Friday, February 18, 2011

Market Snapshot by Sigma Research - Fridays Report

Friday, February 18, 2011
Treasuries and mortgages opened weaker this morning with little new developments in the Mid-East. After weeks of increasing protests from citizens in many Mid-East countries last night it was relatively quiet. As we noted previously, interest rate markets are increasingly concerned about the increasing strength of the economy and now after Jan PPI and CPI the worries over inflation have momentarily increased. Without safety moves into treasuries lead by the what is happening in the Mid-East the bond market will re-focus on domestic economic conditions and the potential that producers and businesses will begin to increase prices after absorbing them for months. At some point the increases in commodities will have to be passed on to consumers; we believe we are getting closer each day.

If price increases begin to surface to consumers it will likely begin in food prices, most every food commodities have increased dramatically. While the Fed continues to focus only on inflation that excludes food and energy as its gauge of inflation, and discounts much of the increases in commodities, sooner rather than later prices across the spectrum will begin to increase. Prices of non-food commodities are increasing as well; aluminum, copper, platinum, silver, oil, all have seen huge price increase as well. Once manufacturers and businesses can no longer absorb input price increases, and they are coming close, the fears of inflation will quickly rise. With interest rates as low as they are it won't take much to open the flood gates. Food prices in some areas are already being passed on in the form of lesser quantities for the same money.

There are no economic releases scheduled today, and Monday is a holiday for the bond and mortgage markets (President's Day). Looking ahead; next week Treasury is back to borrowing, Jan existing and new home sales lead the headlines. On Tuesday Treasury will auction $35B of 2 yr notes, Wednesday $35B of 5 yr notes and Thursday $29B of 7 yr notes. The total at $99B is the same as last month and the same since last Oct. As long as there is quiet in the Mid-East the bond and mortgage markets will not likely improve much and more likely see some pressure within what we now believe is a new range; basis the 10 yr note between 3.75% and 3.50%.


...."The Federal Reserve is committed to its long-standing practice of ensuring that all of its rulemakings are conducted in a fair, open, and transparent manner. Accordingly, we are disclosing on our public website summaries of all communications with members of the public--including banks, trade associations, consumer groups, and academics--regarding matters subject to a proposed or potential future rulemaking under the act....." Bernanke before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate yesterday. Bull! The Fed is completely ignoring the mortgage broker industry, trying to dictate how originators are paid with little or no regard to the impact on professional mortgage originators that don't want to work for a bank....socialism from the Fed. Bernanke says the right things but doesn't actually back it up. Non-bank mortgage lenders are ignored in favor of those large banks that the Fed and Comptroller of the Currency regulate. Bernanke knows full well where most of the blame lies for the sub prime crisis that almost collapsed global economies.

....."The preferences of foreign investors for highly rated U.S. assets, together with similar preferences by many domestic investors, had a number of implications, including for the relative yields on such assets. Importantly, though, the preference by so many investors for perceived safety created strong incentives for U.S. financial engineers to develop investment products that "transformed" risky loans into highly rated securities. Remarkably, even though a large share of new U.S. mortgages during the housing boom were of weak credit quality, financial engineering resulted in the overwhelming share of private-label mortgage-related securities being rated AAA. The underlying contradiction was, of course, ultimately exposed, at great cost to financial stability and the global economy....." Ben Bernanke at the Banque de France Financial Stability Review Launch Event, Paris, France this morning. The Fed will admit the sub-prime mortgage disaster was primarily the responsibility of Wall Street but still is trying to lay much of it on mortgage originators with its attempt to rule how LOs are compensated, aligning itself with the large banks that are dead set on taking control of all mortgage lending that will without any doubt cost consumers more.

Thursday, February 17, 2011

Market Snapshot by Sigma Research - Thursdays Report

Thursday, February 17, 2011
Treasuries and mortgages are doing better this morning; weekly jobless claims at 8:30 were right on, up 25K to 410K after tumbling 36K last due to bad weather. Continuing unemployment claims were essentially unchanged from last wee. Jan consumer prices rose 0.4% slightly higher than 0.3% estimate, removing food and energy CPI up 0.2% also slightly higher than 0.1% estimate. Yesterday Jan producer prices increased 0.8% about in line but when food and energy are left out the core jumped 0.5% much stronger than 0.2% estimates. Markets talk a lot about inflation concerns but the action in the interest rate markets appears to be ignoring any real concern so far.

At 10:00 Bernanke is testifying before Senate Banking Committee on Dodd-Frank reforms, with SEC Chair Mary Schapiro, FDIC Chair Sheila Bair, and CFTC Chair Gary Gensler, in Washington. He is not addressing either the status of the economy or monetary policy. He is staying on message on how the Fed is helping to establish the new Bureau of Consumer Financial Protection (CFPB).
Two reports at 10:00; Jan leading economic indicators expected +0.2% were up 0.1%, Dec revised to +0.8% frm 1.0%; no big concern. The Feb Philadelphia Fed business report, one of the Fed's favorites, jumped to 35.9 from 19.3 in Jan and well over the estimates of 21.9. The sub-components were better but not as powerful as the headline; new orders were about unchanged, 23.7 frm 23.6, employment at 23.6 from 17.6 and prices pd at 67.2 frm 54.3. Any index above zero is considered expansion, the higher the stronger. The initial reaction took the 10 yr note price down a little and mortgages dropped a touch; both still holding gains on the day. The stock market bounced of lows but still weaker.

The US bond market has been improving over the past week, not in huge chunks but steadily edging higher in price and lower in yields. The market appears to be ignoring recent economic data and inflation increases in Europe and Asia, event yesterday with US PPI core increasing over two and a half times estimates and a slight increase this morning in core consumer prices. We noted a few days ago that the turmoil ion the mid-east would likely spread to many nations; after Egypt and Tunisia were successful in toppling present regimes other countries are experiencing some of the same protests. This morning in Bahrain riots increased, protestors being tear gassed and shot at; Bahrain is the base for the Navy's 5th fleet. Reports coming from all over the mid-east; most not momentarily serious but as unrest spreads investors slowly adding to safe haven moves in US treasuries. Minor protests now in Qatar, Saudi Arabia, Iran and Libya in N. Africa. Geo-political issues now trumping domestic economic and inflation considerations on moves to safety trades increases.

