Continue to float locks; we’ll go with it to start; no movement now until after Bernanke’s speech at about 12:00. Interest rates do not appear to have substantial volatility this morning.

Good start today; the interest rate markets opened stronger on the continuing weak dollar and slowly improving technicals. At 8:30 the 10 yr +8/32 3.39% -3 BP, mortgage prices +3/32; the DJIA futures +50.

8:30 brought Oct retail sales; expected to be +0.9% overall and ex autos +0.4%, as released sales were +1.4% overall and ex autos +0.2%. Initial reaction boosted interest rate prices a little and softened the stock index improvement but within minutes stock indexes bounced back and the rate markets backed off to where they were trading prior to the report. Retail sales are increasingly of interest to the interest rate markets as we move into Christmas shopping ( the politically correct reference is Holiday shopping). Retailers are racing to get what there is out there from consumers, normally late holiday price reductions are happening now.

The weakening dollar continues to drive interest rates lower and equity prices higher; the dollar is soft this morning (again). Who wants a strong dollar? No one; not the Fed, not Treasury and not Pres Obama (haven’t heard from Barney on his take; we think he is working on how he can blame mortgage brokers for the dollar fall). In his speech this afternoon Bernanke will likely have nothing to add or comment about the crashing dollar; it isn’t in the Fed domain of responsibility, Treasury leads on currency issues.

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Start by floating this morning; the rest of the session will be focusing on equity markets. We are not looking for much improvement however, and continue to remind the present condition in the rate markets is bearish; although not aggressively so. Any additional selling in mortgages and we will stop floating and lock. Stay tuned for updates as necessary.

Rate markets opened weaker early this morning. At 8:15 prior to weekly jobless claims the 10 yr note -6/32 and mortgage prices -5/32. Weekly jobless claims at 8:30 were higher than expected; markets were expecting an increase of about 4K they jumped 11K to 531K. Last week’s claims were revised up 6K frm 514K to 520K. Continuing claims declined to 5.92 mil from 6.02 mil last week, revised from 5.992 mil.

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Weekly claims being higher than expected should have provided a modicum of support for the rate markets and a little pressure on equity prices (although at 9:45 the DJIA was trading better); at least on a knee jerk reaction. Not the case however, claims data is leveling out recently so a little chop is no longer the issue it was a month ago.  We don’t trust the recent claims data on jobs with the jobless claims a touch higher, continuing claim lower and a minor improvement on the 4-wk average.  All the alterations in how jobs and or joblessness are counted have shifted, and without a straight read of some sort the market will continue to distrust the reports.

At 10:00, a few minutes ago, Sept leading economic indicators were expected to be +0.9%; it came at +1.0%, August revised to +0.4% frm +0.6%. Not a big series so not much attention is paid to it by traders.

Also at 10:00 the FHFA housing price index for August, expected to be +0.3%, prices as reported were down 0.3%. That did a little initial number on the equity market with the DJIA selling off slightly, The decline boosted the rate market prices a little.

At 11:00 Treasury will announce the amounts for next week’s auctions; 2 yr, 5 yr and 7 yr notes to fund the growing federal deficit. Last month the total was $112B for all three. Supply, while in the past few months has not been a problem to absorb, is always a pressure point for the rate markets. The last auction Treasury conducted, 30 yr bond on the 8th of the month, didn’t go as well as traders expected. At the long end of the curve, it doesn’t necessarily equate to the auctions next week; but with the dollar declining it begs the question about how much more foreign investors are willing to take down at present yields. So far the weakening dollar has attracted investors, likely to continue this go round. That said, it is unlikely treasuries will rally into the supply.

