Interest rates spiking higher this morning, the stock indexes jumping; both moves huge. The August employment report has nailed the bond and mortgage markets that had already looked very weak this week. Early this morning the 30 yr FNMA Sept coupon is trading below its key 20 day moving average, the first time we have seen that since last April. The 10 yr note yield at 9:00 this morning up 13 more basis points at 2.76%, mortgage prices down 18/32 (.56 bp) from yesterday’s closing levels. At 9:30 the DJIA opened +95, the 10 yr -32/32 at 2.74% +11 bp, mtg prices at 9:30 -13/32 (.41 bp) on 30 yr mtgs.

The August unemployment rate at 9.6% was right on, up 0.1% from July; non-farm payrolls declined just 54K against general estimates of -100K, private job payrolls reported up 67K against estimates of +20K. The BLS reported revisions to June and July; the original totals for the two months was a decline of 351K jobs, revised to -229K. While employment remains a serious impediment to economic growth, the surprising improvements in the data released this morning are sending interest rate higher and stock indexes opening strong. The take away on the data is that while the economy is struggling, it isn’t going off the cliff.

Some better news on the housing sector yesterday, July pending home sales were up 5.2% while estimates were for a slight decline. Pending home sales, contracts signed but not yet closed. While better, the housing sector remains in depression.

Yesterday afternoon in a surprise announcement the White House announced the President would make a statement at 10:00 this morning. Markets expecting some announcement on tax reductions for small businesses, as this is being delivered he hasn’t begun his remarks.

At 10:00 the August ISM services sector report; the estimates for the overall index was a read of 53 frm 54.3, it fell to 51.5 the second lowest index reading this year. The employment component fell to 48.2 frm 50.9, new orders slipped to 52.4 frm 56.7 and prices 60.3 frm 52.7. The weaker data stopped the selling in treasuries and mortgages and took some wind out of the buying in equities. (Any index over 50 is considered expansion, under 50 contraction).

We have been warning for over a week that the interest rate markets were softening, after the employment report today the 10 yr note yield had jumped 20 basis points in rates since the close on Wednesday, mortgage rates on 30s up 7 basis points. Trading over the past two weeks implied investors were becoming less interested in treasuries as safety moves with the rates so low it had changed the risk equation between hiding in treasuries and accepting a little more risk in equities. While rates are increasing it is unlikely they will increase too much more; the worst we can expect for the 10 yr is another 25 basis points higher to test 3.00% and mortgage rates up another 15 basis points on 30s. We continue to expect high levels of trading volatility; we suggest taking advantage of any rallies in the bond market, it is very likely we have seen the lows now for mortgages and treasury rates. While the news today (and this week) was stronger than expected, it was not really great news, but the Treasury market seemed to be priced to a worst case scenario.

Treasuries opened weaker this morning on news from China that its manufacturing pace has increased. The reaction sent the stock indexes screaming higher, at 9:15 the DJIA +107, the 10 yr note -15/32 at 2.53% +5 bp; mortgage prices holding but down 3/32 (.09 bp) frm yesterday’s close. China’s Purchasing Managers’ Index rose to 51.7 last month from 51.2 in July, the Federation of Logistics and Purchasing said. The median forecast of 17 economists in a Bloomberg News survey was for an increase to 51.5. Not a huge improvement but with negative sentiment having increased recently the data was seen as a relief and sent global equity markets higher. Australia also reported better economic news, although it was the Chinese improvements that lead the move higher in stocks and weaker rate markets. Last month the same Chinese PM report was very soft, this month some reprieve.

At 8:15 the ADP August private jobs estimate hit and surprised with a decline of 10K private jobs in the month with markets expecting an increase of anywhere from +13K to +40K new jobs. The report didn’t help the bond market however, it didn’t dent the strong trade in the stock index futures trading.

At 9:30 the DJIA opened +130, the 10 yr -15/32 2.53% +5 bp and mortgage prices holding well down just 4/32 (.12 bp) frm yesterday’s close.

