Current Trend Direction: Sideways in a Wide Range

Risks favor: Carefully Floating

Current Price of FNMA 4.0% Bond: $99.84, +12bp

Mortgage Bonds are trading modestly higher and remain in a range between strong overhead resistance and support at the 25-Day Moving Average. Yesterday afternoon, Moody’s downgraded Greece’s debt to junk status…and while this did not come as a real surprise, the markets reacted to the news, with Stocks giving up their gains on the day, and Bonds erasing all their losses.

San Francisco Fed President Janet “Always” Yellen is suggesting that in her opinion, Fed rate hikes shouldn’t need to happen until 2012. This is in sharp contrast to the growing list of Fed members who are feeling that a rate hike towards 1% should be happening right now. So we have members of the very same Fed, hearing the same data, that are in wide disagreement with one another.
The New York Empire Manufacturing Index came in at 19.57, nearly in line with estimates of 20.00. The report had little effect on the markets.

Executives from BP, ExxonMobil, Chevron, ConocoPhillips and Royal Dutch Shell will be on Capitol Hill today, testifying in front of the House Energy and Commerce Committee on offshore oil drilling and the effects of the massive oil leak in the Gulf. This comes before President Obama’s speech tonight at 8:00pm ET on the catastrophe in the Gulf…which will be his first address from the Oval Office.

Since the expiration of the Homebuyer Tax Credit, some purchasers are feeling that they may have missed an opportunity. But the recent drop in rates to historic lows after the expiration of the Tax Credit, could offset most if not all of the expired benefit. Much depends on estimated time in the home and loan amount, but you may want to do a calculation for your potential buyers based on how much they are saving each month in rate today, compared to where rates were at the end of April. In fact – use your new MMG Benefit, the Borrow Smart Analysis software to check it out right now. If you haven’t downloaded it yet – just look under Member Benefits on the site for your free download.
For now, we can continue to Float – but watch carefully, as prices approach a tough ceiling of resistance.

Current Trend Direction: Sideways in a Wide Range
Risks favor: Carefully Floating
Current Price of FNMA 4.0% Bond: $99.53, -19bp
Mortgage Bonds are starting the week lower, as the credit woes out of Europe have eased a bit…at least for the moment. The Euro is attempting to stabilize from its recent decline and now hovers near $1.22 against the US Dollar, which means it takes $1.22 USD to buy 1 Euro. The Euro had dipped below $1.20 in recent weeks. This positive move in the Euro was sparked by some good economic reports out of Europe, which has also helped propel most of their Stock markets higher…and this is coming at the expense of Bonds. A look at the Bond Page shows that Bond prices were pushed back lower from overhead resistance last Wednesday, and currently remain beneath this tough ceiling.
There are no economic reports due for release today and there are no Treasury Note auctions this week, so today’s trading will likely be influenced by Stocks and any breaking news out of Europe, as well as the aforementioned technical signals.
St. Louis Fed President James “Raging” Bullard, a voting member in 2010, was in Japan this morning saying that the European crisis should not cause the Fed to postpone raising interest rates as the US economy recovers. He went on to say that “While the sovereign debt crisis in Europe is indeed a serious matter, the global recovery at this point looks very strong, and seems unlikely to be derailed.” As we discussed in Friday’s Update, Mr. Bullard is part of a group of Fed Members who have expressed concern about the present accommodative policy and the need to hike rates sooner rather than later.
We can start the day by Carefully Floating, while paying very close attention in this volatile environment.

Risks favor: Floating

Current Price of FNMA 4.5% Bond: $102.53, +47bp

The Jobs Report was a complete surprise, and a disappointment in general. It was far worse than most estimates, including ours, as we had felt that the risks were for a stronger Report. And as a result, Mortgage Bonds are trading higher – but we need to pay close attention, as prices are right near a strong resistance level.

The headline number in the Jobs Report showed 431,000 jobs created in May, quite a bit below the 500,000 that were expected. And of that 431,000, there were 411,000 temporary census workers hired…so this was not a good number. Private employment increased by just 41,000, quite a bit below Wall Street estimates and the weakest gain since January. There were no revisions to April’s reading, but March was revised to show 22,000 fewer jobs created, taking that number to 208,000 jobs created from the previously reported 230,000. And even the Household Survey – which had shown 1.1M jobs created over the past three months – showed a very poor number last month, of 35,000 jobs lost during May.

As we have often written to you about over the years, the Household Survey or Current Population Survey (CPS) may be a more accurate reading, because this is where actual households are contacted. Additionally, this is the survey that gives us the Unemployment Rate. The headline job creations number that you hear about in the media comes from the business or Establishment Report, also known as the Current Employment Statistics (CES). This report includes the “birth-death ratio”, which we have also written to you about and explained to you about for several years. It’s interesting to see how just lately, some of the media networks appear to have just caught on to how misleading the birth-death ratio can be.

Obviously the number was a disappointment, but there still were modest job creations. Additionally, average hours worked did improve, which is a good sign. And the Unemployment Rate did drop from 9.9% to 9.7%.

Even before the disappointing jobs news, the stage was set for lower Stock prices and higher Bond prices, with more troubling news out of Europe this morning. Hungary has stated that they are in a “very grave situation” as it relates to their economy. This constant negative turbulence out of Europe has pushed the Euro down towards $1.20 this morning. And once the jobs number came out, the Stock losses and Bond gains accelerated.

Next week the Treasury will auction off $70B in 3 and 10 Year Notes and 30-Year Bonds. It will be interesting to see how these auctions perform with yields at very low levels.

We will start the day by floating and watch how prices trade near resistance. Be mindful that the last couple of times the Bond was near these levels, it did retreat lower.