Market Analysis

Bond markets are relatively flat this morning but this week could be volatile for rates as the Fed completely steps away from mortgage purchases and investors position themselves for Friday's March Non-Farm Payroll report. Investors are expecting an increase of payrolls of 190,000 and a jobless rate of 9.7%.

Below are the key items on this week's economic calendar:

Monday, March 29, 2010

February Personal Income, Spending and Personal Consumption Expenditure (PCE) Index - Income was unchanged vs expectations of a .1% increase, Spending was up .3% matching expectations and the PCE Index was unchanged vs expectations of a .1% increase.

Tuesday, March 30, 2010

March Consumer Confidence - Expected 50.0 reading vs 46.0 in February.

Wednesday, March 31, 2010

March ADP Employment Change Report - Expected increase in private sector employment of 40,000 vs minus 20,000 in February.

Chicago Purchasing Managers Index (PMI) - expected 61.0 reading vs 62.6 in February

February Factory Orders - expected up .8% vs 1.7% increase in January.

Thursday, April 1, 2010

Initial Jobless Claims Week Ended 3/27/10 - expected down 2,000 to 440,000

Continuing Jobless Claims Week Ended 3/20/10 - expected down 48,000 to 4.6 million from 4.648 million.

February Construction Spending - expected down 1.3% vs down .6% in January

March Institute of Supply Management Manufacturing Index

Friday, April 2, 2010

March Nonfarm Payroll Report - expected increase of 190,000 jobs and unemployment rate unchanged at 9.7%. 

Bond markets experienced a sell-off yesterday afternoon which pushed rates up .125%.  The US Treasury's 5 year note auction went poorly compared to investor expectations.  The bid/cover ratio was 2.55 ($2.55 bid for every $1 being auctioned) and the yield was 2.605%.  To put that in perspective, the bid/cover ratios in the prior months for the 5 year note auctions were 2.75 in Feb, 2.80 in Jan, 2.59 in Dec 09, 2.81 in Nov 09 and 2.63 in Oct 09.   The yields in the prior months was 2.395% in Feb, 2.370% in Jan, 2.665% in Dec 09, 2.17% in Nov 09 and 2.338% in Oct 09.

In other economic news, Initial Jobless Claims for the week ended 3/20 were down by 14,000 vs expectations for a 7,000 decrease.  Continuing Claims for the week ended 3/13 dropped to 4.648 million vs market expectations for a 4.562 million number.

Bond markets are slightly positive this morning. As of last Thursday, the Federal Reserve’s mortgage purchase program had just a little more than $14 billion left to spend of their original $1.25 trillion set aside for the direct purchase of mortgage-backed securities (MBS). The Fed plans to conclude this program on March 31st as originally scheduled. So far analysts are attributing the lack of a spike in interest rates to the limited supply of MBS available and enough investor cash that views them, even at current yields, as a safer bet than equities.

Below is a recap of the economic calendar for this week.

Monday, March 22, 2010 – the economic calendar is vacant

Tuesday, March 23, 2010

February Existing Home Sales – expected down to an annualized pace of 4.99 million homes vs a 5.05 million home annualized pace in January.

US Treasury auctions $44 billion of 2-year notes

Wednesday, March 24, 2010

February Durable Goods Order – expected up .5% vs Jan up 2.6%. Excluding the auto segment expected up .5% vs Jan down 1%.

February New Home Sales – expected up to an annualized pace of 315,000 per year vs January’s annualized pace of 309,000 homes.

US Treasury auctions $42 billion of 5-year notes

Thursday, March 25, 2010

Initial Jobless Claims for the week ended 3/20/10 – expected down 7,000 to 450,000

Continuing Jobless Claims for the week ended 3/13/10 – expected down 17,000 to 4.560 million vs prior week 4.579 million.

US Treasury auctions $32 billion of 7-year notes

Friday, March 26, 2010

Final estimate 4^th Qtr 2009 GDP – expected 5.7% growth vs last revision of 5.9% growth

March Reuters/University of Michigan Consumer Sentiment Survey – expected 73.0 reading vs initial reading of 72.5.

Bond markets improved slightly yesterday afternoon in response to the post meeting Fed statement in which the Fed left rates unchanged (as expected) and kept the "extended period of time" language for the outlook for lower short term rates (some analysts had been expecting modification to this language to give the Fed more flexibility to raise rates short term rates in the near future if necessary).  It is important to note that the Federal Reserve does not directly control mortgage rates.  The rates the Fed controls are the rates banks pay to borrower money from eachother and to borrower from the Fed for very short term loans.  The market dictates long term rate levels.  Many analysts are still expecting mortgage rates to climb to the 5.5% to 6.0% level this year regardless of whether or not the Fed increases their Funds Rate this year.

In economic news, the Producer Price Index (PPI) was down .6% which was greater than the .2% decrease expected.  However, the Core PPI (excluding food and energy) was up .1% which matched expectations. 

US Treasury bonds opened worse but Fannie Mae and Freddie Mac mortgage-backed securities (MBS) are relatively flat. Investors are expecting the Federal Reserve to announce no change in short term rates when their Open Market Committee meeting ends tomorrow afternoon. Some analysts are anticipating a change in “extended period of time language” used to refer to the period for which the Fed will keep short term rates so low.

This week there will not be any US Treasury auctions. Below is a recap of this week’s economic calendar:

Monday, March 15, 2010

March Empire State Manufacturing Survey (New York Region) – Report came in at 22.86 vs expectations of a 22.0 reading and a 24.91 reading in February.

February Industrial Production and Capacity Utilization – Production was up .1% vs expectations of no change and a January increase of .9%. Utilization was up to 72.7% vs expectations of 72.5% and a 72.5% value in January.

