Floating is going against the grain these days with the rate markets bearish. However, we always look for that opportunity to catch a bounce. If you are able to keep tuned to our rate alerts we suggest floating to start, but if you are unable to keep close we suggest locking through the day. We will not float overnight unless mortgage prices improve enough to reduce overnight risk (+.25 bp frm initial pricing levels)

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More selling in the interest rate markets this morning. Prior to 8:30 data the 10 yr note was off 5/32 and mortgages were unchanged, the DJIA futures trade had the index -25 after closing slightly above 10K yesterday At 8:30 weekly jobless claims were down 10K to 514K; continuing claims also declined to 5.992 mil from 6.067 mil last week. Sept CPI was fractionally higher than forecasts; +0.2% for both the overall and the core (ex food and energy components). Finally at 8:30, the NY Empire State manufacturing index jumped to 34.57, the estimate was a decline to 17.5 frm 18.88 in Sept, new orders component jumped to 30.82 frm 18.82 (above zero is expansion). All three reports added more negative response in the bond and mortgage markets.

On the weekly claims; continuing claims are declining but may be due to those unemployed running out of unemployment benefits. 514K new filings however isn’t a reason to cheer too much, workers continue to lose jobs at a lesser rate but jobs are still eroding. On the CPI, inflation based on the Sept report suggest a slight increase on the core, but so far we consider it an anomaly, traders however are on edge with the inflationary outlook with interest rates at the current low levels. Don’t have much to comment about on the NY Empire State index jumping like it did, rather surprising given the index was expected to decline, it didn’t go unnoticed by traders.

At 10:00 the Philly Fed business index was expected at 12.5 frm 14.1 in Sept, as reported the overall index fell to 11.5; new orders at 6.2 frm 3.3, prices pd at 21.3 frm 14.9 and employment at -6.8 frm -14.3. Overall the report is slightly better but not nearly as robust as the earlier NY Empire State data at 8:30. No initial reaction to the report in either stocks or bonds.

The bellwether 10 yr is approaching where we expect to hold at 3.50%. Looking for a new range between 3.25% and 3.50%. The 10 yr and mortgages are however technically bearish and it is not advisable to make decisions that the 3.50% will hold until it actually is tested. Both mortgages and long term treasuries are trading below their 20 and 40 day moving averages and have broken various chart support levels after interest rates declined to unsustainable levels based on the increasing view the economy is recovering.

PIMCO is betting on deflation based on the view that the economic recovery will be slow and lethargic. PIMCO reduced its holdings of mortgages in favor of long term treasuries a month ago on the bet deflation and not inflation will keep interest rates low. The increase in treasuries was minor however, from 44% to 48% of the total $185.7B Total Bond Fund. Traders concerned about inflation, Bill Gross at PIMCO concerned that deflation is the coming issue. A lot of uncertainty about the outlook in 2010 will keep volatility high with overall interest rates at these historic low levels.

The FOMC minutes yesterday noted some of the members want to consider having the Fed buy mortgage MBSs after the $1.25 commitment runs out at the end of Q1 2010. If the Fed does signal it will continue to buy MBSs it will keep mortgage rates from increasing as much as they would otherwise. Mortgage rates however will track the 10 yr note direction; if interest rates increase so too will mortgage rates but with less of an increase if the Fed is in the game.

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Mortgage prices are already lower than at 9:30 as seen below. The 10 yr has taken out its support at 3.28%, the next level of support is right where the market is at 10:00, 3.32%, the 20 day moving average. We suggested locking yesterday, still really don’t like the risk. If you float today pleas keep alert for our rate alerts. After the recent decline in rates, markets are rejecting the low yields.

Treasuries and mortgages started a little better early this morning; at 8:30 the 10 yr +2/32, mtgs +1/32, but didn’t hold. Stock index futures were lower, the DJIA -26 at 8:30 on a better dollar. At 9:00 the 10 yr note fell out of bed, -12/32 at 3.30%, mtgs -6/32, the DJIA futures -12. At 9:30 the DJIA opened +5, 10 yr note -10/32 at 3.29% and mortgage prices -4/32.

August trade deficit was slightly better than expected, -$30.71B against estimates of -$33B; no reaction to it as usual. The world knows the US runs trade deficits, importing a lot more than exporting. There are no more data feeds the rest of the day. Today is all about Fedspeak; Fed officials are speaking everywhere today. Lockhart of ATL (8:30) vice-chair Kohn (12:00) and St. Louis’s Bullard (2:00).

Last night Bernanke reiterated again that he will be ready to remove stimulus when “the economy has improved sufficiently”. “My colleagues at the Federal Reserve and I believe that accommodative policies will likely be warranted for an extended period,” he spoke at a Board of Governors conference in Washington last evening. “At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road.” “Looking at the amount of excess capacity in the economy, looking at the low rate of inflation, we believe that conditions will warrant policy accommodation for an extended period,” he said.

Most economists surveyed by Bloomberg are rather pessimistic on the outlook for increased consumer spending in Q4; with unemployment exceeding 10% next year consumers are likely to refrain from the pace of spending in the past quarter. According to the survey of 50+ economists consumer purchases will increase just 1.0% this quarter after increasing 2.4% in Q3. Household spending will grow at a 1.5% pace in the first three months of 2010, and 1.8% in the second quarter, the survey showed.  Obama is considering, and likely will do it, extending the first time homebuyers credit, extending unemployment insurance past the current 27 weeks (if that occurs continuing unemployment claims will increase again after recent declines).

