Anthony Hood
Equity Investment Capital
Office: 949-891-0067
Email: tony@equityinvestmentcapital.com
website: www.equityinvestmentcapital.com


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Thursday, January 06, 2011


Yesterday's huge ADP job growth estimate for Dec (+297K jobs) sent a shock through the markets; the consensus was for ADP to report an increase of 100K. Interest rates increased 13 basis points on the 10 yr note and 10 basis points for 30 yr mtgs in reaction to yet another better than expected data point. Add in the better ISM services sector index, the better than expected ISM manufacturing data on Monday, the better than expected Nov factory orders, and the better than expected Nov construction spending, all adding to the increasing view that the US economy is expanding, sent interest rates higher.

This morning the 10 yr note and mortgages opened a little better than yesterday's weak close. At 9:00 the 10 yr traded +8/32 at 3.43% -3 bp and mortgages +5/32 (.15 bp). Still trading in their respective tight ranges with no real overall changes in rates, and continuing the volatile swings that have dominated since the beginning of Dec.

This morning weekly jobless claims were expected to increase 17K to 405K after falling 34K the previous week. Claims as reported increased 18K to 409K, somewhat more but generally in line with forecasts. Continuing claims declined 47K to 4.103 mil; the 4 wk average at 410.75K declined from 414.25K the previous week, the lowest average since July 26th 2008. Although the weekly claims were slightly higher than forecasts, markets were not phased.

The rest of the session should be quiet today ahead of the key Dec employment report tomorrow morning. Prior to the surprising ADP estimate the consensus was for non-farm jobs to increase by 132K and private jobs +142K. After the ADP data analysts have been revising the forecasts closer to 190K to 200K job growth. The unemployment rate in De is still thought to be unchanged at 9.8% to possibly 9.7%. The unemployment rate is calculated by BLS phone surveys asking respondents whether or not they are employed, unemployed, or not looking for a job; if one is unemployed but has given up looking they are not considered unemployed thus not adding to the unemployment rate. The change in non farm jobs is calculated by surveys of employers. Two reports that can at times be seen from different perspectives. The monthly employment report is always the mother of all monthly data points, the report tomorrow takes on even more importance after the ADP yesterday.

Later today Treasury will announce the amounts of next week's 3 yr, 10 yr and 30 yr auctions; the amounts likely the same as last month.

Until about 9:00 this morning the 10 yr was holding an 8/32 price gain and mortgages up 5/32 (.15 bp); by 9:45 however mortgage prices were trading lower on the day, down 2/32 (.06 bp) and likely down as much as 6/32 (.18 bp) frm when most lenders priced. Already the potential of re-pricing if prices fall just a little bit more. It is highly unlikely that we will see any improvement in the rate markets today ahead of the employment data tomorrow morning.