Tuesday, October 2, 2012

Market Snapshot

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Bob Rosenbaum
The Rosenbaum Lending Group
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Tuesday, October 02, 2012
Treasuries and mortgages opened slightly weaker this morning; the US and Europe’s stock markets better. European stocks climbed for a second day, their first back-to-back gains in three weeks, as Spanish bond yields fell following a report the country will soon seek a sovereign bailout; possibly as soon as this weekend. When that actually occurs it will alleviate a little of the fear factor that is one issue that has contributed to these low interest rates. Yields on Spain’s 10-year debt retreated 14 basis points to 5.74%; it was only a few days ago that Spain’s 10 yr traded at 6.06%. Reuters late yesterday reported that the government is prepared to ask the European Union for a bailout, citing four unidentified European officials. The buying has carried over to Italy where yields are down as much as 7 bps. Today’s bid has lowered the Italian 10-yr 5 bps, and dropped it back below 5.00%. Meanwhile, light selling has the German bund yields up as much as 4 bps. A 2 bp uptick has the German 10-yr yield near 1.475%. Finally, Britain held a 10-yr Gilt auction that saw the yield fall to 1.760% (1.83% previous) and the bid/cover rise to 1.9x (1.8x previous). If Europe’s rates continue to find support, the US 10 yr note and MBS markets may be vulnerable to selling.
The only scheduled economic measurement today is Sept auto and truck sales; estimates are that sales dipped a little I Sept.
Data from the investment markets suggest consumers are not buying the QE 3 announced in Sept. According to Bloomberg News The Consumer Discretionary Select Sector SPDR Fund -- which includes Amazon.com Inc. and Macy’s --has lagged behind the Consumer Staples Select Sector SPDR Fund by 2.8% since Sept. 14 the day after the $40B a month MBS buy the FOMC announced the easing move. The recent weakening in discretionary stocks relative to staples differs from 2010, when Fed Chairman Bernanke’s speech at the annual Jackson Hole conference in late August foreshadowed QE2, setting off almost six months of outperformance of discretionary stocks over staples.
At 9:30 the DJIA opened +28, NASDAQ +12, SA&P +3. The 10 yr note yield at 1.64% +1 bp and 30 yr MBS price -3 bp.
It is Tuesday; tomorrow ADP payroll people will release its estimate for Sept private job growth, the consensus is ADP will report 140K jobs while the consensus for Friday’s BLS data is that private jobs increased 103K. There is always a difference between ADP and BLS data, but either estimate isn’t much. As the calendar clicks off toward Friday’s employment data markets are likely to stabilize with not much change. That Spain is now expected to ask the ECB for money to support its bans has, at least for the moment, relaxed the safety trade into German and US bonds and notes. Countering the relaxation is the Fed’s easing move that adds support to MBS and Treasury markets. The Fed’s current QE is substantially different from the other easing moves, previously QE 1. QE 2 had limits for the amounts of treasury and mortgage purchases; this easing is open-ended that could go on for a year or two. One year of monthly purchases adds $480B to the Fed’s balance sheet.
Rate markets continue to hold bullish technicals. The 10 yr note has resistance at 1.56% and support at 1.69%. MBS 30 yr FNMA doesn’t have resistance as the price is at historic levels, support for 30 yr MBSs is at 104.59 down 119 bp frm present levels. The mortgage markets could suffer large declines and still hold the bullish outlook.

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