While the Treasury and mortgage markets have improved on the increasing unsettled situation in the Mid-East and N. Africa, the technical situation in both markets remains bearish. The key momentum oscillators, key moving averages, and our proprietary models are still throwing off bearish readings. We believe the bond market is being supported by safety moves into treasuries, a slow process so far but as more reports of rioting and protests continue to expand from one nation to another in the region less attention is being directed to the improving economic outlook and inflation concerns. Until now the moves into safety have been rather moderate, if however tensions in the region continue to escalate the bond market will see more buying and take mortgage prices higher with them. Although in hindsight we have missed some opportunities we will keep our discipline and continue our slightly bearish bias until our models change and technicals turn positive.

Tuesday, February 15, 2011

Market Snapshot by Sigma Research - Tuesdays Report

Tuesday, February 15, 2011
Treasuries and mortgage markets started weaker this morning prior to 8:30 data. At 8:30 three data points were released. Jan retail sales were lower than expected at +03% against +0.6% expected, excluding auto sales up 0.3% also against estimates of +0.5%. We question the reliability of the data, as noted previously severe weather in most of the country in Jan likely distorted the data. Whether the sales would have been better or worse due to the weather is difficult to interpolate. Dec retail sales were revised slightly lower but not much.

The second report this morning, the Feb NY Empire State manufacturing data; the overall index was expected at 15.0 frm 11.92 in Jan, as reported it increased to 15.43. The new orders component fell however, to 11.8 frm 12.29; employment also fell, to 3.6 frm 8.42 and prices pd increased to 45.78 from 35.79. Overall the NY report didn't quite meet expectations.

The third report at 8:30; Jan export and import prices; import prices for the month increased 1.5% while export prices were up 1.2%. Yr/yr import prices increased 5.3% while yr/yr export prices increased 6.8%.

Weaker retail sales and softer NY Empire State manufacturing put a bid in the rate markets, prior to the 8:30 releases the 10 yr note traded off 7/32 and mortgage prices were down 5/32 (.15 bp). At 8:45 the 10 moved to unchanged on the day and mortgage prices improved to unchanged.

At 9:30 the DJIA opened -29, the 10 yr note -3/32 and mortgage prices -2/32 (.06 bp).

Dec business inventories rose 0.8% slightly better than 0.7% expected. Sales were up 1.1% with the sales to inventory ration at 1.25 months unchanged from Nov.

The final data point today, at 10:00 the NAHB housing market index, expected unchanged from Jan at 16, was at 16 the 4th month at that level.

As you know, markets are continuing to fret over inflation levels; in the US we don't see it but in England the inflation rate announced this morning was double what the Bank of England wants; up 4.0%. While we don't see it yet in the US Europe's and China's rates are increasing. Even with little inflation here, the increases in inflation around the globe will add additional pressure to US bond markets.

Yesterday the budget battle started with the Administration's 2012 release of it's budget. As noted yesterday, it is dead in the water from the start. A baby step that doesn't mention the entitlement programs that must be cut to bring down the expanding annual deficits. This yr the deficit is estimated at $1.5T and may actually exceed that amount. The first shot yesterday came from the Sec of Defense, Gates; he isn't happy with cuts to military projects for new planes and other weapons. Imagine when someone in power actually starts talking about cuts in entitlements. Unless our deficits are brought under control and are believable to foreign investors that fund our shortfall US interest rates will increase to double digits within two years. Without the world funding the US deficits the long term outlook for US interest rates and the economy is not good to say the least. In the end we are left with the question; who will take up the battle (politicians) and put the country's interest ahead of their individual interests?

The outlook for interest rates is still for a gradual move higher, however we continue to hold that rates won't increase much. The 10 yr note no higher than 4.00% and 30 yr mortgages holding at 5.5%.

Monday, February 14, 2011

Market Snapshot by Sigma Research - Mondays Report

Monday, February 14, 2011
Greetings from Las Vegas. Markets are starting quietly this morning; today has no economic data to work on but the Administration is releasing the 2012 budget. The annual ritual, the budget next year as presented this morning at 10:30 is another miss as far as the deficit is concerned. The President's own commission that was charged to come up with ways to cut the debt, the recommendation from the bi-partisan group called for cuts of $4.0T, as presented this morning it will cut just $1.4T over the next three years. Nothing in the budget on dealing with the elephants; social security and Medicare or an admission that taxes will have to increase.
The deficit for the current fiscal year is forecast to hit a record $1.6 trillion -- 10.9 percent of gross domestic product -- up from $1.4 trillion the administration estimated previously, according to documents released this morning by the administration. It would fall to $1.1 trillion in fiscal 2012, the fourth consecutive year of deficits exceeding $1 trillion. By 2015 it would decline to $607 billion, or 3.2 percent of GDP.
While some of the lowest borrowing costs on record have helped the economy recover from its worst financial crisis since the Great Depression, bond yields are now rising as growth resumes. Net interest expense will triple to an all-time high of $554 billion in 2015 from $185 billion in 2010, according to the Obama administration’s adjusted 2011 budget.
Last week the bond and mortgage markets were focused on Treasury auctions with very little on the economy; this week markets have a number of economic reports to work on beginning tomorrow through Thursday.
This Week's Economic Calendar:
Tuesday;
8:30 am Jan retail sales (+0.5%, ex autos +0.6%)
Feb NY Empire State manufacturing index (16.0 frm 11.92 in Jan)
Jan Import and Export prices (N/A)
10:00 am Dec business inventories (+0.7%)
NAHB Feb housing market index (16 unch frm Jan)
Wednesday:
7:00 am MBA mortgage applications
8:30 am Jan housing starts and permits (starts +2.4% to 540K; permits -8.7% to 580K)
Jan PPI (+0.7%; ex food and energy +0.2%)
9:15 am Jan industrial production (+0.6%)
Jan capacity utilization (76.4% frm 76.0 in Dec)
2:00 pm FOMC minutes from 1/26 meeting
Thursday;
8:30 am weekly jobless claims (+27K to 410K)
Jan CPI (+0.3%, ex food and energy +0.1%; con't claims to 3.90 mil frm 3.88 mil)
10:00 am Jan leading economic indicators (+0.2%)
Feb Philadelphia Fed business index (21.9 frm 19.3 in Jan)
The revolutions in Tunisia and Egypt have settled but we expect more to come from the mid-east. This morning there are rep[orts that people are getting roiled in Bahrain with security forces using tear gas and rubber bullets to quell the unrest. Expect more to come in the mid-east region; so far no serious violence, lets hope it stays that way. in the meantime the US must review and change man of its policies in the region.
Very quiet so far this morning; the DJIA opened -10 but is sliding lower. The rate markets generally unchanged so far but if equity indexes work lower it will support the bond market. We still do not want to float rates, best to lock as the bond and mortgage markets remain bearish fundamentally and technically.

