Market Analysis

Bonds are under pressure this morning as January's Non Farm Payroll report and the January Institute of Supply Management (ISM) Services Sector index both came in stronger than expected.

The big news of the day was the January Employment report.  Payrolls were up 243,000 vs an expected 155,000.  Private Sector Payrolls were up 257,000 vs an expected 168,000 increase.  Public Sector Payrolls were down 14,000 which almost matched the 13,000 decline expected.  The US Unemployment Rate dropped from 8.5% to 8.3%.  Analysts had been expecting no change in the unemployment rate.

Separately, the January ISM Services Sector index came in at 56.8 vs an expected 53.1. December Factory Orders were up 1.1% vs an expected 1.5% increase.

Stocks are up today and US Treasury bonds down on manufacturing data coming out of China and Germany that created a boost in international equity markets and gave some relief to yields in bonds in Europe.  Mortgage-backed securities are relatively flat with a slight negative bias.

In the US, ADP reported a 170,000 increase in January's Private Sector Employment vs expectations for a 200,000 figure and a revised 292,000 increase in December.  The January Institute of Supply Management (ISM) Manufacturing index came in at 54.1 vs expectations for a 54.5 reading (a value over 50 is viewed as evidence manufacturing activity is expanding).  December Construction spending was up 1.5% vs expectations for a .4% increase.

Mortgage-backed securities began to lose steam yesterday afternoon and opened weak this morning.  In mid-day trading though they are starting to improve.  If the improvement continues we may see better investor pricing in the afternoon.

In economic news in the US, yesterday December Personal Income came in up .5% which was better than the .4% expected.  Personal Spending was flat vs expected .1% growth.  This morning the Chicage Purchasing Manager's Index came in at 60.2 vs expected 62.8.  January Consumer Confidence came in at 61.1 vs a 67.0 expected.

In Europe, unemployment in the 17 member Euro zone (countries that use the Euro) climed to 10.4% in December which is a record high since the Euro was introduced in 1999.  Spain's unemployment rate is 22.9% and Greece is at 19.2%.  Germany though posted a rate of 6.7% which is its lowest rate since the reunification of East and West Germany in 1991.

Prior to markets opening this morning stock futures are down on the continued concerns about Greece which has been trying to reach a write-down agreement with its private sector creditors. The hang up appears to be around Greece accepting oversight from the European Union in exchange for aid that would allow it to repay even part of its debt. In the US, investors are currently expecting a weaker January Non Farm Payroll Report on Friday. The outcome of negotiations on Greek debt and Friday’s Payroll report results are expected to have the largest influence on mortgage rates this week. If a Greek deal is announced and/or US Payrolls come in stronger, bets that have already been placed on additional Fed easing during 2012 may be pulled back. If there is continued impasse in the Greek negotiations or if US Payrolls come in weaker than expected then bonds are expected to improve slightly.

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

Monday, Jan 30

• December Personal Income - expected increase of .4% vs .1% increase in November
• December Personal Spending – expected .1% increase in Personal Spending vs .1% increase in November

Tuesday, Jan 31

• January Chicago PMI Purchasing Manager’s Index – expected 62.0 reading vs 62.5 in December
• January Consumer Confidence – expected 67.0 reading vs December 64.5

Wednesday, Feb 1

• January ADP Private Sector Employment Change – expected 175,000 increase vs 325,000 in December
• January Institute of Supply Management (ISM) Manufacturing Index – expected 54.7 reading vs 53.9 in December
• December Construction Spending – expected .4% increase vs 1.2% increase in November

Thursday, Feb 2

• Initial Jobless Claims for week ended 1/28/12 – expected 375,000 unchanged from the prior week.

Friday, Feb 3

• January Nonfarm Payroll Report – expected 170,000 increase in Non Farm Payrolls vs 200,000 in December. The Private Sector is expected to add 145,000 jobs vs 212,000 in December. The Public Sector is expected to add 25,000 jobs.
• January Unemployment Rate – expected unchanged at 8.5%.
• December Factory Orders – expected up 1.6% vs up 1.8% in November
• January ISM Services Sector Index – expected 53.1 reading vs 52.6 in December

Bonds improved yesterday on a surprise from the post meeting statement from the Federal Reserve which extended by 1 year the period during which the Fed expects to keep their Federal Funds rate at near 0.   The Fed said, ".....the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014."  The announcement by the Fed is an attempt to incentivize corporate and institutional investors into investing in riskier assets that would generate growth for the economy.  Essentially the Fed is telling investors that they are not going to earn more than the rate of inflation by investing in "safe" assets and that the Fed will do whatever it can to make sure that Fed policies are accomodative of growth so that "risky" assets have as good a chance as possible of producing better returns.  This announcement is being viewed as a better alternative for the Fed than announcing a new bond buying program.

In economic news, Initial Jobless Claims for the week ended 1/21/12 came in at 377,000 which almost matched the 375,000 economists were expecting.  December Durable Goods Orders came in up 3% which was better than the 2% expected and November Durable Goods Orders were revised up from 3.7% growth to 4.3% growth.  December Durable Goods Orders excluding the more volatile automotive component were up 2.1% which was much stronger than the .7% expected growth.

Bonds are slightly improved this morning as investors are anxious that a deal has not yet been announced between Greece and its private sector creditors. No key economic data is being released today. This week interest rates will be most heavily influenced by the Greek debt negotiations (a deal being announced would be expected to put upward pressure on rates), activity in equities as a result of corporate earnings announcements (so far, results have been mixed), the results of the US Treasury auctions (investors are looking to see whether demand will wane as the flight to quality trade of those seeking safe haven from Europe was seeming to unwind) and Friday’s initial estimate of 4^th Qtr US GDP (estimates are for over 3% growth).

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

Tuesday, January 24

• US Treasury sells $35 billion of 2-year notes

Wednesday, January 25

• December Pending Home Sales – expected down 3.0% vs up 7.3% in November
• Federal Reserve Open Market Committee (FOMC) post meeting announcement – in light of the fact that Jobless Claims have been coming in better than expected, the Fed is expected to be guardedly optimistic that the economy is improving. No change in the Fed Funds rate is expected
• US Treasury sells $35 billion of 5-year notes

Thursday, January 26

• December Durable Goods Orders – expected up 2% vs up 3.7% in November. Excluding Transportation, Orders are expected to be up .7% vs up .3% in November
• Initial Jobless Claims Week Ended 1/21 – expected 375,000 vs 352,000 the prior week
• December New Home Sales – expected annualized pace of 321,000 vs Nov pace of 315,000
• December Leading Indicators – expected up .7% vs up .5% in November
• US Treasury sells $29 billion of 7-year notes

Friday, January 27

• Initial Estimate 4^th Qtr US GDP – expected growth of 3.2% vs 1.8% growth in the 3^rd Qtr
• Final University of Michigan January Consumer Sentiment Index – expected 74.2 vs 74.0 initial estimate

Our market update with an analysis of this week's economic calendar will be published tomorrow.  No key economic data was released today.

Bond markets continued with their negative bias today.  The 10 Yr US Treasury yield has climbed to 2.07%.  Mortgage-backed securities issued by Fannie Mae and Freddie Mac are showing less volatility than US Treasuries.