Stepping back; since 8/14 the bellwether 10 yr note has established a well defined range and set the range for mortgage rates. With the exception of six trading days the 10 yr note has held between 3.25% and 3.50% with most of the trade occurring between 3.35% and 3.47%. When seen in that context the rate markets have been very stable since mid-summer. Lots of swings but within a tight range. The run lower (below 3.25%) was immediately rejected, implying investors have little interest in the 10 yr or mortgages when their yields fall much below where they trade today. Technically the 10 yr and mortgages are bearish, as long as 3.50% holds we are not concerned, but if 3.50% breaks on the note look for a rapid increase of 25 basis points on the note and 30 yr mortgage rates.

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We warned of increased volatility this week, the rate markets are near term bearish but with not much enthusiasm for massive selling. Yesterday mortgage prices started better, this morning starting lower. We suggest floating to start the day, but remind to stay close for our updates. Not willing to press the markets but with the pricing this morning lower we hang in there for a pop. Unless prices improve frm morning levels we will lock at the end of the session if not sooner based on market movements.

Treasuries were weak from the get-go this morning with the stock indexes roaring higher; the DJIA at 8:00 was trading +90. The 10 down 13/32 and mortgages off 7/32. At 8:30 the 10 -21/32 at 3.42% +7 bp, and mortgages -13/32. At 9:00 the 10 yr -16/32 3.41% +6 BP, mtg prices -15/32 and the DJIA +109. JP Morgan profits were well above forecasts (about 7 times better), and is driving all bank and financial stocks higher this morning, taking the entire market up with it. Most all earnings in Q3 are beating the Street estimates although only a few are out so far. Intel is saying sales will to $1B and earnings from Alcoa and others have been better. In China their exports were down 15%, but that is the best in a year. At 9:30 the DJIA opened +90, 10 yr note -14/32 3.40% +5 BP and mortgages at 9:30 -11/32 on 30s, -9/32 on FHAs and -7/32 on 15s.

Sept retail sales hit at 8:30, better than expected; -1.5% overall but when auto sales are extracted +0.5%, expectations were for a 0.2% increase. August retail revised to +2.2% frm +2.7% overall and ex autos +1.0% frm +1.1%. The initial reaction to the better ex auto sales sent treasuries and mortgages lower but both managed to recover a little from the knee jerk. The DJIA and the other key indexes are on fire this morning on better Q3 earnings being reported. No signs of any weakness in the equity markets as the DJIA is now seen headed to 10K.

Earlier this morning at 7:00 the weekly MBA mortgage applications index fell 1.8%; purchases declined 5.0% while re-finance applications were down 0.1%. 64.7% of all apps were for re-finances. The four week moving average for the seasonally adjusted Market Index is up 5.6%.  The four week moving average is up 1.6% for the seasonally adjusted Purchase Index, while this average is up 8.0% for the Refinance Index.  The average contract interest rate for 30-year fixed-rate mortgages increased to 5.02% from 4.89%, with points decreasing to 1.11 from 1.13 (including the origination fee) for 80% loan-to-value (LTV) ratio loans. The average contract interest rate for 15-year fixed-rate mortgages increased to 4.44% from 4.32%, with points remaining unchanged at 1.04 (including the origination fee) for 80% LTV loans. The decline in apps on an increase of 13 basis points in rates tells a big story. With interest rates headed higher the volume is likely to continue to fall until buyers and re-financers believe the best has likely passed for rates.

August business inventories were out at 10:00, expected to be down 0.9%, inventories were down 1.5%; sales were up 1.0%. The inventory to sales ratio at 1.33 month frm 1.36 months in July.

At 2:00 the FOMC minutes are the day’s biggest known-unknown, with the market sniffing for hints of dissention on rate hike timing among the ranks and inflation concern. We know what the statement said, what markets will look for in the minutes is the debate that focuses on when the Fed will decide to wind down the easing. Most Fed watchers are expecting the Fed will start by doing re-pos to drain money from banks before it actually starts raising the FF rate. No matter, the bond market will as usual be ahead of what the Fed actually does, so we don’t wait to see the whites of the eyes before markets discount any tightening. While no one is expecting a tightening move from the Fed for many more months until unemployment bottoms, markets will be way out front in driving rates higher—-slowly, but moving higher.