Friday, February 11, 2011

Market Snapshot by Sigma Research - Fridays Report

Friday, February 11, 2011
Treasuries and mortgages opened better this morning after Treasury auctions. The 10 yr note continues to imp[rove after the spike up in rates last week, mortgages also tracking better. Not much driving news this morning, most talk is about Egypt but in terms of market impacts there hasn't been any. Mubarak didn't resign yesterday as media reported he would, demonstrators still there. Mubarak apparently has left Cairo and will continue as leader in name only but Egyptians still wanting him to resign now.

Economic data this morning had Dec wholesale trade balance at 8:30, the deficit was as expected, -$40.58B. The US imported that much more than we exported; no news there, it has been that way for years and will not change. The only significance to the report is the amount of deficit; less is good as a measurement of US competitiveness.

At 9:55 the morning the U. of Michigan consumer sentiment index, expected at 75 from 74.2, was 75.1. The current conditions component at 86.8 frm 81.8, expectations index at 67.7 frm 69.3 and the 10 month outlook at 78 frm 87. Treasuries and mortgages improved a little on the data with a less positive outlook. The sentiment index is volatile, we don't place a lot of emphasis on it but today's weaker current conditions, expectations and 12 month outlook will need to be monitored.

Foreclosure filings in the U.S. fell 17 percent in January from a year earlier, the fourth straight month of declines, as legal scrutiny of lender practices slowed actions against delinquent homeowners, RealtyTrac Inc. said. A total of 261,333 U.S. properties received notices of default, auction or seizure, the Irvine, California-based data seller said today in a statement. One in every 497 households got a filing. It was the third consecutive month with fewer than 300,000 filings, following 20 straight months above that mark. “Unfortunately, this is less a sign of a robust housing recovery and more a sign that lenders have become bogged down in reviewing procedures, resubmitting paperwork and formulating legal arguments related to accusations of improper foreclosure processing,” James J. Saccacio, RealtyTrac’s chief executive officer, said in the statement. (Bloomberg News)

Treasury Sec Geithner and Housing and Urban Development Secretary Shaun Donovan presented three approaches for a future housing finance system. It also calls for the government to shrink “and ultimately wind down” Fannie Mae and Freddie Mac, the bailed-out government-sponsored enterprise companies that helped fuel the housing bubble before being felled by investments in subprime mortgages. We won't take time now to go over the three plans, none of which will be fully implemented as presented, it is however going to happen. The time frame is long, possibly as soon as five years, more likely longer than that. At this time it isn't something to be focused on other than following the process over the next year or two.

Thursday, February 10, 2011

Market Snapshot by Sigma Research - Thursdays Report

Thursday, February 10, 2011
Weekly jobless claims at 8:30 were another surprise; claims were expected to be down 3K to 412K as reported claims fell 36K to 383K, the lowest level of weekly filings since July 2008. Continuing claims also fell more than expected, to 3.888 mil frm 3.935 mil. Measuring the actual status of the employment sector is increasingly more difficult. In Jan the unemployment rate fell to 9.0% from 9.4% in Dec, non-farm jobs were anemic at best. Today weekly claims added more confusion. Is the weather the culprit or is the employment situation actually better than most believe? Eighteen states and territories reported an increase in claims, while 35 had a decrease. The initial reaction to the data wasn't much, the stock indexes didn't budge, the rate markets held levels prior to the report. By 9:00 however the bearish interest rate markets did back off, prices of mortgages and treasuries fell.

Recent employment data is almost impossible to square with conflicting data becoming the norm. Spinning the employment report in either direction to fit ones outlook has become easy with recent data points measuring the job sector. Earlier this week a Labor Department report showed job openings in the U.S. decreased by 139,000 to 3.06 million, the fewest since September. The number of people hired also dropped along with the number of workers fired. Fed Chairman Bernanke told the House Budget Committee yesterday that while the declines in the jobless rate in December and January “do provide some grounds for optimism,” companies need to hire more to reduce joblessness. “With employers reportedly still reluctant to add to their payrolls, it will be several years before the unemployment rate has returned to a more normal level,” Bernanke said.

At 9:30 the stock market opened weaker; the DJIA down 50 on the open. The 10 yr note lower in price with its yield up 2 basis points on the new 10 yr auctioned yesterday. Mortgage prices at 9:30 -7.32 (.22 bp)

At 10:00 Dec wholesale inventories, expected up 0.6%, were up 1.0%. Sales increased 0.4% with consensus at +1.3%; the sales to inventory ratio at 1.16 months from 1.5 months in Nov. No initial reaction to the report.

At 1:00 Treasury will auction $16B of 30 yr bonds; the 10 yr auction yesterday was exceptionally well bid fueling short-covering and improvement in the rate markets.

Over night the Bank of England left its base interest rate unchanged as expected. Stock markets in Europe all weaker today. Today’s debates were based on new quarterly economic forecasts, that will be released on Feb. 16. Inflation accelerated to 3.7% in December, the fastest pace in eight months, and the rate may rise above 4% before easing to the bank’s 2% target. Food prices increased the most in 19 months in January. The BOE as well as Germany and other European countries facing inflation while here in the US our Fed is more concerned that our inflation remains too low.

The recent spike in interest rates wasn't unexpected; the rate markets have been technically bearish for three months. Rates likely will continue to increase through the year however we still hold that while rates are likely to increase the magnitude won't be severe. Presently we are not expecting the bellwether 10 yr note to exceed 4.00% and mortgage rates to hold at 5.50%.

Wednesday, February 9, 2011

Market Snapshot by Sigma Research - Wednesdays Report

Wednesday, February 09, 2011
A better start this morning in the bond and mortgage markets. As we noted in yesterday's 4:30 comments the rate markets are temporarily oversold after seven consecutive days of prices falling and yields increases. Technically both the bellwether 10 yr note, driver of MBSs and the MBSs themselves are now registering very oversold momentum oscillators and some rebound is likely. While improvement is likely, it will not change the overall bearish longer term outlook for the rate markets. We suggest using any improvements to get deals done but not adopt a bullish view. Although we have been bearish on rates since last Nov, we still hold that interest rates for mortgages will not increase over 5.5% and the 10 yr note won't move above 4.00% this year. Any improvements in longer term rates should be seen as opportunities, interest rates will not likely fall much from these current levels.

