Markets Quietly Range Bound. Energy Being Stored For Bigger Move

Good Morning.

Let's review the headlines and market levels.

Reuters: Japanese Prime Minister Yukio Hatoyama and his powerful ruling party No.2 quit on Wednesday to try to boost the party's fortunes in an election next month, less than a year after sweeping to power with promises of change.  The political turmoil could delay efforts to thrash out plans set to be announced this month to cut the country's public debt, which stands at about 200 percent of GDP, and a strategy to engineer economic growth in an ageing society.

The US$ rose to a two week high vs. the Yen on the news....

Reuters: Spain's jobless rate -- the highest in the euro zone -- fell at its fastest pace for five years in May, data showed on Wednesday, offering a glimmer of hope for the euro zone's most battered labour market. The non-seasonally adjusted jobless figure, a monthly record of unemployment benefit claimants, but which also includes those who have exhausted welfare payments, fell a greater than expected 1.8 percent from April to 4.06 million people. The drop surprised analysts and gave a small boost to Spanish bond markets.

The Euro initially stabilized on the news but has since resumed its decline toward new lows. It didn't help that Iran's central bank announced it would sell 45 billion euros and buy gold and the US$. $1.21 is support....a break below that level would likely trigger more sell signals (bad for U.S. stocks!)

We should also check in on LIBOR: The London Inter Bank Offered Rate. The chart below is a one month look back....interbank lending rates have been on the rise. 1m and 3m LIBOR ticked higher again today. Anyone refinancing INDEX + ARM mortgage payers to fixed rate loans?

Reuters: Moving on from its failed "top kill" attempt to plug up the undersea gusher, BP worked on its new plan to siphon off some of the oil by first using robot submarines to cut away what is left of the ruined offshore well's leaking riser pipe, then lower a containment dome over the remaining wellhead assembly. This latest attempted fix actually increases the flow of oil at least temporarily before the leak can be contained. The FBI and other federal agencies are aggressively investigating the spill and "if we find evidence of illegal behavior, we will be forceful in our response," U.S. Attorney General Eric Holder said on Tuesday after meeting with state and federal prosecutors in New Orleans

The front month NYMEX Crude Oil futures contract is currently -0.45 at 72.13. The Gulf of Mexico accounts for about 20% of the U.S's oil production output. Oil has been flowing into the Gulf for 44 days now. Two years ago this spill would've sent oil prices into the $200 handle, but in today's environment, oil prices are actually falling! I know the dollar is stronger now than it was then (safe haven) but what does that say about the market's perception of supply and demand? Are we really moving toward alternative energy that fast or is oil a true indicator of the health of U.S. consumers?

Yikes...there's another descending triangle! READ MORE ABOUT THIS CONTINUATION PATTERN

Yesterday I wrote that we should expect to see choppy price action until the market was presented with more substantial news/information. That implied U.S. market participants were waiting for the official Employment Report to be released on Friday. Well we got some guidance on that report today.....

CHALLENGER JOBS REPORT:  The pace of downsizing was virtually unchanged in May, as employers announced plans to cut 38,810 jobs from their payrolls during the month. That was slightly (1.3 percent) more than the four year low of 38,326 job cuts announced in April, according to the latest job-cut report released Wednesday by global outplacement consultancy Challenger,Gray & Christmas, Inc. May layoffs were 65 percent lower than the same month a year ago, when planned job cuts totaled 111,182. This marks the 12th consecutive month in which the job-cut total was lower than the comparable year-ago figure. It also marks the 12th consecutive month that saw fewer than 100,000 announced job cuts.

THIS DATA WAS "AS EXPECTED"

This bothered me though: “Unlike the private sector, which is beginning to see the fruits of recovery, the budget crisis for many states and municipalities is only getting worse. High unemployment and falling home ownership are taking a significant toll on tax revenues

Ugh. The last thing we need is for the EU, China, and Japan to turn on us and say "HEY, WTF, LOOK AT YOUR OWN BOOKS!"

None of this seems like good news....yet the S&P is holding above 1070 support, currently +0.41% at 1074.85.

And guess what...rate sheet influential MBS prices are SIDEWAYS!!!!!!  The FNCL 4.5 is currently +0-00 at 102-04. The secondary market current coupon is +1.2bps at 4.148%. Yield Spreads are UNCH vs. benchmark yields.

From last night's post:

While there were a few news headlines to account for in valuations today, price action and trading flows really didn't teach us anything new about the market's long term bias. Market participants continue to exhibit noncommittal behavior. Institutional fast money traders are dominant while retail investors ride the pine....

I offer the same LOCK/FLOAT guidance I shared last week...

Thanks to a lack of liquidity in the 4.0 TBA MBS market, securitizing 4.5 and 5.0 MBS is a lender's best execution option (how do you hedge 4.0s right now? Against the long bond?)  This implies it is unlikely that we see  mortgage rates move much lower than current levels. Considering the amount of volatility in the marketplace and the tightly wound correlation between the stock lever and interest rates....passengers in the float boat s/be waiting it out for a shorter lock period at most. Besides that...the risk that rates rise far outweighs the minimal reward one would see if stocks sell and benchmarks rally. When/if stocks break 1090 and confirm, interest rates will move higher in a violent manner.

Markets are storing energy, waiting for more guidance. We might be range bound until that guidance hits screens...but the markets will make a move sooner than later. Make sure your pipeline is hedged for that event.