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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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Given the huge double barrel shock to the equity bulls; the Chicago PM index and the ADP employment estimate, we suggest floating to start the day. Yesterday we locked all rate locks overnight in preparation for the employment report and the 10 yr note failing to break its resistance. Still has not done it this morning but with the stock market getting hammered we will reload and float. Keep tuned for our rate alerts through the session.

At 8:00 this morning the 10 yr note -4/32 at 3.30%, mtgs started -2/32 frm yesterday’s close. At 8:15 the Sept ADP jobs report down 254K jobs; for August ADP increased its original estimate by 20K to 277K. At 8:30 Q2 GDP final hit at -0.7%, up frm the preliminary -1.0% reported in last month’s GDP release; the reaction to the better quarter put the 10 yr -6/32 and mortgages -5/32; the DJIA index +38. At 9:00 the 10 yr -7/32, 30 yr mtgs -5/32, DJIA +35. At 9:30 the DJIA opened +14, the 10 yr -6/32 and mortgages at 9:30 -4/32. (see below for 10:00 levels).

At 9:45 the Chicago purchasing mgrs index, expected at 52.0 frm 50.0, unexpectedly fell to 46.1. The much weaker index flipped stocks over to -90 on the initial reaction for the DJIA. The new orders component fell to 46.3 frm 52.5 (any read under 50 is contraction). The 10 yr note jumped to +1/32 frm -6/32 and mortgage prices which were -4/32 at 9:30 jumped to +5/32 on the session. A major shock to the stock market running investors and traders into safety trades. A double blow for economic bulls this morning.

Earlier this morning at 7:00 the weekly MBA mortgage applications. Apps declined 2.8% from the previous week, purchase apps were down 6.2% while re-fi apps were down 0.8%. The four week moving average for the market Index is up 3.9%.  The four week moving average is down 0.6% for the purchase Index, while this average is up 6.8% for the refinance Index. The refinance share of mortgage activity increased to 65.3% of total applications from 63.8% the previous week. The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.94% from 4.97%, with points decreasing to 0.94 from 1.12 (including the origination fee) for 80% loan-to-value (LTV) ratio loans. The average contract interest rate for 15-year fixed-rate mortgages decreased to 4.34% from 4.41%, with points decreasing to 1.01 from 1.05 (including the origination fee) for 80% LTV loans. This is the lowest 15-year fixed-rate ever recorded in the survey.

Mortgage re-finances may have peaked. Credit is tight and FICO scores over 750 to get the best rate; while we can’t be certain, most of those qualified for re-finances may have already done it. Something to keep an eye on given purchases are still very sluggish.

This morning’s ADP estimate of job losses at 254K was worse than what markets were expecting, but since it isn’t the official BLS report which occurs Friday it isn’t getting the negative reaction that the BLS report will have if it shows more jobs lost than what markets are expecting (-180K to -200K). The ADP data does not include government job changes, thus if government jobs increased by say 25K the ADP would be closer to the BLS forecasts but still more lost jobs than markets are expecting now.

No additional data through the rest of the day; all about trading off stocks through the rest of the day, and monitoring the 10 yr note ability to break technical resistance at 3.28%.

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I have held rate locks into this morning to confirm that the 10 yr had held its technical resistance, but warned not to hold locked loans taken yesterday on the re-price improvements. We will float again to start the session but will likely lock at the end of the session if not before. The 10 yr and mortgages are likely to edge lower in price today and into the employment report—technical selling in a well defined range. Keep alert for our alerts.