Markets were rattled yesterday on very weak demand frm foreign investors for the $32B 3 yr notes sold at the Treasury auction. After the recent spike in rates traders were more optimistic than they should have been that the 3 would see strong demand. At last month's 3 yr auction it was the same; it didn't see much demand. Today Treasury will offer $24B of new 10 yr notes, the demand should be much better, just as it was for last month's 10 yr.

Ben Bernanke is about to begin his testimony to the House Budget Committee; the first such appearance under the Republican leadership. He will be questioned on economic issues, trade issues, the dollar's worth, the Fed's quantative easing that has come under increasing fire both within the Fed and in Congress. When initiated last Nov Bernanke made the point that by buying $600B of treasuries would keep interest rate low; most bought into it, we however said it wouldn't and of course it didn't. Congress will ask today whether the Fed will do another easing move; Bernanke will dance around it but it is highly unlikely there will be more money printing-----so-called easing is over. The economy is recovering, slowly but nicely; the Fed should stop. An increasing number of Fed officials are voicing opposition. The Fed is continuing to chip away at purchases everyday; today $6 to $8B of issues maturing 2015/2016.

The weekly MBA mortgage applications out early this morning for the week ending February 4, 2011. The Market Composite Index, a measure of mortgage loan application volume, decreased 5.5% from one week earlier. The Refinance Index decreased 7.7% from the previous week. The seasonally adjusted Purchase Index decreased 1.4% from one week earlier.
The four week moving average for the seasonally adjusted Market Index is down 0.9%. The four week moving average is down 0.8% for the seasonally adjusted Purchase Index, while the average is down 1.5% for the Refinance Index. The refinance share of mortgage activity decreased to 66.6% of total applications from 69.3% the previous week. This is the lowest refinance share observed in the survey since the beginning of May 2010. The adjustable-rate mortgage (ARM) share of activity increased to 5.9% from 5.5% of total applications from the previous week. The average contract interest rate for 30-year fixed-rate mortgages increased to 5.13% from 4.81%, with points decreasing to 0.84 from 1.02 (including the origination fee) for 80%loans. This is the highest contract 30-year rate recorded in the survey since the week ending April 9, 2010. The 32 basis point jump is the largest rate increase since June 2009. The average contract interest rate for 15-year fixed-rate mortgages increased to 4.29% from 4.13%, with points increasing to 1.02 from 1.01 (including the origination fee) for 80% loans. This is the highest contract 15-year rate recorded in the survey since the week ending May 7, 2010.

The rest of the day is about Bernanke's testimony and the results of the $24B 10 yr note auction at 1:00 this afternoon.
________________________________________

Tuesday, February 8, 2011

Market Snapshot by Sigma Research - Tuesdays Report

Tuesday, February 08, 2011
Treasuries and mortgage markets opened softer this morning but nothing major. Over night China raised interest rates for the third time since the middle of Oct as its inflation rate hangs at 4.0% for the third month. In Europe German Dec industrial production fell unexpectedly for a second consecutive month on colder weather that hampered construction, down 1.5% frm Nov and against +0.2% that was expected. The US stock market isn't being hit early but with the weaker data from Germany Europe's stock markets trading lower. In Germany, where the economy is booming and import-price inflation is running at the fastest pace in 29 years, workers are demanding bigger pay increases. Inflation concerns are spreading abroad (China, India, Germany to name a few); not here yet but investors in long term fixed income investments (10 yr notes and 30 yr bonds and long term corporates) are not waiting for the whites of the eyes. With interest rate so low any thoughts of inflation are going to pressure rate markets.

Are we headed for an increase in inflation? If so, will it be much of an increase? Inflation concerns are currently based on rising energy and commodity prices, it depends on whether commodity prices remain at these or higher levels; producers and businesses so far have been able to absorb price increases but that is likely over. Unless prices decline inflation will increase a little; the Fed wants it up to 2.0% frm the present 0.8% to 1.0% rate. The bond market is moving up in yield anticipating deflation is now dead, with the very low existing rates just the talk of a small increase in inflation has driven rates up 30 basis points on the 10 yr and 20 basis points on mortgages in less than a week.

Earlier this morning Richmond Fed's Lacker was speaking, he said he wants the Fed to re-consider the remaining QE 2 now that the economy is growing faster than the Fed expected. Lacker has been dissenting on about every QE move the Fed has undertaken. He is concerned that inflation will increase as it is in China and many emerging markets. It is highly unlikely the Fed will abandon QE 2 but equally unlikely there will be a QE 3 as some have mused recently. Lacker estimates the US economy to grow 4.0% this year; he sees a better jobs market, "robust" consumer spending, and the inflation rate between 1.5% and 2.0%.

The Johnson Redbook retail report this morning reported chain store sales for the first week of Feb up 1.7% frm Jan; yr/yr +2.7% frm the the first week of Feb. 2010.

Looking to tomorrow, Ben Bernanke is scheduled to testify at the House Budget Committee. He will be grilled to explain what the Fed is planning to withdraw its easing. His testimony is the first that we don't have Barney Frank running to testimony, although barney will have his moment. With Republicans now in control of the committee the hearing will get a lot of attention.

The only thing scheduled today is the $32B 3 yr note auction at 1:00 this afternoon. Auctions this week will be interesting to monitor as yields have broken out of their month and a half long ranges and may entice buyers at these higher levels. If demand isn't strong look for the bond and mortgage markets to work higher in rate and lower prices. The 3 yr usually sees decent demand, tomorrow's 10 yr auction is what we are concerned with, weak demand will push mortgage rates higher.

Monday, February 7, 2011

Market Snapshot by Sigma Research - Mondays Report

Monday, February 07, 2011
The bond and mortgage markets opened weaker today after the big increases last week. At 8:45 the 10 yr note -7/32 to 3.67% +2 bp and mortgage prices -5/32 (.15 bp). Last week the dam that had held all attempts to push rates up broke opening the flood gates and driving prices lower and yields up. The only surprise was that it took as long as it did to break out of the bearish technical pattern; it should not have been much of a jolt except for those that refused to accept that interest rates were going higher. Better economic outlook and growing concern that the Fed may get its wish, getting the inflation up to 2.0% has finally engaged with investors and traders.

While last week was somewhat rattling for the mortgage markets we are not looking for a huge increase in rates this year. Likely the highest we will see is the 10 yr note moving up to 4.00% with occasional rallies within a new trading range from 3.50% to 4.00% for the next few months.

