger than most had thought. China’s manufacturing expanded at the fastest pace in seven months in November, the country’s logistics federation said.

Interest rates prior to 8:15 were higher on the twin news; ECB and China. At 8:15 on the day loaded with key data points, the Nov ADP non-farm private jobs estimate was stronger than expected, +93K with markets thinking +58K. With rates already hit hard there was no additional selling on the strong data. ADP estimates have been running about 40K less than what the BLS data shows leading to thoughts Friday's employment report will be better than had been expected.

At 8:30 Q3 revised worker productivity, expected up 2.4%, was in line at +2.3%; Q3 unit labor costs were expected down 0.4%, as reported down just 0.1%. As with the 8:15 ADP report, no reaction to the reports in the bond and mortgage markets. With key data at 10:00 and rate markets already weak, traders unwilling to add more selling.

Keeping up with today's time line; at 9:30 the DJIA opened +160, the 10 yr note 2.93% +13 basis points and mortgage prices at 9:30 -25/32 (.78 bp) on 3.5 coupons, on the 4.0 coupon -21/32 (.66 bp).

At 10:00 Oct construction spending, expected down 0.5%, increased 0.7%.

The Nov National ISM manufacturing index, expected at 56.4 frm 56.9 in Oct, was 56.6; sub-components, new orders at 56.6 frm 58.9, employment at 57.5 frm 57.7, and prices pd at 69.5 frm 71.0. Yesterday's regional Chicago data was stronger than expected, the national data was in line with what had been expected prior to the Chicago data yesterday, many were thinking the national data would follow. No backing off in the stock market or rate markets on the in line 10:00 data.

The 10 yr note at 2.93% is approaching its high rate in the present bearish increase in rates, 2.96%; if that cracks the 10 yr will target 3.00% and push mortgage rates even higher. Can't stress it strongly enough, waiting for rates to decline will be costly to consumers and lenders. For three days the bond and mortgage markets improved a little, did you take advantage of it? The difficulty with retracements is not being sure when the market returns to trend.

Later this afternoon, at 2:00 the Fed will release its Beige Book, the Fed's detailed economic report from each of the 12 Fed districts. Normally we don't find much new in the Book, this time however with the economy showing signs of improving the Book becomes more important as to the details in it.


Thursday, December 02, 2010

reasuries and mortgages opened weaker again today following the huge selling yesterday on belief the ECB would continue to support those economies facing possible debt defaults. After Ireland required a bailout Spain and Portugal moved into the queue for their turn. Yesterday the ECB head Jean Claude Trichet was quoted that he would do what is necessary to keep sovereign debt defaults from occurring. Overnight the ECB meeting didn't come out with a US style QE but the bank said will delay its withdrawal of stimulus measures. Spanish bonds and U.K. gas gained, while U.S. Treasuries fell. Trichet said the ECB will keep offering banks unlimited loans through the first quarter. Seven-day, one-month and three- month operations will be tied to the ECB’s benchmark rate, which it left unchanged at 1.0% today. While a step in the correct direction, the bank fell short of what markets thought yesterday when the US stock market rallied and US interest rates increased the most in one day this year.

At 8:15 this morning the 10 yr note rate traded at 3.01% and mortgage prices were down 15/32 (.47 bp). By 9:00 however some improvement; the 10 yr yield fell back to 2.98%, unchanged from yesterday's close and mortgage prices at 9:00 still lower, down 6/32 (.18 bp). Technically the bond, stock and mortgage markets may have over-reacted and prices are approaching near term oversold momentum on most of the oscillators we track. After a move like we had yesterday we should expect increased volatility; early today the stock index futures were looking better but by 9:00 the DJIA futures were hugging unchanged levels.

At 8:30 weekly jobless claims were reported up 26K to 436K, continuing claims at 4.27 mil frm 4.217 mil last week. Claims data slightly worse than expected (forecasts were for an increase of 16K) but still the total weekly filings remain under 450K that many had seen as a plus in the employment sector. We don't find any particular substance to the 450K level, traders seem to like it though. Employment in the US is still hardly able to meet the increase in the number of new entrants to the job sector.

