Mortgage Rates



The Dec employment report at 8:30 this morning was stronger than consensus estimates. Dec unemployment expected at 8.7% fell to 8.5%, the lowest level since Feb 2009 when it was 8.3%. Non-farm jobs expected +155K, jumped to 200K; non-farm private jobs thought to be 160K increased 212K. Yesterday ADP reported 325K private jobs. Dec average hourly earnings, as usual, up 0.2%. The initial reaction sent the 10 yr note to 2.03% and mortgage prices fell 8/32 (.25 bp); stock indexes rallied and stocks in Europe were boosted. At 9:00 the DJIA futures were +37, the 10 yr back to 1.98% -1 bp and mortgage prices +1/32 (.03 bp). Employers added 1.64 million workers in 2011, the best year for the American worker since 2006, after a 940,000 increase in 2010. Even with the gains, little headway has been made in recovering the 8.75 million jobs lost as a result of the recession that ended in June 2009. Annual benchmark revisions to the household survey showed the unemployment rate averaged 8.9 percent in 2011, down from 9.6 percent and 9.3 percent in the previous two years. It still marked the worst three-year period since 1939 to 1941.

The reaction to the stronger employment report sent the 10 yr to 2.03%, above its 20 and 40 day averages; it lasted about five minutes before it moved back to unchanged then turned positive. Mortgages also held nicely on the data. Stock indexes didn’t show much enthusiasm either, after a knee jerk improvement the key indexes fell back to pre-employment levels. The same scenario in Europe’s markets; a bounce on the data, then retreating to earlier levels.

At 9:30 the stock market opened generally unchanged, losing all the initial gains on the employment report. The 10 yr note held a 4/32 price improvement at 1.98% -1 bp frm yesterday’s close; MBS prices +1/32 (.03 bp). While the employment data was better than expected, there was weaker data out of Germany. Europe’s confidence in the economic outlook fell to the lowest in more than two years and German factory orders plunged as the euro area’s leaders struggled to contain a worsening fiscal crisis and global demand weakened.

The take away this morning on the reaction to the better than expected employment in the stock and bond market is that Europe remains the critical focus for traders. With no inflation fears as the US job market improves, and the Fed on record to keep rates low for the next year or so; Europe’s debt problems and the economic outlook worsening is still the dominant force in the financial markets.

The Fed’s New York President William Dudley also added to the strength in the bond market this morning; saying more monetary accommodation is appropriate even after a report showed the economy added more jobs than forecast last month. “Implementing such policies would improve the economic outlook and make monetary accommodation more effective,” Dudley said today in a speech to bankers in Iselin, New Jersey. At the same time, it’s “appropriate” for the Fed to consider steps to ease monetary policy, he said.

Technically; the 10 yr once again held near term bullish levels. Given the markets ignored the better jobs data, the decline in the stock market today; the rest of the day should hold well and possibly improve more if equity markets continue to fall as they have been doing since the open at 9:30. That said, we don’t expect any significant improvement in interest rates; next week Treasury will be back auctioning $66B in 3 yr, 10 yr, and 30 yr notes and bond.