For a few months markets have wrestled with the outlook for inflation; prices of commodities were increasing rapidly but until the past two weeks there was little concern businesses and producers were going to absorb the increases. The reality sank in last week, prices of finished goods and foods will begin to be passed on to consumers. The government and the Fed have consistently ignored food and energy price changes when measuring inflation, the Fed still does. With the economy growing this year and emerging markets and the BRIC countries moving to curb their growing inflation rates concern has increased in the US as well. The Fed will not increase the FF rate this year and maybe not next year, but the Fed cannot control long term rates as easily as very short rates. With long term rates as low as they are any sniff of potential increases in inflation, even a little smell the bond and mortgage markets will move higher.

Russia, the only one of the so-called BRIC countries without capital controls, is following China and Turkey in relying on reserve requirements to drain cash from the economy and avoid luring more speculative investment. The central bank on Jan. 31 increased the mandatory reserve ratio while unexpectedly leaving its deposit rates unchanged after inflation in January accelerated to the fastest in 15 months. Policy makers cited the threat of rising capital inflows driven by higher oil prices. Emerging economies are weighing the need to curb inflation against the risk of attracting speculative capital from near- zero interest rates in the U.S. and Europe.

This Week's Economic Calendar:
Today;
3:00 pm Dec consumer credit (+$2.5B)
Tuesday;
1:00 pm $32B 3 yr note auction
Wednesday;
7:00 am Weekly MBA mortgage applications
1:00 PM $24B 10 yr note auction
Thursday;
8:30 am weekly jobless claims (-2K to 413K)
10:00 am Dec wholesale inventories (+0.7%)
1:00 pm $16B 30 yr bond auction
2:00 pm Jan Treasury budget (-$50.0B)
Friday;
8:30 am Dec trade balance (-$40.7B)
9:55 am U. of Michigan consumer sentiment mid-month index (75.5 frm 74.2)

At 9:30 the DJIA opened +24, the 10 yr note yield 3.68% +3 bp and mortgage prices -9/32 (.28 bp). Unlikely interest rate markets will improve through the day with $72B of notes and bond auctions this week starting tomorrow. Investors and traders convinced inflation concerns would not increase are now in the process of reassessment given the technical breakout last week and growing real inflation fears spreading from emerging markets to all economies. That interest rates are as low as the are, any chatter that inflation MAY increase will pressure the long end of the curve and send mortgage rates higher.

Friday, February 4, 2011

Market Snapshot by Sigma Research - Fridays Report

Friday, February 04, 2011
It is the first Friday of the month, the day each month we suffer through the monthly employment report. Suffering to understand and make sense of it is the norm and today is no different. Recent employment reports are getting even more difficult to manage than the norm. Today non-farm payrolls were expected to be up about 140K give or take, with private non-farm jobs +160K give or take; what we got was non farm jobs up just 36K and private jobs up 50K. In Dec the unemployment rate fell from 9.6% in Nov to 9.4%, Jan was supposed to see the rate up to 9.5%, what got was the unemployment rate fell to 9.0%.

Unless you are a mystic or an economist that can twist data like spaghetti on a fork, the employment report always has something for everyone, at the end of the day though it will remain difficult to understand. One has to just accept what analysts settle on. The report this morning makes little sense; we know that the unemployment rate is determined by telephone surveys, we know that a respondent that answers that he/she is not looking for a job even though unemployed, they are not considered unemployed. The non-farm jobs also begs debate, every regional report and the two national ISM reports (manufacturing and services) have shown increases in the employment component yet today's anemic 36K total non-farm jobs gain and +50K private jobs doesn't square.

That job growth was well short of forecasts is likely due to weather; construction jobs and other jobs that bad weather can impact may have caused the soft job gains. Dec and Nov revisions added an additional 40K jobs from previous reports. Average hourly earnings increased 0.4% one of the biggest increases seen in a long time and that in itself has put pressure in the rate markets as another indication inflation may be getting a toe hold.

Summing; the employment report today should be taken with that grain of salt. Job growth is better than the report indicated, the unemployment rate is closer to 10.0% than 9.0% and if those not looking for jobs want jobs then the unemployment is closer to 15%.

Interest rates have broken out of their well-defined and long term range; the 10 yr at 3.58% at 10:00 is headed to 3.75% the next target and mortgage rates will also increase. Inflation fears, the economic strength, increasing interest rates around the globe coming; all will keep rates from declining.

The DJIA opened -4 points at 9:30, the 10 yr note -9/32 at 3.59% +4 bp and mortgage prices at 9:30 -4/32 (.12 BP).

Nothing else for the markets to think about today. Next week Treasury will auction $72B of notes and bonds. We are now sellers on any rallies in the rate markets.

Thursday, February 3, 2011

Market Snapshot by Sigma Research - Thursdays Report

Thursday, February 03, 2011
Interest rate markets continued to sell-off this morning; the 10 yr note moving slightly out of its six week range, at 9:00 am the 10 yield at 3.52% and likely will test the intraday high rate at 3.55% hit on Dec 16th. Mortgage prices down 8/32 (.25 bp) at 9:00 am.

8:30 data was a mixed picture; weekly jobless claims fell 42K to 415K, estimates were for a decline of 19K. Continuing claims were lower, 3.925 mil from 4.009 mil. Q4 worker productivity was better, up 2.6% a little better than +2.3% expected. Q4 unit labor costs fell 0.6%, forecasts were a decline of 0.1%. The better productivity brings debate about future hirings, stronger productivity implies less need for new hires. That said, productivity is a lot weaker now than it was two years ago.

January chain store sales were surprisingly strong with most expecting a soft Jan due to weather conditions, it didn't happen. The results counter the weakness reported by ICSC-Goldman and Redbook which had been warning of strongly negative weather effects. Today's reports point clearly to another month of strength for the ex-auto ex-gas category of the monthly retail sales report.

The DJIA opened down 12 points at 9:30, the 10 yr note at 3.54% +6 bp and mortgage prices -9/32 (.28 bp) frm yesterday's close. (see below for 10:10 levels)

More key data at 10:00; the Jan ISM services sector index, expected at 57.0 frm 57.1 jumped to 59.4. Yet one more data point that beats estimates; the employment component increased to 54.5 frm 52.6, the new orders component increased to 64.9 frm 61.4 and the price component increased to 72.1 frm 69.5. Any of the indexes above 50 is expansion, the higher the stronger.

Dec factory orders out at 10:00, expected to be down 0.4%; increased 0.2% and Nov orders revised from +0.7% to +1.3%.

