From The Desk Of Laura Wheeler

Morning News….”The House passed the tax cut extension bill late yesterday after political wrangling caused some momentary concerns. The bill passed with a surprising amount of support and a final vote tally of 277 to 148. The bill will now makes its way to the President’s desk for signature at which point Americans can rest assured that their paychecks will not be cut by an increase in tax rates on January 1^st. In other news, Senate Majority Leader Harry Reid pulled the $1.1 trillion spending bill to keep the government funded last night amidst Republican opposition. The bill was laden with over $8.3 billion in earmarks.”

November’s 1.1% rise in the Conference Board’s Leading Economic Index, while in line with expectations, was the strongest rise since March. The overnight treasury bounce was helped by Asian/Japanese real money buying and Moody’s five-notch Ireland downgrade. Bonds have rallied over the past 24 hours and the 10-year has traded back down to a low of 3.39% this morning, 17 bps lower than it traded yesterday morning. Early buying today has touched the 8-day moving average for the first time since the breakaway sell-off earlier this month. The 8-day, now at 119-305, often proves to be a strong resistance point during a bearish trend. We would need to see a decent close above 119-305 to further moderate the bearish trend, and we still feel that any rally is a selling opportunity. On a side note, the Dow Jones Industrial Average had its highest close at 11,499.25 yesterday since September 2008. The DJIA is up 76% from its lows back in March 2009. It is, however, still down 19% from its 2007 highs.

Have a great weekend!

Last month saw a large miss by most forecasters, with the most accurate being FAO Economics (+120k NFP, +150k private). This month they are looking for +210k NFP, +220k private, again solidly above consensus. So far this year, the market consensus has overestimated payrolls six times (by an average of just under 52k), and underestimated four times (by an average of a little over 60k). The average miss has been a relatively small +7k, though with considerable deviation.

The November Employment Report is released at 8:30 AM tomorrow. The consensus is for an increase of 143,000 payroll jobs in November, and for the unemployment rate to stay steady at 9.6%.    

1)      Non-Farm Payrolls – Plus 143K

2)      Private Payrolls – Plus 155K

3)      Unemployment Rate – 9.6%

4)      Hourly Earnings – Plus .2

5)      Average Workweek – 34.3 hours

Weekly claims over the last four weeks averaged 431,000. Although elevated, this is better than the October average claims of 456,500.    Our Bias for tomorrow is slightly higher NFP at +150K, and we agree with the masses on the employment rate staying at 9.6%, but don’t be surprised if a higher participation rate pushes us to 9.7%.  Here’s what others are saying…

1)      Moody’s – Plus 145K at 9.6%

2)      Barclays – Plus 170K at 9.7%

3)      UBS – Plus 150K at 9.5%

4)      RBS – Plus 145K at 9.6%

5)      JPMorgan – Plus 170K at 9.6%

Headline News and Market Report

“Bond Market News and Perspective for Mortgage Professionals”

Wednesday, 12/08/10

Click on link for more information

The MBA Weekly Mortgage Applications Survey Market Composite Index decreased 0.9%, The Refinance Index decreased 1.4%, and the Purchase Index increased 1.8%.  The refinance share increased to 75.2% and the ARM share decreased to 5.6%.   The average 30-year rate increased to 4.66% from 4.56%, and the average  15-year rate increased to 3.98% from 3.91%. 

Treasury 10-Year Yield Rises the Most Over Two Days Since September 2008.  Treasuries dropped, pushing yields on 10-year notes up the most over two days since September 2008, as optimism the global economic recovery is gathering pace sapped demand for safety before a $21 billion auction of the debt.

Dollar Rises for a Third Day on Prospects U.S. Tax Cuts Will Spur Growth. The tax rates that have been in place since 2001 and 2003, were set to increase on Dec. 31.  Obama said he would accept lower tax rates on income, dividends, capital gains and multimillion dollar estates for the next two years in exchange for extending federal unemployment insurance.

Stocks, Commodities, Treasuries Fall on Chinese Rates; Dollar Gains.  U.S. stocks retreated, led by commodity producers, while a stronger dollar weighed on prices of oil and raw materials as concern China will raise interest rates overshadowed optimism about the potential extension of American tax cuts. Treasuries slid, sending the 10-year yield to the highest since June.

