Jobless Claims

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Weekly jobless claims this morning were -11K about in line with estimates. Last week’s claims were revised frm 354K to 357K; the 4 week average +4500 to 352,500. Prior to the 8:30 data the 10 yr note had lost another basis point in yield to 2.08% but the claims data kind of ended that and the 10 back to 2.09% at 9:00. At 9:00 the DJIA was flat after being better earlier this morning.  In the MBS world at 9:00 prices continued under pressure, down 14 bp in price. Yesterday the last hour of trading between 4:00 and 5:00 MBS prices declined 10 bp frm what we reported at 4:00 taking away all the gains seen earlier in the day. A few lenders re-priced better about mid-day yesterday but it was gone by 5:00. The MBS market continues to decline, even more than in the treasury markets. Possibly pressured by comments on Tuesday by comments frm Dallas Fed Pres. Fisher when said the Fed should reduce monthly purchases of mortgage backed securities. Through the month of May it was apparent that lenders were unprepared for the massive selling of MBSs; not hedged, and that led to excessive panic and wild price declines. Yesterday the Fed’s Beige Book data wasn’t good based on comparing the last Beige Book last April, the Book couched the assessment on the economy not being as strong as it was in April’s Book. The result was a big decline in US stock indexes. In Europe this morning ECB Pres. Draghi kept their base lending rate unchanged while revising lower its growth rate for 2013. The ECB now expects the economy to shrink 0.6% and the inflation to be at 1.4% on average. German factory orders fell more than economists predicted in April, data showed today. Orders, adjusted for seasonal swings and inflation, decreased 2.3% from March, when they increased a revised 2.3%, the Economy Ministry in Berlin said; estimates were for a decline of 1.0%. At 9:30 the DJIA opened -22, NASDAQ unchanged, S&P -3; 10 yr note at 2.10% +1 bp. 30 yr MBS price for the 3.5 coupon -3 bp, the 3.0 coupon -18 bps. Nothing the rest of the day except speculation over what the May employment data will show tomorrow morning. Earlier this week the general forecast was for an increase of 178K private jobs and 167K non-farm jobs with unemployment unchanged at 7.5%. Wednesday ADP was expected to reveal private jobs increased 171K, as reported ADP said just 135K and in turn analysts are now expecting 165K private jobs. It is always a guessing game with the employment data; it is rare that what is reported actually comes close to estimates. The lead into the May report is about the same as the lead into the April report; ADP shocked markets with just 119K new jobs when estimates were an increase of 165K. The lower ADP data sent estimates for the BLS data lower but when the report hit it was stronger than expectations, the result started the rapid increase in rates that still hasn’t abated. What will we see tomorrow? Technically, the bond and mortgage markets remain bearish; we had support for the June 3.5 Fannie coupon at 103.00, it held until this morning (now trading at 102.89). Fundamentally, the main concern is what will the Fed do about its QE? Most market participants are of the mind that the Fed is about to begin tapering the easing’s. The timing is debatable but it doesn’t matter, markets are already moving to reflect some curtailment of the Fed’s QEs. Until this week the stock market didn’t seem to care about the reduction; if the Fed backs off it is an indication that the economy is improving, on the other hand if the Fed stays in the game it will keep rates from increasing and that is considered a good thing. If tomorrow’s May employment report is at or better than estimates the 10 yr will likely climb to 2.25% and take mortgage rates up another 10 basis points in rates.