The two 10:00 reports pushed the 10 yr to 3.55% before backing off momentarily. Mortgage prices held lower at -9/32 (.28 bp).

Markets still have Bernanke to think about; he will be speaking to the National Press Club in Washington, taking questions from reporters.

Overnight the ECB left interest rates unchanged after rattling markets recently with comments that the bank would begin tightening to head off inflation. The bank is weighing the risk of faster inflation against the danger that higher borrowing costs could worsen the region’s sovereign debt crisis. Trichet said last month that while the jump inflation is “temporary,” risks to the price outlook “could move to the upside.” That prompted investors to bring forward expectations for an ECB rate increase to as soon as the third quarter. ON inflation, ECB's Trichet like Bernanke, talking tough on inflation but finding good reasons not to raise rates and run the risk of choking off economic recovery.

The situation in Egypt remains tense but still having little or no impact on financial markets as most continue to believe the situation will not spread to other mid-east countries. Crude oil doesn't need much of a reason to increase as it has but not much. News now from Egypt is that reporters are being rounded up and buildings being searched to find anyone with a camera; what isn't clear is who is doing it---Mubarak followers or Mubarak protestors.

Technically, the bond and mortgage markets are increasingly bearish; the 30 yr FNMA coupon failed at its key 20 and 40 day averages, the 10 yr note is moving out of its almost two month trading range to higher yields. We have been saying for months interest rates are headed higher, the economy can't be ignored for its strength, prices are increasing but so far haven't filtered down to consumers. The general outlook for global rates is for increases from emerging markets to China to Europe and here in the US. The Fed can control short term rates but isn't much of a force for long term rates, investors and traders increasingly moving out of bonds and into equities just what Bernanke wants. The equity markets haven't rallied on the better economic reports this morning keeping the rate markets from deteriorating further.

Market Snapshot by Sigma Research - Wednesdays Report

Wednesday, February 02, 2011
Prior to 8:15 this morning treasuries and mortgages were doing a little better with US stock indexes slightly weaker after the strong rally yesterday. The 10 yr note at 8:00 +7/32 to 3.42% -2 bp and mortgages +4/32 (.12 bp). At 8:15 the infamous and market-unsettling ADP employment estimate for Jan; ADP was expected to show an increase of 140K/150K jobs, as reported up 187K. The ADP report on jobs in Dec sent markets scrambling when the company reported job growth of 297K, in the report this morning they revised it to 257K. After the huge miss on jobs in Dec (BLS reported 113K non-farm private jobs), most traders simply ignored the report as they should. Over the previous six reports, ADP’s initial figures were closest to the Labor Department’s first estimate of private payrolls in July, when it understated the gain in jobs by 29,000. The estimate was least accurate in December, when it overestimated the employment gain by 184,000.

Today’s ADP report showed an increase of 21,000 workers in goods-producing industries, which includes manufacturers and construction companies. Service providers added 166,000 workers. Employment at factories increased 19,000 jobs, ADP said. Companies employing more than 499 workers expanded their workforces by 11,000 jobs. Medium-sized businesses, with 50 to 499 employees, created 79,000 jobs and small companies increased payrolls by 97,000.

The "official" employment report hits on Friday; estimates are for an increase of 140K jobs. Already economists and analysts are hedging their estimates because of the weather issues that have hammered much of the east through Jan. One thing is likely, the actual report won't be near the estimates; either much stronger or much weaker, take your pick.

It is Wednesday; the MBA released its Weekly Mortgage Applications Survey for the week ending January 28, 2011. The Market Composite Index, a measure of mortgage loan application volume, increased 11.3%. The previous week did not include a holiday adjustment for Martin Luther King, Jr. Day. The Refinance Index increased 11.7% from the previous week. The seasonally adjusted Purchase Index increased 9.5% from one week earlier. The four week moving average for the seasonally adjusted Market Index is up 1.0%. The four week moving average is down 1.5% for the seasonally adjusted Purchase Index, while this average is up 1.7% for the Refinance Index. The refinance share of mortgage activity decreased to 69.3% of total applications from 70.3% the previous week. This is the lowest refinance share observed in the survey since the week ending May 14, 2010. The adjustable-rate mortgage (ARM) share of activity increased to 5.5% from 5.2% of total applications from the previous week. The average contract interest rate for 30-year fixed-rate mortgages increased to 4.81% from 4.80%, with points decreasing to 1.02 from 1.19 (including the origination fee) for 80% loans. The average contract interest rate for 15-year fixed-rate mortgages increased to 4.13% from 4.12%, with points decreasing to 1.01 from 1.26 (including the origination fee) for 80% loans.

At 9:15 Treasury announced the details of next week's quarterly refunding. Tuesday $32B of 3 yr notes, Wednesday $24B of 10 yr notes and Thursday $16B of 30 yr bonds. The total of $72B is in line with what dealers were expecting.

At 9:30 the DJIA opened down 21, the 10 yr note +6/32 3.42% -2 bp and mortgage prices +5/32 (.15 bp).

We are not expecting much for the rate markets today. Friday's Jan employment report looms and next week Treasury will conduct its quarterly refunding auctioning $72B of notes and bonds. By 10:00 the 10 yr and mortgages have already drifted off their best levels seen prior to 9:30 when the equity markets opened. The 10 still confined to its six week range, mortgages also stuck in their tight range keeping mortgage rates essentially unchanged for the past month. We continue our longer term bearish outlook for interest rates, the economic recovery is improving and inflation while not yet an issue, prices pd for commodities and energy are increasing and keeping investors and traders reluctant to press the bond market much.

Market Snapshot by Sigma Research - Tuesdays Report

Tuesday, February 01, 2011
More selling in the bond and mortgage markets this morning; at 8:30 the 10 yr note -15/32 at 3.43% +5 bp and mortgage prices -11/32 (.34 bp). Yesterday the 10 declined 11/32 to 3.38% +5 bp, mortgage markets held well against treasuries, off just 4/32 (.12 bp) in price. The stock market managed a gain yesterday after the 166 point decline in the DJIA on Friday; better economic data continues to fortify investors. Dec personal spending yesterday was better than what was thought and the Chicago purchasing mgrs index was the highest since July 1998.

At 9:30 the DJIA opened 43 points higher ahead of the ISM manufacturing report. The 10 yr note at 9:30 -16/32 3.44% +6 bp and mortgage prices -11/32 (.34 bp).