The MBA today released its Weekly Mortgage Applications Survey for the week ending August 27, 2010.  The Market Composite Index increased 2.7% on a seasonally adjusted basis from one week earlier.  The Refinance Index increased 2.8% from the previous week and is at its highest level since May 1, 2009. The Purchase Index increased 1.8% from one week earlier. The unadjusted Purchase Index was 37.0% lower than the same week one year ago. The four week moving average Market Index is up 5.2%. 
The refinance share of mortgage activity increased to 82.9% of total applications from 82.4% the previous week and is the highest refinance share observed since January 2009. The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.43% from 4.55%, with points increasing to 1.34 from 0.89 (including the origination fee) for 80% loans. The contract rate is a new low for this survey. The average contract interest rate for 15-year fixed-rate mortgages decreased to 3.88% from 3.91%, with points decreasing to 1.45 from 1.64 (including the origination fee) for 80% loans. The contract rate is a new low for this survey.

More data at 10:00; July construction spending, expected to be down 0.6%, was down 1.0%, the lowest in 10 years. The Aug ISM manufacturing index was expected to be weaker than in July but came in better at 56.3 frm 55.5; new orders at 53.1 from 53.3 and employment increased to 60.4 frm 58.6. The ISM data coincides with the data out of China this morning. The DJIA was up about 130 points and immediately jumped to up 233; the 10 yr note yield jumped to 2.60% +12 bp and mortgage prices fell to -11/32 on the day (-.34 bp) frm yesterday’s close and -7/32 (.22 bp) frm 9:30.

A Brick Wall? The bellwether 10 yr note, the driver for long term rates, has hit the wall, at least for now. Six times in the last six days the 10 yr has run headlong into resistance when its yield has fallen to 2.48%, it did again yesterday. As we have noted, the huge selling that occurred last Friday has given us cause to reflect on how much lower rates might fall. Friday’s jump ion yield on the 10 yr note (17 basis points) was the largest move for the 10 this year and generated technical concerns that a temporary end may be at hand. Still depends heavily on the economic outlook; on the flip side the 10 yr yield shows little signs of increasing, the recent range is tight and rates are so far holding well.

The past two sessions have been confusing technically; rarely do we see the 10 yr note move 17 basis points up in one session as it did last Friday, then the following day rally back to erase almost all the rate increase. The selling on Friday did serious damage to the note but with no follow-though yesterday and a firm opening this morning taking the 10 yr back to its low yield at 2.48%, we are somewhat at a loss to explain what happened Friday and yesterday. Fundamentally, the equity markets were very weak yesterday sending buying back into safety at the long end; Friday the DJIA gained 165, yesterday -141. Bernanke’s speech on Friday, saying he is ready to execute more quantative easing if necessary, that the economy is growing slowly, really sent mixed signals. It is tiring to continue to hear Bernanke with his upbeat talk about the recovery when he fully knows that isn’t the case. The bond and mortgage markets acted rationally on both days, but still the magnitude of Friday’s rate increase remains hard to define from a technical perspective. Friday mortgage prices crashed 18/32 (.57 bp), yesterday prices increased 19/32 (.59 bp).  

This morning at 9:00 the 10 yr +16/32 at 2.48% -5 more basis points while mortgage prices were up 6/32 (.18 bp); the DJIA down 36 points. The June Case/Shiller home price index was expected to be up 3.1%, increased 4.2% yr/yr for the 20 city read and +5.0% for the 10 city data. The increase is totally a result of the tax credit that has expired; July sales prices are expected to fall again. 

At 9:30 the DJIA opened -28, the 10 yr note at 9:30 was sitting on the low rate at 2.48% that has stopped any rallies so far. Mortgage prices at 9:30 +6/32 (.18 bp). 