Tuesday, March 16, 2010

February Housing Starts and Building Permits – Starts are expected to drop from an annualized pace of 591,000 to 570,000. Permits are expected to drop from an annualized pace of 622,000 to 602,000.

Federal Open Market Committee (FOMC) Meeting and Post Meeting Statement – the Fed is expected to leave short term rates unchanged. Some analysts are expecting a change in the “for an extended period of time language.”

Wednesday, March 17, 2010

February Producer Price Index (PPI) – expectations are for the PPI to decrease to (.2%) vs an increase of 1.3% in Jan and the Core PPI (excluding food and energy) to increase by .1%. vs a .3% increase in Jan.

Thursday, March 18, 2010

February Consumer Price Index (PPI) - expectations are for the CPI to increase by .1% vs an increase of .2% in Jan and the Core PPI (excluding food and energy) to increase by .1%. vs a .1% decrease in Jan.

Initial Jobless Claims for the week ended 3/13 – analysts are expecting claims to drop by 12,000, from 462,000 from the prior week to 450,000

Continuing Jobless Claims for the week ended 3/6 – analysts are expecting claims to drop by 8,000 from 4.558 million to 4.550 million.

Conference Board’s February Leading Indicators – expected up .1% vs .3% increase in January.

March Philadelphia Fed Survey – index expected up to 18.0 from 17.6 in February

Bonds are under pressure this morning, with the US 10 Year Treasury yield inching up to 3.74%.  European Commission President Romano Prodi made statements indicating that the Greece crisis is over in terms of any real concern for a default in Greece or for a collapse of the Euro system.  The "flight to safety" benefit that mortgage-backed securities and US Treasury notes have received from concerns about Greece are consequently abating. Stocks are up this morning.

In economic news today, January's wholesale inventories were expected to have increased .2% but instead declined .2%.  Manufacturing activity remains muted. 

Bonds are slightly positive this morning despite a better than expected the Initial Jobless Claims report for the week ended 2/27/10 (claims were down 29,000 vs expectations for a 20,000 decline.  Continuing Claims for the week ended 2/20/10 were also better than expected (down to 4.5 million vs expectations of a 4.6 million figure).  Due to the influence of weather shutdowns in the Northeast last month, analysts have revised upward their expectations for tomorrow's February Non Farm Payroll Report from the 20,000-50,000 job loss level to the 75,000 job loss level.  I read an article earlier this week, but can not longer find the reference to reverify the information, which said that the portion of the monthly Jobs report which tallies job losses doesn't survey employers for actual hirings and firings, but is just a telephone survey which asks them how many employees are at work that day.  According to that article, employees not at work due to weather conditions would be considered a job loss in the Non Farm report.  I have not been able to reverify this information from another source but if it is correct it would provide support for why analysts are beginning to say that tomorrow's report may be written off in terms of accuracy due to the weather issues.  One note, however, is that if, even with the weather issues built into the report, the report shows fewer job losses than expected, it would be expected that such a report would exert upward pressure on mortgage rates.

In other economic news, 4th Qtr 2009 Productivity was revised upward to 6.9% improvement vs prior estimates of 6.2% and market expectations for a revision to 6.3%.  4th Qtr 2009 Unit Labor costs were revised to a 5.9% reduction which was greater than the -4.4% initial report and market expectations for a revision to -4.5%.  January 2010 Factory Orders were up 1.7% vs expectations for a 1.8% increase.

This week is expected to be pivotal for mortgage rates. On Friday, February’s Non Farm Payroll report is expected to show job losses in the 20,000 to 50,000 range. A number significantly higher than that may support steady to possibly slightly lower rates. A number better than the 20,000 may put upward pressure on rates. Industry analysts are somewhat baffled as the continuing narrow spread between the 10 Year US Treasury Bond and Mortgage-Backed Securities (MBS) issued by Fannie Mae and Freddie Mac. By now, most analysts had expected the market to price in a larger risk premium for the MBS and rates were expected to be in the low to mid 5’s. Continued speculation of a stock market correction and problems with sovereign debt in Europe have kept the market on edge enough that investors are still willing to accept lower yields/rates in return for the relative safety of US Treasury notes and the MBS.

Below is a recap of this week’s economic calendar:

Monday, March 1, 2010

January Personal Income and Spending and PCE Index – Personal income was expected to increase .4% and only increased .1%. Personal spending was expected to increase .4% and increased .5% (the increase in spending was attributed more to lower savings than higher income). The Personal Consumption Expenditure (PCE) index was expected unchanged and came in unchanged.

January Construction Spending – declined .6% which was exactly what the market had been anticipating

February Institute of Supply Management (ISM) Manufacturing Index – expected 57.9 reading, actual was 56.5.

Tuesday, March 2, 2010

No significant economic data released

Wednesday, March 3, 2010

February ADP Employment Change Report – Expectations are for 10,000 private sector job losses compared to 22,000 job losses in January.

February ISM Service Sector Index – Expected 51.0 reading up from 50.5 in January

Federal Reserve Beige Book – expected to show slowly improving economic conditions for non employment metrics but continued very weak employment.

Thursday, March 4, 2010

Initial Jobless Claims, week ended 2/27 – expected down 20,000

Continuing Jobless Claims, week ended 2/20 expected down 17,000

4^th Qtr 2009 Productivity (Revised) and Unit Labor Costs – expected no change in productivity at 6.2% increase and expected no change in unit labor costs at -4.4%.

January Factory Orders – expected up 1.2% vs up 1.0% in December

January Pending Home Sales – expected up 1.7% vs December up 1.0%

Friday March 5, 2010

February Non Farm Payroll Report – expected 20,000 to 50,000 job losses and unemployment rate expected to increase to 9.8% from 9.7%. Hourly earnings expected to be up .2% which is no change from January.