This morning two reports hit at 10:00; the Jan ISM national manufacturing index, expected at 58.0 frm 57.0 in Dec.The overall index increased to 60.8, the highest since 2004; the sub components were also much better. New orders index at 67.8 frm 62.0, prices pd really is increasing, 81.5 frm 72.5 and employment increased to 61.7 frm 58.9. Any reading over 50 is considered expansion. The initial reaction sent interest rate markets lower in price after already being substantially lower early.

U.K. manufacturing grew at a record pace in January as domestic and export demand boosted orders. The gauge based on a survey of companies by Markit Economics and the Chartered Institute of Purchasing and Supply surged to 62 from a revised 58.7 in December, like the US ISM manufacturing index, any read over 50 is considered expansion.

Also at 10:00 Dec construction spending, the estimate is an increase of 0.2%; late last week estimates were for a decline of 0.5%. As released spending fell 2.5%. Traders not concerned with it as the ISM data overrides the volatile construction spending.

Retail sales in Jan have been negatively impacted by bad weather; the Johnson Redbook US chain store sales for Jan were down 0.9% frm Dec, sales were up 1.8% however from a year ago. Another retail sales report, the ICSC-Goldman store sales confirmed the weather related decline in Jan; sales were 1.0% in Jan but up 1.6% from Jan 2010. The measure of comparable store sales at major retail chains, published by the International Council of Shopping Centers, is related to the general merchandise portion of retail sales. It accounts for roughly 10% of total retail sales. We were looking for Jan sales as confirmation of the pace of recovery, unfortunately weather has made the data less reliable.

Germany reported an increase in employment; unemployment fell to an 18- year low in January. The number of people out of work declined a seasonally adjusted 13,000 to 3.135 million, the lowest since November 1992, the Nuremberg-based Federal Labor Agency said today. Economists forecast a drop of 10,000, according to the median of 32 estimates in a Bloomberg News survey. The adjusted jobless rate fell to 7.4% from 7.5%. Friday we get the Jan US employment data, expectations now are for NFP jobs to have increased 150K with private jobs up 163K, the unemployment rate at 9.5% +0.1%.

Although the economy is gaining momentum there is no reason to fear inflation, the key reason US interest rates remain very stable over the past six weeks after the spike in Nov and early Dec. The Fed continues its $600B purchases of US treasuries and additional Treasury buying using the repayments from the $1.25T MBS buying binge a year ago. That the Fed is buying almost the equivalent of all recent Treasury borrowing has kept rates from increasing. Mortgage interest rates have kept within a narrow 10 basis point range for 30 yr rates; as long as the 10 yr note doesn't move above 3.50% (currently 3.44%) mortgage rates will remain generally unchanged.

Market Snapshot by Sigma Research - Mondays Report

Monday, January 31, 2011
Treasuries and mortgages started a little soft this morning, prior to 8:30 the 10- yr note was off 9/32 at 3.36% once again finding resistance at 3.31% which was Friday's low before closing at 3.33%. Mortgage prices prior to 8:30 -5/32 (.15 bp). At 8:30 Dec personal income and spending were reported; income up 0.4% with forecasts of +0.5%, spending +0.7% against expectations of +0.6%. In 2010 income was up 3.0% while spending increased 3.5%. There was little reaction to the data, the 10 yr improved a few 32nds. Stock indexes after the report, the DJIA up 40 points after falling 166 points on Friday. The personal consumption index, slowed further below the central bank’s long-term forecast. The Fed’s preferred price index, which is tied to spending patterns and excludes food and fuel, increased 0.7% from December 2009, the smallest increase since records began in 1959. The core price index was unchanged in December for the fifth time in the past six months. The gauge was forecast to increase 0.1% from November and 0.8% from December 2009.

The unrest in Egypt continued over the weekend but is having little or no affect on US markets. Mubarak is on his way out after 30 years but markets believe the transition to a new government will not disrupt US/Egypt relations or disturb oil flows through the Suez Canal with only about 3.0% of oil moves through it. Mubarak, Egypt's president, has sworn in a new cabinet in a bid to quell days of mass uprising against him and the government. The changes are unlikely to save Mubarak, riots and protesters still occurring; meantime a lot of press on it but markets seem non-plused.

At 10:00 the Chicago purchasing mgrs index, expected at 65.0, jumped to 68.6 frm 66.8 in Dec; the highest index reading since July 1998. New orders increased to 75.7 frm 68.7, prices pd increased to 81.7 frm 78.0 and employment component increased to 64.1 frm 58.4 (any index reading over 50 is considered expansion, the higher the stronger). The initial reaction wasn't much in the bond market.

Last Friday the DJIA fell 166 points in what may be the start of the expected correction in the equity markets. This morning the all key indexes opened better and at 10:00 still a little better but struggling a little. The 10 yr note rate fell to 3.31% on Friday on the stock market weakness, the recent level that has stopped any rallies in the past couple of weeks. This morning, after opening higher the 10 yr at 10:00 is firming at 3.34% up just 1 bp and mortgage prices at 10:00 unchanged.

The stock market is presently hanging in there but looks soft. If the 10 has any chance to break to lower rates the equity markets will need to roll over. A rally in equities today will keep rate markets from improving much. With the employment report on Friday the financial markets are more likely to sit still with some choppiness and no real changes until later this week.

This Week's Economic Calendar:
Tuesday;
10:00 am Dec construction spending (-0.5%)
Jan ISM manufacturing index (58.2 frm 57.0)
3:00 pm Jan Auto and Truck sales
Wednesday;
7:00 am weekly MBA mortgage applications
8:15 am ADP employment estimate for Jan (+150K private jobs)
Thursday;
8:30 am weekly jobless claims (-19K at 425K, con't claims 3.925 mi frm 3.991 mi)
10:00 am ISM manufacturing index (57.0 frm 57.1 in Dec)
Dec factory orders (-0.7%)
Friday;
8:30 am Jan employment data (non-farm jobs +150K, private jobs +163K; unemployment rate 9.6% frm 9.4% in Dec)

Market Snapshot by Sigma Research - Weekly Preview

Sunday, January 30, 2011
This Week is employment week on Friday, between Monday and Friday however there are a number of key economic reports. The markets start Monday with developments over the weekend in Egypt and the equity markets looking toppy and possibly headed for a long overdue correction. At the end of last week the famous 10 yr treasury note yield fell to 3.31% on Friday and closed at 3.33%, the bottom of its six week trading range (33 market days). A break in stocks and increased fears about the uprisings in Tunisia and Egypt should push interest rates lower on safety moves, if however stocks hold and there is no escalation of concerns in the mid-east the 10 yr and mortgages will move back to the top of their ranges on yields.

