Executive Rate Market Report

Rate markets still trading on the strong October employment report last Friday. Friday saw MBS prices decline 45 bps and the 10 yr yield increase 10 bps to 2.33% the highest yield since mid-September. Strong job gains (+271K), average hourly earnings twice as strong as forecasts (+0.4%), U-6 at 9.8% the lowest since May 2008 (less people working at part time or jobs less than workers want). No matter how you look at it the October employment data was much better than expectations and has elevated the prospect of the Fed increasing the FF rate in Dec. Still a lot of measurements between now and Dec, including the November employment data, but markets presently now believing a rate hike in Dec. It will take a huge reversal in the economic data now to dissuade the Fed from not moving in Dec.

Chinese trade figures showed a fourth-straight month of year-on-year decline in exports for October (-3.6% versus -1.1% in September) and the 12th consecutive yr/yr fall for imports (-16% versus -17.7% in September). Export growth in Germany beat expectations, hitting 2.6% m/m in September (-5.2% in August), while imports rose a greater-than-expected 3.6% m/m (-3.2% in August). San Francisco Fed President Williams (FOMC voter) said that the U.S. economy has hit his target for full employment based on the 5% unemployment rate. He said that the October decision to hold rates steady was "a close call, in part reflecting the crosscurrents we're navigating"; yet he isn’t in favor of a rate increase in Dec, saying inflation isn’t going to be an issue for two years and the Fed should “wait until we see the white's of inflation's eyes".

Whether the Fed does move in Dec or not, presently markets are discounting it in the movement higher in rates. Equity markets still making assessments about what a 0.25% increase to 0.37% will have on stock prices and economic growth. At current levels the bond market has almost discounted the increase at these levels. At Noon today Eric Rosengren, Boston Fed, will be speaking. He isn’t a voter n the FOMC this year but will be next year. Tomorrow Charles Evens (Chicago), Thursday Janet Yellen. Thursday there is a parade of other Fed officials speaking. By the end of the week markets not likely to know any more than today about what the Fed will do.

Over the last two weeks the yield on the 10 yr note has increased 36 bps as of 9:30 this morning and mortgage rates up 20 basis points in rate. Almost daily now the 10 yr treasury note is easily braking numerous technical levels, not even hesitating. All of the long positions and negative economic outlooks disappearing driven recently by the October employment report last Friday. The report showed the strongest yearly wage gains since 2009 and the lowest unemployment rate in more than seven years. Looks now like there is no stopping the Fed unless November employment falls substantially. Other data though between now and then can keep markets guessing.

Wednesday is Veteran’s Day, banks will be closed but the stock market will remain open. This week has just a couple of key reports while Treasury will auction $64B of notes and bonds. A new 10 yr and 30 yr bond will be issued in the quarterly refunding. It should not be news by now; the bond and mortgage markets obviously bearish; there isn’t any price point now that we can see that may hold prices. That said, but not to mislead, some of our momentum oscillators are approaching oversold levels. This week should experience some volatility after two weeks of strong selling. We however don’t want to float now, even a day or two of better prices isn’t going to change the current very negative outlook.