Treasuries and mortgages started weaker this morning, as we noted in the 4:30 comments yesterday, the 10 yr note hit its solid resistance at 3.28% and once again (so far) has failed to crack it. Mortgages and the 10 yr still are technically positive but the 10 remains in its 3.50% to 3.28% range. At 8:30 the 10 yr  -7/32 at 3.30% and mortgages -5/32; the DJIA futures -6. At 9:00 the 10 yr -13/32 to 3.33% +5 BP, and mortgage prices -7/32; the DJIA up 10 points. At 9:30 the DJIA opened +4, 10 yr -13/32 and mortgage prices -6/32. (see below for 10:10 levels)

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Yesterday the stock market got a little too excited about the acquisition by Xerox of Affiliated Computer Services; the excitement based on the view that M&A and acquisitions are signs businesses are about to invest more, leading to the thought that the economic outlook is improving. Many traders and market participants were off yesterday for Yom Kippur increasing market volatility. This morning though, in early activity the stock market in pre-market trading, while slightly weaker is holding most of the gains of yesterday. The remainder of the week will focus on the unfolding economic releases and Friday’s Sept employment figures.

At 9:00, the first of two reports today; Case/Shiller home prices for July, expected to be a little better than June at -14.2% frm -15.44%, prices were down just 13.3% the smallest decline in prices in 17 months; 17 of the 20 areas covered showed an increase, led by a 3.1% jump in Minneapolis and a 2.9% increase in San Francisco. Las Vegas suffered the biggest one-month decrease at 1.9%. The reaction sent treasury and mortgage prices lower. Increasing home prices, while likely an anomaly as July generally has increases, combined with the 10 yr failing again at is resistance (3.28%)  flipped short term sentiment; likely the note will track back to 3.41% now, its fist level of support.

At 10:00, a few minutes ago, Sept consumer confidence from the Conference Board, expected at 57.0 frm 54.1 in August, was a little weaker at 53.1 and gave a nice boost to the bond and mortgage markets, the 10 yr prior to the 10:00 release was off 16/32, mortgages off 8/32. After the lesser confidence the 10 and mortgages climbed to -8/32 and -2/32 respectively. The stock market traded better until the report then rolled over a little.

Weekly Johnson Redbook retail sales were down 2.2% at a year-on-year pace that extends an improving trend, but still declining. The report said low temperatures helped move seasonal items and that Halloween sales are off to a good start. Vehicle unit sales, to be posted Thursday, will be the next key piece of information for the September retail sales report.

Short term the run is likely over; the 10 yr went where we expected and failed where it has on three previous occasions at 3.28%, a rock of resistance. Still the 10 and mortgages hold slight bullish bias but not in the near term. Since late July the bellwether 10 yr has traded in a 23 basis point range, mortgages about the same. Last week’s FOMC meeting statement said the Fed would keep short tem rates low for quite awhile as the economic recovery is fragile. Since then however various Fed officials have been speaking more hawkishly, saying repeatedly that the Fed will act aggressively and with surprise when it has to tighten. Likely a plus for the long end of the curve in that investors can find solace that the Fed will not let inflation get a toe hold.

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I am floating rate locks again to start the day. The equity markets hold the key to break rates into new recent lows (yields). Lower stock indexes today are critical to improving mortgage rates; if we get a lower close in the indexes the 10 has a good chance to re-test resistance at 3.28% and mortgage rate to decline 10 to 15 basis points.

No trending movement in the rate markets, just chop with the 10 yr and mortgages trading in a 10 basis point range for the past two weeks. Yesterday, one of the more volatile days in months, drove the 10 yr to 3.52% momentarily, then back to close at 3.41%, covering the entire trading range on the note in the last couple of weeks, mortgages also churning with no real changes.