More data at 10:00; the August Chicago purchasing mgrs index, expected at 56.0, hit at 56.7 down from 62.3 in July; the new orders component fell to 55.0 frm 64.6, employment declined to 55.5 frm 56.6 and the prices pd component at 57.2 frm 58.1. Any reading over 50 is considered expansion. The reaction was positive in the equity markets because the data was expected to be soft, but came in slightly better than some were thinking; the DJIA went from -40 to unchanged on the initial reaction (see below for 10:10 levels). 

August consumer confidence index was expected at 51.0 frm 51.0 (rev’d from 50.4), was stronger at 53.5. The expectations component also increased, from 67.5 to 72.5. The reaction turned the stock market indexes up and is pushing rates higher from early lows at 2.48%—-another failure at that level. 

The long end of the curve (10 yr note) is having difficulty at its recent past low rate of 2.48%. Last Friday’s strong selling and yesterday’s equally strong gain has significance; if the 10 yr fails to push new low yields the likelihood of more treasury selling and lower mortgage prices remains an issue yet to be resolved. 

Bonds and mortgages got spanked hard last Friday, rocked around all week…again with the market given back all the week’s gains and then some on the shorter dated stuff. The data, the Bernanke, the technical, all played into the beat down and got some added help as markets in general decided to put risk back into play, consequences be darned. The 10-yr was able to take out a batch of key levels fairly easily with thinned Fri in Aug volume not helping any while traders reported mortgage players were not in as a presence. 

This morning, after the strong selling on Friday, the bond market is opening better with those key equity market indexes trading weaker after their strong rally Friday. Churning, churning; that is what we have in the equity markets. The key indexes are trendless, every time it looks like a trend will develop it is thwarted by uncertainty whether traders to sell or buy. The bond market is running out of steam with the 10 yr note finding resistance at the 2.50% area. Bernanke last Friday continued his windmill tilting; comments that the economy is continuing to improve but very slowly; that the Fed stands ready to do more quantative easing if necessary (using unconventional means). The Fed is relatively helpless now; the Fed can talk the talk, walk the walk but it is out of bullets. How many times? The US economy is stuck and won’t loosen until the housing markets stabilize and job security increases; neither is on the horizon until at least the end of 2011. 

July personal income and spending was out at 8:30; income up 0.2% in line with estimates, spending was slightly better, up 0.4%. Not any noticeable reaction to the report. At 9:00 the DJIA -37, the 10  yr note +16/32 (-46/32 on Friday) at 2.59% +7 BPs (+17 BPs on Friday). At 9:30 this morning mortgage prices were +8/32 (.25 bp) after falling 18/32 (.56 bp) on Friday. The DJIA opened at 9:30 -30, 10 yr +15/32. 

This week has a lot on the plate of data culminating on Friday with the big bopper, the August employment report. Reports on the August manufacturing and services sectors, weekly jobless claims and July pending home sales.    

This Week’s Economic Calendar: 

          Tuesday; 

              9:00 am Case/Shiller 20 City index (+3.1%) 

              9:45 am Chicago Purchasing Mgrs index (57.0 frm 62.3 

             10:00 am Aug Consumer confidence index (50.0 frm 50.4) 

              2:00 pm FOMC minutes from 8/11 meeting 

         Wednesday; 

             8:15 am ADP Aug private sector job estimate +13K 

             10:00 am July Construction spending (-0.7%) 

                            ISM Manufacturing index (52.9 frm 55.5 in July 

             2:00 pm Aug auto and truck sales (N/A) 

         Thursday; 

             8:30 weekly jobless claims (+2K to 475K) 

                    Q2 productivity revision (-1.7% frm -0.9% initially) 

                    Q2 unit labor costs revision ( +1.1% frm +0.2% initially) 

            10:00 July pending home sales (unch frm June which were down -2.6%) 

        Friday; 

            8:30 am August unemployment at 9.6% +0.1%) 

                         Non- farm jobs -120K but private sector jobs +44K) 

            10:00 am August ISM Services sector index (53.0 frm 54.3) 

Last Friday’s strong selling should not be ignored; the magnitude of the price declines and yield increases in treasuries suggests investors and traders are increasingly fearful that long term rates may struggle to decline more from their recent lows (2.48% on the 10 yr) and mortgage rates at their recent lows. However; there is still no longer term evidence that rates will increase with the economy struggling just to hold on. This week will likely see continued volatility in the financial markets (stocks, bonds and mortgages). Short staffed street and Fed statements produced second largest %change this year on the 10 yr note Friday. 

