Market Analysis

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.

Investors appeared to place little validity on the data from the Commerce Dept which showed that New Home Sales in January fell 11.2%.  According to Larry Baer with Market Alert, the historical standard reporting error for January new home sales data is plus or minus 14%.

Stocks improved today on testimony to the House Financial Services Committeee from Fed Chairman Bernanke that pointed to continued low rates due to the weak labor market.   Bernanke reiterated, however, that the Fed would stick to plans to end buying mortgage-backed securities (MBS) in March.  He put out what appears to be a new spin, which is that just but holding the $1.25 trillion of mortgages (vs beginning to sell them), the Fed would be supporting the market albeit he didn't go so far as to say "at current levels."