Economic data this week has Dec personal income and spending, the ISM manufacturing and service sectors indexes, Jan auto sales, Dec construction spending and the employment report. Early forecasts for all non-farm job growth is for an increase of 150K jobs, private non-farm jobs up 163K and the unemployment rates at 9.6%, up 0.2% from Dec. There are no Treasury auctions this week.

Mortgage interest rates have been very stable now for the past five weeks, not a bad thing as consumers continue to digest the spike up in rates last Nov and early Dec. If the rate markets do improve this week it will present an opportunity to get deals done, unlikely any rate improvements will last long with the economic outlook improving. Lots of talk about inflation, although it hasn't shown itself yet with rates so low just the thought of it will keep longer term rates for holding these low levels for long.

Market Snapshot by Sigma Research - Fridays Report

Friday, January 28, 2011
Two very key economic releases at 8:30 this morning. Q4 GDP was expected to be up to 3.6% frm +2.6% growth in Q3 2010, the advance report showed growth at 3.2%; the miss occasioned by the biggest drag from inventories in two decades. Q4 employment cost index was at +0.4% as expected. Those were the headlines but the details revealed better comparisons. Final sales in the fourth quarter increased 7.1%, the best showing in sales since 1984. The employment cost index for all of 2010 at +2.0%, was the second lowest on record at 2.0%, in 2009 the employment cost annual index was up 1.4%. GDP growth in 2010 at +2.9% was the strongest in five years. Household purchases, about 70% of the economy, rose at a 4.4% pace, the most since the first quarter of 2006. Retailers’ holiday sales jumped 5.5% for the best performance in five years. The report this morning is the first of three that will be released over the next two months before the final GDP hits in March, nevertheless there is little doubt that the economy is recovering at a pace better than what we were expecting, still however, we want to see retail sales data for Jan and Feb for confirmation. That may be a problem though in that Jan will be negatively impacted by many snow storms through the month.

Treasuries and mortgage markets were soft into the 8:30 releases, initially weakened more before settling down by 9:00; at 9:00 the 10 yr note -11/32 at 3.43% +4 bp, mortgage prices down 7/32 (.22 bp). (see below for 10:00 levels). The economic improvement is increasing the possibility that the six week trading range for the 10 yr and mortgages is going break to higher rates soon. There are two factors that are still holding rates stable; inflation is low and there is nothing out there that suggests it is about to increase, and there is a potential for the equity markets are due for a correction after the huge improvement over the past six months.

The stock indexes opened better at 9:30; DJIA +4 points. The indexes are struggling recently; although improving the equity markets are showing some signs of exhaustion after the very strong rally over the past six months. Most of the optimism that drove stocks higher have now been about completely discounted; the economic rebound has essentially met market expectations. To take the market higher now it will need an infusion of new news and data. Many analysts that remain bullish in the long run are talking about a correction, a few are looking for as much as 10%. If (when) a correction begins it will support the rate markets on safety moves.

The 10 yr note still is holding in its 25 basis point yield range; mortgages following along. This week so far the 10 yr note and mortgages are unchanged from last Friday's closes. So far there isn't enough momentum to drive the 10 yr note above 3.50%, however recent action is less optimistic. Rallies have been weaker than days when prices fall and yields increase. The rest of the session for the bond and mortgage markets will depend on how stock indexes trade.

The final economic data point this week; at 9:55 the U. of Michigan consumer sentiment index, expected at 73.0 frm 72.7. Sentiment came at 74.2; the current conditions index at 81.8 frm 79.8 and the 12 month out expectations unchanged at 87.0. No noticeable initial reaction to the report as it was in line with investors' forecasts. The stock indexes did back off a little but not much.

Market Snapshot by Sigma Research - Thursdays Report

Thursday, January 27, 2011
Prior to 8:30 interest rate markets were lower in price with the 10 yr note yield at 3.47%, touching its support level at 3.50%, mortgage prices traded down 9/32 (.28 bp). Two data points at 8:30 stopped the selling while leaving traders trying to square with the data. Weekly jobless claims were expected to increase 1K, as reported claims increased 51K to 454K the highest weekly claims since last Oct. Continuing claims also increased for the first time in four weeks, to 3.99 mil frm 3.87 mil. Unemployment claims were distorted by the winter weather in the South with four states reporting claims higher than normal. It took 30 minutes but by 9:00 the 10 yr note moved back to unchanged at 3.42% and mortgages at 9:00 +2/32 (.06 bp).

Dec durable goods orders were out at 8:30; orders were expected to be up 1.5%, as reported orders fell 2.5%. When transportation orders were excluded orders were thought to be up 0.6%, as reported +0.5%. Durables is a very volatile series and usually sees revisions later when factory orders are released (Feb 3rd), markets normally don't get too worked up over any deviations and with the volatile transportation orders excluded orders were generally in line with forecasts. Bookings for goods like computers and communications gear excluding aircraft climbed 1.4% after a 3.1% gain in November that was larger than previously estimated, figures from the Commerce Department showed today in Washington. Total orders fell 2.5% as noted, depressed by volatile demand for aircraft, which plunged 99%.

Stock indexes were looking good prior to the 8:30 data then backed off; at 9:30 the DJIA opened -2 points but within a few minutes managed to move a little higher. Mtgs at 9:30 +3/32 (.09 bp) and the 10 yr note +2/32 at 3.42%; by 9:45 however the 10 traded lower by 3/32.

Nov pending home sales released at 10:00 were expected to be down 0.5%; sales increased 2.0%, pending sales are sales with contracts but net closed. Yr/yr sales however down 2.2%. The NAR said better employment and good values were forces that improved the sales report. The initial reaction pushed prices on the 10 and mortgages off a little but no major reaction, nevertheless it is another measurement that beat the estimates.

Later this afternoon Treasury will complete this week's auctions with $29B of 7 yr notes. Yesterday's 5 yr note auction was met with strong demand, Tuesday's 2 yr auction however was not well bid.

The bond and mortgage markets continue to show bearish technicals, fundamentals also are working against the rate markets. The economy is improving, while data this morning is weaker investors will likely dismiss them as anomalies as most reports support the improving outlook for the US economy. We believe it is only a matter of time before the 10 yr note and MBSs break their ranges to higher rates. That said, as long as the 10 yr note and MBSs hold within their respective six week ranges there remains the potential of improvement but the potential is lessening with each economic release.