Treasuries and mortgages are under pressure this morning with the revision of Q2 GDP, expected to have declined from +2.4% in the advance data last month to +1.4%, as released GDP was reported at +1.6%. The equity market rallied on the better than expected growth and sent the interest rate prices down. 1.6% is nothing to shout about but with most big investors still sitting out traders have a field day moving prices around with little overall changes when seen from a wider perspective. Wages and salaries increased by a revised $6.5B in the first three months of 2010 from the fourth quarter, compared with $18.8B initially reported. The figures incorporate new, more comprehensive data from the Labor Department and show why consumer spending will be hard-pressed to accelerate in coming months. The trade gap in the second quarter widened to $445B, compared with an initial estimate of $425.9B, subtracting 3.37% from growth, the biggest reduction since record-keeping began in 1947. Imports grew at a 32.4% pace, the most since 1984.

The 10 yr note is churning between 2.48% and 2.55%, rotating every other day so far this week. Mortgage prices follow, yesterday 30 yr MBS prices increased .34 basis points, this morning at 9:00 am down .28 basis points. At 9:00 this morning the 10 yr back to 2.55%. At 9:30 the DJIA opened +75, the 10 yr 2.54% +5 BP and mortgage prices -.18 bp (-6/32).

St. Louis with comments that the second half of the year should show moderate growth. Using words like moderate tells very little; one man’s moderate is another man’s recession. We remind that the Fed like every other economists’ forecasts has missed reality; early this year the overwhelming consensus was 2010 would be a growth year and in 2011 a growth of 4.0% GDP. That kind of growth isn’t likely and the Fed is finally beginning to admit it. Bullard, questioned on more quantative easing said the Fed stands ready to do whatever is necessary, however he went on to warn the Fed has little wiggle room saying it is a fiscal problem that should be dealt with by Congress—-he didn’t say this Administration—-but between the Congress and the Administration they have collectively fumbled the ball and are seeing the results of economic decline. Fed Pres Bullard on CNBC this morning trying to put a positive spin on the economic outlook

The final data point this week at 9:55, the U. of Michigan consumer sentiment index; it was expected to have shown a little improvement to 70.0 frm 69.6. The sentiment index fell to 68.9 with the 12 month outlook remaining unchanged at 69.0. The sentiment index put some pressure on the equity markets but didn’t generate any noticeable reaction in the bond and mortgage markets.

Ben Bernanke is about to speak, opening the Jackson Hole conference; all week markets have been looking forward to his remarks hoping he has something of substance to say about the economy and possibly some more help from the Fed. The Fed is out of bullets; there is not much more to expect. Lower interest rates won’t help; rates are at historic lows, that hasn’t dented the housing depression, it hasn’t helped revive consumer spending it hasn’t stopped job losses. Driving rates lower would likely cause more harm by weakening the dollar that already is in free fall against the yen, lower rates forced by the Fed will drive the dollar lower and be counter-productive to any recovery.

Weekly jobless claims hit at 8:30 and were better than expected, down 31K compared to the estimates of down 15K. 473K new filings for unemployment isn’t good but in this paranoid market environment it did put a bid in stock indexes and turned the treasury markets from early price gains to unchanged at 9:00. Last week new claims were at 500K, in the data this morning that was revised to 504K, Continuing claims fell to 4.456 mil to 4.518 mil. The better claims is nothing to celebrate, at 473K new unemployment claims and no real increase in new job creation the outlook for increased employment remains bleak as the economy struggles along in what will be a very long period of recovery. The likelihood that job growth is on the horizon is wishful but hopeful thinking.

