MBS OPEN: Markets Move Sideways After ADP Jobs Data

By: • Wed, Jan 6 2010, 8:20 AM

Good Morning everyone. Happy Hump Day.

Recap of Yesterday...

After nine consecutive months of improvement, Pending Home Sales fell 16.0% in November, much worse than the forecasted decline of 2.0%. Economists blame the tax credit expiration, which has since been extended. READ MORE
Factory Order rose by 1.1% in November, a better print than forecast (+0.5%) and a bigger gain than the 0.8% uptick in October. Growing demand for business equipment is a forward looking sign of economic expansion. READ MORE
Stocks opened weaker ahead of 10am data. Although Pending Home Sales were weaker than expected, the market chose to discount that data (blamed the tax credit for the blip) in favor of focusing on the rise in Factory Orders. The benchmark S&P closed +0.31% at 1136, the Dow closed -0.11% at 10,572.02 while the NASDAQ was +0.01% at 2,308. The S&P closed at a new 15 month high with the automobiles index rising 5.74% and the financial index +1.7%.
The dollar index was up 0.12% to 77.618. The dollar made up ground against the EURO, closing at $1.4367 but lost ground vs. the yen, the dollar was -0.9%..a two week low vs. the Japanese Yen. READ MORE
Oil prices rose for the ninth consecutive day...traders leaned on cold weather and a feud between Russia and Belarus as the culprit. Crude Oil was +0.43% to $1.86/barrel. Gold fell 0.17% to $1119.15. READ MORE
Corporate debt issuance picked up yesterday...totaling over $27 billion in debt supply. GE launched a $4bn two part sale (3yr and 10yr), Lloyds launched a $5bn two part sale (5yr and 10yr), Barclays offered $3bn in 10yr debt, Deutsche bank a $2bn 3yr note. This was a POSITIVE for benchmark Treasuries as hedges were unwound. (before issuance, issuer sells TSYs as hedge. After issuance, issuer buys TSYs to add lost duration..ceterus paribus in swaps market)

In the rates market, 10s made positive progress outside the recent range, breaking 3.78% resistance. Benchmark 10yr note yields moved as low as 3.749% before heading out the door at 3.765%. While headlines called attention to a weak pending home sales report, the trader community points out money being put back to work and supportive influences of hedge unwinds after corporate debt issuance. This implies yesterday's rally was not a function of a flight to quality as much as it was a factor of normal hedging activities and re-allocation of year end cash. I have to agree with this..the economic outlook is SO CLOUDY (fog or poison gas?). Obviously we call attention to HOUSING

In the MBS market, the rate sheet influential FN 4.5 MBS coupons traded well with flows favoring sellers thanks to an overseas bid (Asia), loan servicer buying, and the constant support of the Federal Reserve. The FN 4.0 ended the day +0-20 at 97-19 yielding 4.229%. The FN 4.5 went out +0-16 at 100-19 yielding 4.445%. The secondary market current coupon was 4.434%. At the end of the session, the current coupon yield was 67 basis points over the 10yr TSY yield and 58 basis points higher than the 10 year swap rate. MBS valuations remain EXTREMELY RICH in terms of yield spread thanks to continually LIGHT LOAN PRODUCTION SUPPLY and FED SUPPORT. HERE IS A REFRESHER ON YIELD SPREADS

Several lenders repriced for the better towards the end of the day as gains held into the close. Rate sheets were paying at 4.875 at a few lenders, but not many. For most, rates are over 5.00%.

We called a lot of attention to the CROSSROADS AHEAD. MG, VIC and I all wrote on it. MG COMMENTS and AQ COMMENTS and VIC COMMENTS. READ THESE POSTS IF YOU ARE FLOATING. Matt's post also addresses a story about a possible extension to the Fed's MBS Purchase Program.

So Far this Morning...

SHANGHAI -0.85%, HANG SENG +0.62%, TOPIX 1.26%, NIKKEI +0.46%, CAC +0.05%, DAX +0.07%, FTSE -0.10%
UK Consumer Confidence fell the most in a year. READ MORE
Dodd decides to Retire. He was a leader of financial reform...could be a setback. READ MORE

The ADP Report was released at 815am. The report shows 84,000 jobs were lost in the private sector in December. This is worse than the Reuters forecast of -73,000 but better than the Dow Jones forecast of -90,000. When you average both estimates..the report was slightly worse than expected.

I feel the need to make a point about the labor market. Job losses were bound to moderate after the massive amount of cost cutting induced layoffs we witnessed in 2009. While the trend of declining job losses is indicative of a stabilization in the labor market...IT IS NOT A SIGN OF IMPROVEMENT. Heading into the future, firms will focus on productivity and efficiency. This implies business investment will be in new technology...not human labor. This also implies that many of the jobs that were lost over the past year...WILL BE LOST FOREVER. If you are unemployed...go back to school. Grad school, trade school, undergrad, high school...it doesnt matter, just find a way to make yourself a more attractive source of labor or a machine will be taking over your job.

After the Data...

Stock futures improved but didnt make much progress....1130 is a pivot point. 1137 is first bullish target, then 1143, and 1150 if the bulls have their way. Onthe downside, a sell off would stop at 1125 with a target of 1120, then 1117.

In the rates market, 10s havent ventured too far from yesterday's close and overnight range. Not much reaction to the ADP data...there is a clear layer of resistance at 3.76%. Looking at a wider range, I see a range between 3.70% and 3.84% developing. I find it unlikely that rates move too far in either direction as the market will remain defensive ahead of NFP on Friday. This means profits will be taken if rates start to make progress. It also implies we should see "buying on the dips" in the event prices cheapen up. The overall result of this strategy will be a narrowing range/sideways price action. Like this...

The mortgage market is starting slow again today. Given the above forecast for a narrowing range in TSY yields/prices...we would expect to see a similar event in the mortgage market. However, if action picks up and we a move in either direction...

After reaching 100-22 early in the session, the FN 4.5 has fallen back to the 100-17 pivot point...where support was found. A reprice for the worse would start to be considered if the FN 4.5 breaks 100-17 and tests 100-14. A reprice for the better would require another facemelter. Lender's are not going to be too giving ahead of Friday's "CROSSROADS EVENT".

The market is looking to confirm the bearish bias we witnessed in December. This means, at some point, we should see rates testing lower yield levels if data is supportive or at least not overly bullish.(Data being NFP on Friday). This is a good thing for mortgage rates, however it does not imply stability at lower rates and definitely doesnt mean lenders will be passing along a few extra bps. I hope I have made it clear that I am not feeling "Warm and fuzzy" about economic reality...there is much weakness to be priced in...perhaps instead of weakness I should say STAGNATION.

NEXT EVENT: 10AM ISM-NON MANUFACTURING