At 8:00 this morning the 10 yr was unchanged, mortgages were +2/32 frm yesterday’s close. At 8:30 weekly jobless claims were expected to be up 5K to 550K, as reported claims declined 21K; continuing claims also dropped, from 6.26 mil last week to 6.138 mil. The reaction pushed the 10 down 4/32 and mortgages at 8:45 down 2/32. Stock indexes were flat prior to the claims data but increased 31 points on the DJIA. At 9:00 the DJIA futures was +10; 10 yr note +1/32 and mortgages +2/32. At 9:30 the DJIA opened +49, 10 yr +2/32 and mortgages +3/32. (see below for 10:10 levels)

August existing home sales at 10:00 were expected to be up 2.0%, they fell 2.7% to 5.10 mil units against 535K expected. Prices fell 12.1% annualized, inventory levels at a 8.5 month supply, the lowest level in 2 yrs. Government tax credits for first-time buyers and foreclosure-induced price declines are helping the housing market recover from the worst slump since the Great Depression. Not any initial reaction to the report n the bond market, the equity markets however, went negative after being up 60 points on the DJIA earlier.

G-20 meeting begins today in Pittsburg at 6:00 PM and concludes at 4:00 PM tomorrow with a press conference; however nothing will come of it in terms of market movement. Leaders of the G-20 nations have to confront $9T of global debt created to keep the financial systems from complete collapse. Their next challenge will be to reduce the resulting debt before it sparks higher bond yields and erodes their governments’ creditworthiness. The International Monetary Fund says G-20 debt will reach 82.1% of gross domestic product in 2010, almost 20 percentage points more than two years ago and the equivalent of about $37 trillion. US debt is now 84% of GDP, a level that markets have yet to fully understand as it impacts global growth.

Yesterday’s action in the stock market, closing lower than the previous day after making a new multi-month high earlier in the day, may have a significant impact on the near term outlook in the equity markets. A new high, then closing lower than the previous day, is a technical key reversal. Whether it is meaningful depends on today’s trading, a lower close will add to the view stocks may finally be setting up for a major correction. Many times a key reversal pattern leads to a change in direction, but there has to be a lower close today to add conviction and confirm the reversal yesterday. Significant for the rate markets; to drive mortgage rates lower the bullish bias in equities has to be shaken.

One more auction to go through today; $29B of 7 yr notes at 1:00. Yesterday’s 5 yr was not as good as we hoped, the rate was slightly higher than where it traded ion the WI (when issued) market earlier in the day, demand was decent however.

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High volatility today in the rate and stock markets; treasuries were under pressure after the 5 yr note auction had a higher yield than what was expected pushing the 10 yr down 18/32 at one point with its yield jumping to 3.52% for a very short time. Mortgage prices at 2:00 were down 16/32 on the day. At 2:15 the FOMC statement was released and flipped the markets hard; the 10 rallied from -18/32 to +11/32, the yield dropped from 3.52% to 3.41% and mortgage prices from -16/32 to +6/32. Most lenders held the line on the early afternoon selling, and also didn’t bite on the knee jerk rally on the statement. The DJIA jumped to +80 on the statement, but also fell back to close on the lows of day—-buy the rumor, sell the fact?

The FOMC statement had little new in it as far as we saw other than a reaffirmation that the Fed would likely keep rates low for a long time as the economic outlook, while improving isn’t likely to grow much with unemployment high and home price wealth lost. Nothing really new in the statement, just confirmation rates are likely not about to increase much. The 10 yr once again has held its support at 3.50% on a closing basis. While treasuries were volatile today, mortgage prices were even more so. The statement in its entirety follows.

FOMC Policy Statement: Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn.  Conditions in financial markets have improved further, and activity in the housing sector has increased.  Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.  Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales.  Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability.  The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.  To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt.

The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010.  As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009.  The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets.  The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted. (end)

The $43B 5 yr drew 2.470% with a 2.40 cover and an indirect bidder take of 44.8%. This is against the 2.435% to 2.460% anticipated yield in the WI trade this morning and an average over the ’09 auctions of 2.22 and 43.1%.

Tomorrow markets finally have data to think about. Weekly jobless claims at 8:30 are expected to increase by 5K to 550K, continuing claims down to 6.195 mil frm 6.23 mil the previous week.At 10:00 August existing home sales are expected to be +2.0% to 5.35 mil units annualized.

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