MBA Letter Critical of Proposed FHA Indemnification Requirements:  “MBA is particularly concerned with the ability of FHA to require indemnification on loans regardless of whether the violation caused the default,”

Economic Indicator News Release Calendar for the weeks ahead

This Week's Calendar

Week of December 13 - December 17

Week of December 20 - December 24

Week of December 27 - December 31

http://www.youtube.com/watch?v=PTUY16CkS-k&feature=youtube_gdata_player

CPI, inflation at the consumer level, hit the tape up .2% (up 1.2% year on year). The core index (ex- food and energy) print was unchanged, the lowest reading in the history of core index tracking. That part of the index dates back to 1957 (one of my favorite cars). Energy prices were the bulk of the modest increase, rising 2.6% with gasoline up 4.6%. Food prices were clearly declining as fruits, vegetables, cereals, and bakery products were all on the slide. Dairy prices however were 1.1%. Sounds like all of the inflationary pressures within the index came from cows driving fast cars. Housing Starts and Building permits were also released. Housing Starts hit an 18 year low, down 11.7%. Building permits were up a meager .5%. No joy in Mudville here. Market reaction has provided follow through buying on the heels of yesterday’s reversal. Reasons behind the late yesterday, early today price action are due to good support levels holding, oversold market conditions, and Irish eyes crying as the banking crisis across the pond which does not look good, most likely needing a bailout. QE2 has also gotten a reprieve as the inflation data, both yesterday and today’s gives the Fed a little cover on its view to stem deflation. As much as I’ve tried to explain QE2 and its relationship to interest rates, I’m afraid I haven’t done a very good job. Courtesy of Rene Marguilies, I have provide a 5 minute video that explains quantitative easing. Click on the link above. It is perfect! Technically, the bounce over the past two sessions in nearing the 38% retracement level (off the bottom looking for a target of 2.78%, currently 2.82%). The reaction to that level will be key, giving us either confirmation or denial of the rally. What I mean by that is we will see if this is just a correction in a new bear market or the formation of a bottom and a return to at least the middle of the range. Bears still have the advantage so best to stay defensive with your pipeline, taking advantage of the rally until the technical skies clear.

The bond market had an uneasy feel yesterday as traders are still trying to guess what the real impact QE2 will have. From what we are reading, the consensus yesterday seemed to be that the market had bid up Treasuries too much over the past three months and there was weak support for bonds all day. The 10-year sold off to close at 2.70%, despite a decent auction. Demand was very high with direct and indirect bidders accounting for 66%. In this morning’s data, import prices rose 0.9% in October. The weaker dollar and strong demand from emerging economies has fueled an increase in commodity prices. However, the weak demand in the U.S. will prevent the increased price of raw materials to be passed on to consumers, preventing inflation. We will start to see corporate profits squeezed as a result, unless commodity prices weaken or demand increases. In other news, Initial jobless claims dropped 24k back to 435k last week. It seems that a new trend is beginning with claims trending between a 430k to 460k print. Last month we saw the first sign from payrolls that perhaps jobs are being created now. These are collectively positive signs for the labor market that it is stabilizing. Finally, the MBA mortgage application index showed an uptick in mortgage applications of 5.8% last week. Purchase applications rose 5.5% while refinance applications rose 6.0%.

The downside today has failed to take us below the 76% retracement level at 125-24 and pricing is now back around the 40-day moving average at 126-10. If we can put in a bottom at these current levels, we have a good shot at returning back to the middle of the range around 127-0 (about a 2.60yld). The 30yr auction today was a bust coming in at a 4.32 yld with only a 2.31 bid to cover. I believe this was the worst bid to cover ratio in one year’s time. While we have bounced off the lows of the session, I wouldn’t say we are out of the woods just yet until we see the close of futures at 2pm CST. The 10yr has come back, now trading down 3s at a 2.71 yld, while mtg backs are still down 6-7 ticks in the lower coupons. A reminder that the bond market is closed tomorrow so in turn, Secondary will not be accepting any new locks/relocks/floatdowns,etc until we open again on Friday. We will be open tomorrow for small maintenance issues.

Failure to build on yesterday’s rally suggests that we are in the midst of a move back into a range trade between the high of 128-05 (2.44 yield) and the low at 126-20 (2.62 yield). We have seen a good bit of consolidation today with mtg backs suffering about 10 to 15 ticks on the lower coupons which has brought the market back into the upper middle of this range. Our position is neutral as we see the market just lining itself back up into position. It would take a move below the 126-20 mark for us to believe that more downside is possible, and on the flipside, a break above the 128-05 area would suggest further upside (better rates) is upon us. You are seeing the market come back to reality after this week’s releases and the fact that the report this morning came out a little better than expected. The bottom line is that the payroll report reflected much better job growth (enough to stabilize the unemployment rate but not reduce it) and the household survey shows more weakness. There is now at least some reason to be optimistic on the jobs front. On an important side note, President Obama, for the first time, signaled that he was open to discussing the extension of all of the Bush tax cuts including the cuts for the highest income bracket. The president’s spokesman, Robert Gibbs, said that while he is open to the discussions, he will not be willing to extend them permanently. Senate Minority Leader Mitch McConnell tacked the opposite direction yesterday saying that the Republicans would not compromise with the President when his policies are in opposition to the will of the people.

Again, our position is flat/neutral on the bias that we will trade the range for the better part of next week, especially with a closed bond market on Thursday for Veterans Day.