At 9:30 the DJIA opened +33, the 10 yr note -2/32 at 2.55% +1 BP and mortgage prices at 9:30 holding minor gains, +3/32 (.09 bp) frm yesterday’s close.  

As long as the housing sector is still declining as was evident in this week’s July data on existing and new home sales and consumers unwilling to spend the economy will at best muddle along. Almost every measurement of the economy that has hit over the past six weeks has been soft; manufacturing is slowing, consumers are holding back, there is no market of consequence for home purchases, and businesses uncertain how all the actions out of Congress will impact their business (heath care, FinRegs). While the outlook has changed from exuberance over the recovery to one of uncertainty, markets are adjusting to that “new normal” that was so roundly ignored by most analysts. Still don’t expect that double dip that seems to surface any day the equity market declines, but it is unlikely economic growth and lower unemployment is on the radar. 

Tomorrow’s revision of Q2 GDP and Bernanke’s comments opening the annual Jackson Hole Conference of economists should limit any significant moves in either the stock or bond markets today. Bernanke will open the conference with what is anticipated to be some additional clarity as to what the Fed is expecting and what the Fed’s sketchy plans might be to support the economy. Very low interest rates are going to be with us for at least another year, the Fed has little ammo now other than to keep interest rates low. There is some chatter the Fed will begin to ”punish” banks that are stashing huge sums at the Fed instead of using it to stimulate borrowing and investments. Whatever Bernanke has to say tomorrow it will likely be couched with Fedspeak and clouded with unrealistic positives about economic improvement—-the Fed can’t openly say what most of its officials are now worrying about. 

The MBA said this morning that 13.97% of all mortgage loans are delinquent or in foreclosure; a huge number but a little better than last month. No silk purses out of that pigs ear.

At 1:00 this afternoon Treasury will auction $29B of 7 yr notes to complete this week’s borrowing to fund the growing federal deficit. Yesterday the 5 yr note auction was not the best, it came with a higher yield than what traders were expecting yesterday morning but overall still not  bad. The rate the 5 yr got was about 2 basis points higher than trading in the WI market. Today’s 7 yr should do better as investors are moving farther out the curve on strong belief that recovery will be moderate at best, that the Fed will have to maintain low rates at least through 2011, and deflation might be brewing. Tuesday’s 2 yr auction and yesterday’s 5 yr auction are both underwater based on what the yields were at each auction, but only slightly. 

We are not expecting much change in stock indexes or the rate markets today ahead of tomorrow’s GDP report and Bernanke’s comments from Jackson Hole. The rate market remains bullish, the equity market bearish. Looking for the DJIA to decline to 9000 before the end of the year and long term rates to decline another 25 basis points on the 10 yr note but mortgage rates down another 15 basis points frm present levels.

World equity markets are taking a huge hit this morning; the US key indexes are under heavy selling. at 9:00 the DJIA -110, money running head long into safe havens. The 10 yr note yield sliced easily through the resistance that has stopped recent rallies at 2.55%, the 30 yr bond yield is down to 2009 lows at 3.59% -7 basis points so far this morning. Mortgages are being dragged along but not much as the port in the storm now is the treasury market.

The DJIA opened down 100 at 9:30, the 10 yr at 9:30 2.53% -8 bp and mortgage prices +7/32 (.22 bp).

In Europe there has been increasing talk out of key officials that a double dip cannot be ruled out, in China its recovery has slowed and now questions arising about its health, and here in the US recent economic data has been weak with growing pessimism. We don’t like being right when being right is a dismal outlook for the US recovery, but we have been concerned for months that this so-called economic recovery was being built on sand and had no real fundamental support. It is increasingly becoming apparent that the US and global economic slump is far from bottoming. Last week’s Philly Fed data, weekly jobless claims, and housing starts and permits were the most recent nails.

