Monday 1/05/2009

Happy New Year

Treasuries traded weak at 7:00 with the 10 yr note down 40/32 and its yield at 2.50% +13 BPS from Friday's close. By 9:00 treasuries rebounded off their lows but still weaker on the session. Mortgages are doing much better this morning; after falling about 14/32 in price last week the 30 yr fixed price at 9:00 was up a solid 15/32; 15s +9/32 (see below for 10:00 levels). The NY Fed already announced it will begin to purchase MBSs today but will not announce the amount it is buying today. $500B will be purchased by the end of the 2nd quarter, the amount bought today will be released on Thursday. The Fed has said, if necessary it would buy more mortgages.

Later today Dec auto and truck sales report is expected to fall to 10.0 million units from 10.2 million units in November. US auto sales in the past year have plunged from the average of about 16.0 million units seen in 2007 to November’s 26-year low of 10.2 million units. US auto sales are currently weaker than at any time since 1982 after the double-dip recession.

Today it is about the Obama stimulus package; we get some details from the Obama camp. Obama is asking that tax cuts make up 40% of a stimulus package, the people say. The measure may be worth as much as $775B, a Democratic aide says, meaning tax cuts may constitute more than $300 billion of the legislation. Nancy Pelosi says she wants to have a stimulus package on Obama's desk one week after his taking office---not likely to be that swift though. Everyone wants a stimulus package; no voices out there saying no. That said, any infrastructure programs will take time to implement and show any progress in new jobs. Watch the Congress pour on the pork and waste money; politicians say they will be good but they can't---not in their gene pool.

The Fed is stepping up to call for "pulling out all the stops" as Janet Yellen (SF Fed Pres) said over the weekend. Her remarks underscore the view of many economists that unprecedented fiscal measures are needed to combat the yearlong recession, and come ahead of meetings this week between President-elect Obama and congressional leaders. They also reflect the failure of Fed efforts so far, including record rate cuts, emergency lending programs and backstops for debt markets, to halt the crisis.

At 10:00 Nov construction spending, expected down 1.4%, was down just 0.6%, Oct was revised from -1.2% to -0.4%.

This Week's Calendar:
Tuesday;
10:00 Nov Factory orders (-2.6%0
ISM services data (37.0 frm 37.3)
1:00 $8B 10 yr TIPS auction
2:00 FOMC minutes (12/16 meeting)
Wednesday;
7:00 weekly MBA mortgage applications
8:15 ADP Dec employment estimate
1:00 3 yr note auction (amount TBA)
Thursday;
8:30 weekly jobless claims (+58K to 550K)
3:00 Nov consumer credit (+0.5B)
1:00 10 yr note auction (amount TBA)
Friday;
8:30 Dec unemployment (7.0% frm 6.7%)
Non-Farm payrolls (-475K)
10:00 Nov wholesale inventories (-0.9%)

Supply this week will weigh on the treasury markets; tomorrow $8B of 10 yr TIPs, Wednesday a 3 yr note auction and on Thursday a 10 yr note auction (the 3 and 10 amounts will be released today). Mortgages this morning are finding strong support on the Fed's announcement it will purchase MBSs today to begin the $500B purchase announced last Nov. $500B is a nice number but only a drop in the bucket that is needed to jump start the residential housing sector.

The bellwether 10 yr treasury hit its key support this morning at 7:15 when its yield ran up to 2.50%; it held and is trading back at 2.41%. The double bottom on the 10 yr caps the rate decline on the note; now unlikely to break below 2.00%. The 10 yr needs to stay under 2.50%, if it climbs over that level it will project a move to 3.00%. The mortgage markets won't be hit that hard as long as the market believes the Fed is intent on not allowing mortgage rates to climb; presently that is the thinking. 4.50% for 30 yr fixed rates however, is not likely as we see it now. Treasuries have run their course; although mortgages will find support, investors are not likely to find an appetite for mortgages much lower than 5.00%. To drive mortgage rates to 4.5% the market will need the 10 yr note trading back at the 2.00% level.