The US, world’s largest economy, contracted 3.8% in the year ended in June, the worst economic slump since the 1930s.

Normally when a market holiday occurs on Monday the bond and mortgage markets close the previous Friday at 2:00; today not the case, markets will not close early. Not a big deal except for traders looking for an early exit.

The 10 yr note, driver for the mortgage markets, hit 3.10% last Friday on the initial reaction to the higher than expected job losses in Sept but rebounded to close at 3.18% that day. Since then the 10 yr note rate has slowly increased to 3.31% at 10:00 this morning and mortgage rates, while holding well against the increase on the 10 yr, are also edging higher. We do not expect the 10 can fall below 3.00% unless the outlook for the economy swings 180 degrees from the current overwhelming consensus that the worst is behind us and recovery will continue. 30 yr bond traded briefly under 4.00% yesterday morning (3.96%) until the auction; the 30 yr is unlikely to fall below 4.00%. Mortgage rates for 30 yr fixed with 20% down are not likely to decline much more from present levels if the economic recovery outlook remains as it is now.

For more information, or to get started on an Arizona FHA, VA or USDA loan, call my office at (602) 291-4362

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Continue to float but stay tuned for rate alerts. Rate markets are overbought and unless the stock market really implodes today there is no more to the rally with Treasury auctions looming next week and near term technical overbought oscillators drawing attention.

Prior to the 8:30 employment report for Sept the 10 yr and mortgages traded +4/32 after the huge rate decline yesterday once the 10 yr broke its resistance at 3.28%. The DJIA at 8:15 was off 30 points. At 8:30 Sept non-farm jobs were reported down 263K against market estimates of -180K to -200K, the unemployment rate at 9.8% was in line and +0.1% frm August. Average hourly earnings in Sept were up just 0.1%, also seen as a negative to the economic optimism. August non-farm jobs were revised a little better, from -216K to -201K. The knee jerk reaction sent the 10 yr to +16/32 at 3.11% and mortgage prices +9/32, but by 8:50 the 10 yr backed down to +10/32 and mortgages +4/32.

The DJIA futures at 9:00 -124, 10 yr +14/32 at 3.13% -5 BP and mortgage prices +6/32 frm yesterday’s close. At 9:30 the DJIA opened -70, 10 yr +10/32 at 3.14% -4 BP, mortgage prices at 9:30 +7/32. (see below for 10:10 levels)

The reversal in the equity markets is finally taking hold after a month of waiting; even the most bullish investors are now having to face the reality that the equity markets may have over-shot. That said, listening to various guests on CNBC after the employment report suggests the bulls are not going to give up easily. Lot of chatter coming from the NYSE floor that traders are excited about the turn lower in the stock market, as have noted previously traders say they want a decline in the stock market so they can buy at lower levels. As far as we are concerned, talk is a very cheap commodity; we do not take those thoughts seriously. Changes in sentiment can occur rapidly based on unfolding data. At the end of the day, the basic question in the markets now is whether or not we will have a double dip recession? The bond market is leaning that way while the equity markets are tilted toward no double dip; will likely to increase market volatility over the next few weeks.

At the low yield this morning the 10 yr this week was down 21 basis points and mortgage rates down 16 basis points. A lot of day ahead, short term technicals are now reading overbought after the rally yesterday and the action so far this morning.

Bernanke yesterday said the expansion may not be strong enough to “substantially” bring down unemployment, indicating the central bank will be slow to drain the trillions of dollars it’s pumped into the economy. With the Fed expected to not initiate any tightening moves for most of 2010 and inflation off the radar at the moment, the fixed income markets are benefiting in a major short covering move after the strong resistance at the 3.25% yield level fell yesterday (10 yr treasury) triggering huge stop loss selling. Carrying on with the rally so far this morning on the weaker than expected employment data at 8:30; mortgages are riding the wave so far this morning.

Additional bad news for the economic outlook this morning from the Labor Dept; its preliminary estimate for the annual benchmark revisions to payrolls that will be issued in February. They showed the economy may have lost an additional 824,000 jobs in the 12 months ended March 2009. The data currently show a 4.8 million drop in employment during that time.

At 10:00 August factory orders concluded the data this week; expected to be +0.5%, orders were down 0.8%; August durable goods orders revised to -2.6% frm -2.4%.

next week Treasury will auction a total of $71B in 3s, 10s and 30s on Tuesday, Wednesday and Thursday ($39B of 3 yr notes, $20B of 10 yr notes and $12B of 30 yr bonds); Monday Treasury will also auction $7B of 10 yr inflation-indexed notes. Demand for US debt has been very strong from foreign and domestic investors in the past three months. This time the auctions will face the lowest yields in six months if rates hold current levels.

By 10:00 the rally early ended; the 10 yr unchanged mortgages unchanged. Not likely to see much movement through the rest of the day. The stock market is slowing finding a little traction from the worst levels at 9:00 this morning.

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