Anthony Hood
Equity Investment Capital
Office: 949-891-0067
Email: tony@equityinvestmentcapital.com
website: www.equityinvestmentcapital.com


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Thursday, December 02, 2010
Treasuries and mortgages opened weaker again today following the huge selling yesterday on belief the ECB would continue to support those economies facing possible debt defaults. After Ireland required a bailout Spain and Portugal moved into the queue for their turn. Yesterday the ECB head Jean Claude Trichet was quoted that he would do what is necessary to keep sovereign debt defaults from occurring. Overnight the ECB meeting didn't come out with a US style QE but the bank said will delay its withdrawal of stimulus measures. Spanish bonds and U.K. gas gained, while U.S. Treasuries fell. Trichet said the ECB will keep offering banks unlimited loans through the first quarter. Seven-day, one-month and three- month operations will be tied to the ECB’s benchmark rate, which it left unchanged at 1.0% today. While a step in the correct direction, the bank fell short of what markets thought yesterday when the US stock market rallied and US interest rates increased the most in one day this year.

At 8:15 this morning the 10 yr note rate traded at 3.01% and mortgage prices were down 15/32 (.47 bp). By 9:00 however some improvement; the 10 yr yield fell back to 2.98%, unchanged from yesterday's close and mortgage prices at 9:00 still lower, down 6/32 (.18 bp). Technically the bond, stock and mortgage markets may have over-reacted and prices are approaching near term oversold momentum on most of the oscillators we track. After a move like we had yesterday we should expect increased volatility; early today the stock index futures were looking better but by 9:00 the DJIA futures were hugging unchanged levels.

At 8:30 weekly jobless claims were reported up 26K to 436K, continuing claims at 4.27 mil frm 4.217 mil last week. Claims data slightly worse than expected (forecasts were for an increase of 16K) but still the total weekly filings remain under 450K that many had seen as a plus in the employment sector. We don't find any particular substance to the 450K level, traders seem to like it though. Employment in the US is still hardly able to meet the increase in the number of new entrants to the job sector.

That the ECB and EU appear ready to deal with debt problems in Europe took the safety trades into US bond markets away yesterday that had provided support the previous three days is one element sending the US rates higher, however we don't hold that it was the center piece for increased rates. Economic data recently has been beating forecasts implying the economy is in fact slowly recovering, yesterday the ADP people said non-farm private jobs increased by 93K, almost double what was thought. The litany of slightly better data points in the US and China recently has put the nail in the coffin for continued low rates at the moment. Also recall that the Fed has made it clear it wants US inflation higher; the combo of better economic outlook and increased inflation levels increased rates; the likelihood that interest rates will decline now is wishful thinking, rates have seen their best levels. We hear a lot of consternation over the jump in mortgage rates, what we should focus on is that mortgage rates are still at historic low levels. Expecting mortgage rates to fall to 4.00% or lower was never in our thinking, now it is not in anyone's' thoughts.

Oct pending home sales out at 10:00, expected down 0.5%, were up a solid 10.5%; pending sales are contracts signed but not yet closed. Yr/yr however pending sales are down 20.5% compared to Oct 2009. The initial reaction added a little gain in stock indexes but no changes in the bond and mortgage markets already weaker.

Tomorrow is employment day; estimates of 145K non-farm private jobs and the unemployment rate unchanged at 9.6%. Trade today should be a lot less hectic than yesterday's strong moves. We are not expecting much change in the rate markets or in the equity markets today ahead of employment tomorrow.