That the ECB and EU appear ready to deal with debt problems in Europe took the safety trades into US bond markets away yesterday that had provided support the previous three days is one element sending the US rates higher, however we don't hold that it was the center piece for increased rates. Economic data recently has been beating forecasts implying the economy is in fact slowly recovering, yesterday the ADP people said non-farm private jobs increased by 93K, almost double what was thought. The litany of slightly better data points in the US and China recently has put the nail in the coffin for continued low rates at the moment. Also recall that the Fed has made it clear it wants US inflation higher; the combo of better economic outlook and increased inflation levels increased rates; the likelihood that interest rates will decline now is wishful thinking, rates have seen their best levels. We hear a lot of consternation over the jump in mortgage rates, what we should focus on is that mortgage rates are still at historic low levels. Expecting mortgage rates to fall to 4.00% or lower was never in our thinking, now it is not in anyone's' thoughts.

Oct pending home sales out at 10:00, expected down 0.5%, were up a solid 10.5%; pending sales are contracts signed but not yet closed. Yr/yr however pending sales are down 20.5% compared to Oct 2009. The initial reaction added a little gain in stock indexes but no changes in the bond and mortgage markets already weaker.

Tomorrow is employment day; estimates of 145K non-farm private jobs and the unemployment rate unchanged at 9.6%. Trade today should be a lot less hectic than yesterday's strong moves. We are not expecting much change in the rate markets or in the equity markets today ahead of employment tomorrow.

Friday, December 03, 2010

What a ride! we talked about market volatility yesterday remaining extreme over the next week or so; today's Nov employment report set it up. A huge miss on estimates from analysts and economists; as we always note, trying to predict employment is difficult if not impossible. The Nov unemployment rates was widely expected to be unchanged, it jumped 0.2% to 9.8% the highest in months. Total non-farm job growth widely believed to have increased 140K were up just 39K; private non-farm jobs were expected up 145K, we got only 50K. Oct non-farm jobs were revised from 151K to +172K and Sept non farm jobs revised from -41K to -24K. The better revisions to Oct and Sept were a glimmer of a bright spot but the Nov data shocked markets. Manufacturing jobs dropped by 13,000 in November, the most in three months, economists had projected an increase of 5,000. Employment at service-providers increased 54,000. The number of temporary workers rose 39,500. Construction companies subtracted 5,000 workers and retailers let go 28,100 workers.

No matter how its sliced, the employment report has thrown a wet blanket over al the recent more positive economic data that had sent equity markets exploding this week and interest rates up. With job markets still soft the US economy isn't likely to sustain any substantial growth. Looking for anything positive from the data this morning, the upward revisions in Oct and Sept is about it.

Prior to the 8:30 employment report mortgage prices started down 15/32 (.47 bp) frm yesterday's generally unchanged prices; the 10 yr note yield was trading at 3.04% +4 bp. By 9:15 the 10 yr note yield had rallied back to 2.93% -7 bp and mortgage prices +24/32 (.75 bp) frm yesterday's close. Stock indexes got hit, at 9:15 the DJIA traded -55 points. At 9:30 the DJIA opened -40, 10 yr +17/32 at 2.93% -7 bp and mortgage prices +12/32 (.65 bp) frm yesterday's close.

Alan Greenspan on CNBC earlier this morning said the US economy may not improve but stagnate at low growth for a long time.

Two more data points at 10:00; Oct factory orders, expected down 1.2% were down 0.9%. The Nov ISM services sector index was about in line at 55.0 frm 54.3; the new orders component at 57.7 frm 56.7, prices pad at 63.2 frm 68.3, and employment component at 52.7 from 50.9. Any index over 50 is considered expansion. The reaction to the 10:00 data points has cut the early price gains in half from what we marked at 9:30. At 10:05 mortgage prices were 10/32 (.31 bp) lower than at 9:30.

The dollar being hit hard this morning on the weak employment, sending gold up and aiding the equity markets frm serious selling.

Keep your head about you today; the bond and mortgage markets remain weak and bearish; already the rate markets have given back a lot of the initial gains on the reaction to the employment report. We hear from many that there remains a belief out there that mortgage rates will decline back to recent lows; a huge mistake in thinking in my view. Interest rates are headed higher, markets may bounce a little but any improvements in prices are considered selling opportunities by traders we chat with. Expect the potential of high volatility over the next week or two. Already we are turning our focus to next week's Treasury auctions, $66B of 3s, 10s and 30s. The employment data this morning is already old news.