I am not going to kick the horse again but we continue to drive home the point, until now however we had been on the fringes with our negative outlook. There is no magic bullet here; we can’t grow out of this recession by building inventories that generated profits for the handful of investors and traders; someone has to buy the inventory and that someone isn’t buying (consumers). In every recession since the Depression it has been housing that has led the way out of it; this time the Fed, the Administration and the Congress made a huge mistake by not making housing its sole concern (after saving the greedy banks and the Street that caused it all). The stimulus has failed; now the leaders of the House and Senate have been advised to never use the word stimulus again, they are told to call it “the recovery plan”. The Federal Reserve is lost; based on all the officials and Bernanke when we read between the lines they have no answers or plans and are riding the slide just as we all are, the only answer from the Fed is to drive interest rates lower. Low rates are welcome but by now it should be very apparent that low rates are having little impact except making money for banks. Banks won’t lend, businesses won’t borrow or hire, the purchase markets for homes is in depression, big banks won’t admit their losses, and above all the job markets are now worsening based on recent data. And, leadership? There is no leadership.

At 10:00 July existing home sales were expected to have declined 13%; as released sales cratered; down 27.2% the lowest sales since June 1995! June sales were revised lower, to 5.37 mil annualized units to 5.26 mil units. Yr/yr sales are down 25.5%; with that pace there is a whopping 12.5 months supply now on the market. This data doesn’t need any further comments.

At 1:00 this afternoon Treasury will auction $37B of 2 yr notes; likely it will be well bid.

Treasuries and mortgages opened unchanged this morning after another failure Friday on the 10 yr note not able to break its rock solid resistance at 2.55% on Thursday when weekly jobless claims jumped to 500K and the August Philly Fed business index went negative for the first time in months with the overall index registering -7.7 and the new orders component at -7.1 and employment contracting to -2.4%. Thursday and Friday the DJIA fell 202 points yet the 10 yr note yield increased. Markets are left with the question; has the rate market totally discounted the economic stagnation in the current levels of rates? Mortgage rates hardly moved last week.

At 9:30 the DJIA opened +25, the 10 yr note traded unchanged on the session and mortgage prices were slightly better (+0.6 bp).

There is no economic meat to chew on today. Treasury will auction $7B of 30 yr inflation indexed bonds at 1:00; not much attention to it however—-there is no inflation now and likely not for a long time to come, with the economy faltering there is literally no pricing ability from manufacturers or the service sector.

July existing and new home sales this week are likely to confirm what we all know; that the housing sector has very little life. Treasury will borrow $102B with the monthly 2, 5 and 7 yr auctions. Demand for US debt has been strong over the past 18 months and we see little reason to that this week will be no different, but if there is any decline in demand with rates at these levels we would expect treasuries and mortgage rates to edge higher.

Weekly jobless claims on Thursday will draw a great deal of attention. Unemployment claims have been increasing for the past month, defying those that still believe jobs are being created. Last week claims were once again expected to have declined but jumped 12K to 500K, the level thought to be pivotal and up 50K a week from the averages in May and June. Another increase this week would signal once and for all another round or firings is underway.

This Week’s Economic Calendar:

            Tuesday;

                10:00 am July existing home sales (-13% at 4.65 mil units ann..)

                 1:00 pm $37B 2 yr note auction

           Wednesday;

                 7:00 am Weekly MBA mortgage applications

                 8:30 am July durable goods orders (+3.0%, ex transportation orders +0.5%)

                10:00 am July new home sales (+3.0% to 340K units ann..)

                 1:00 pm $36B 5 yr note auction

          Thursday;

                8:30 am weekly jobless claims (-15K to 485K)

                1:00 pm $29B 7 yr note auction

          Friday;

               8:30 am Q2 GDP revision (+1.4% frm +2.4% in the advance report last month)

               9:55 am August final U. of Michigan consumer sentiment index (70.0 frm 69.6)

The equity markets are on a treadmill; going nowhere but running hard. A traders delight with not many large investors making bets in this uncertain outlook. As is the case, the bond and mortgage markets ebb and flow as the stock indexes cavitate with no trend. The DJIA index opened better this morning after two consecutive declines last week, the rate markets about unchanged but with a slight negative bias at 10:00 with equity markets stronger. Unlikely there will be any decline in interest rates today ahead of the auctions and with stocks better; however, we don’t expect any major increase in rates either. Technically we are concerned that the 10 yr note and 30 yr mtgs are looking as if momentum is waning; still longer term bullish at the moment but the near term shows the markets losing their momentum.

