7/2/09

Good morning. Yesterday we had yet another bag of mixed economic news. The ADP jobs report, which leaves off government jobs, was worse than expected, but Pending Home Sales increased. Construction Spending dropped .9% in May to its lowest level in 5 years, worse than expected, but the Institute of Supply Management Index rose. On top of all of that, Federal Reserve Bank of San Francisco President Janet Yellen said that overnight rates could remain at .25% or lower for a few years.
June unemployment rate hit at 9.5% against the estimates at 9.6%. Non-farm payrolls were expected at -363K but were down 467K. The chatter on the unemployment rate given it is increasing at a slower pace than earlier this year is that the rate of unemployment is slowing---a good thing. Not in my reasoning though. Job losses at 450K+ a month is hard to argue that it is a good thing; the increase in the unemployment rate is increasing every month, not good. Bottom line, this data this morning can't be legitimately twisted as a good report because unemployment only increased by 0.1%. 15 mil people are out of work, 47% for over 6 months.

After chewing on the employment data this morning markets should be re-assessing the economic outlook. Whether a change in sentiment will occur remain the question for interest rates as well as the equity markets. Even the most outrageously bullish stock traders are now looking for a correction and a decline in equities, but so far every dip in the key indexes lasts a few hours before buying overwhelms sellers. This morning stocks are being hit hard so far but trading volume is thin and will likely continue through the rest of the day with most jumping out for the long weekend. Thin trading increases volatility.

Our thinking now is for another move lower in the rate markets, including mortgage rates. There are two hurdles; the stock market and Treasury borrowing. We continue to expect stocks to make a significant correction, the longer it takes the bigger the fall in equities. We fully admit however, we have been way too early in our expectations for stock indexes to roll over so we have less confidence on when the next round of interest rate declines will occur. The other hurdle; Treasury has to borrow $170+B a month in 2 yr through 30 yr notes and bonds, that amount acts as a drag on treasuries therefore on mortgage rates. Recent demand for Treasury auctions has been solid but there will always be market concerns that rates may have to stay at these or higher levels to attract those indirect bidders (foreign investors and foreign central banks).

There is a lot of day left for the stock market but the bond and mortgage markets will close at 2:00 this afternoon. With the long weekend we may not have the momentum or temperament in the bond markets to break the resistance levels. Traders rightfully are suspicious of the current stock market decline, in past attempts to pressure indexes lower they have all failed so far.

There will be no market reports tomorrow. Have a GREAT weekend, enjoy the weather, be safe.