This week has treasury borrowing a total of $102B in 2 yr, 5 yr, and 7 yr notes; the total is $2B less than last month’s series. On the economic calendar July existing home sales are thought to have plummeted 13% while new home sales are expected to be up 3.0%. Existing home sales in June dropped 5.1%, following a 2.2% decline the month before. Sales for the latest month (June) came in at a 5.37 million annual rate and are up 9.8% on a year-ago basis, compared to up 19.2% in May. New home sales made much more of a comeback than expected in June, rebounding 23.6% after plunging 36.7% in May. The June pace recovered to an annualized 330,000 from a revised 267,000 for May. The June percentage was large and that primarily was due to coming off a record low base.

The week also has those weekly jobless claims; as of this week-end the expectations are for claims to decline 15K frm 500K to 485K. Markets will also get the Q2 GDP revision expected to be at +1.4%, down frm 2.4% reported last month in the advance release. Look for the rate markets to continue testing current low yields with the potential of some back up with the levels of rates now at such low levels investors may be backing off. The demand for this week’s auctions will be a measuring stick; weak demand for the three auctions will likely send rates up a little. Over the past two weeks mortgage rates have settled in a narrow range while the yield on the bellwether 10 yr note has fallen 20 basis points over the past two weeks.

Treasuries opened better this morning with the key stock indexes pointing to a lower 9:30 open. No economic releases to think about today so markets will be left in the hands of traders. A technically critical day, the 10 yr on every rally recently has not been able to move below 2.55%; this morning at 8:30 it traded at that level but unable to break through. The same situation exists in the mortgage markets, Wednesday the 30 yr FNMA coupon tested and held its very key 20 day moving average that has held any price declines since mid-April. Yesterday mortgage prices jumped, probably more on technicals than fundamental rationale.

It is all about chasing higher yields these days with investors shying away from equities and looking for safety and the best rates possible. The 30 yr bond is the focus; its yield continues to decline, last Friday the 30 closed at 3.86%, this morning the rate is 3.62% down 24 basis points while the bellwether 10 yr rate has declined just 11 basis points and mortgages are unchanged on the week.

Stock markets in Europe this morning are under pressure and trading at the lows of the past month. Weak economic data in the US and Europe are keeping investors away and looking for safety with some potential to earn some returns, driving some into the 30 yr US bond. This is the time of the year when most investors sit out ahead of Labor day, August Dog days; traders dominate and exaggerate any moves in both directions.

At 9:30 the DJIA opened -33, the 10 yr note traded at 2.58% +1 BP and mortgage prices -4/32 (.12 bp).

Yesterday’s two data points, weekly jobless claims and the Philadelphia Fed business index, broke the back on the view that the US economy is recovering. Nevertheless, all we heard yesterday was ‘don’t worry-be happy’ comments from the heads CNBC chose to interview. Jobless claims hit one half million last week and have been climbing steadily for the past month after declining for a couple of months. The Philly Fed index went negative in August (-7.7) with new orders and employment components also reading contraction levels. Retail sales of chain stores have been less than expectations, the housing sector—-we don’t need to repeat ourselves, and consumers are rightfully increasing savings and paying down debt—-deleveraging.

We would dearly love to have a more optimistic outlook but unlike the media and many Street people, the Fed, and politicians that have no other alternative but to preach the good news or lose their jobs, we have to do our job. The US economy isn’t headed to a double dip, but the outlook going forward is for the economy to struggle along; a little better but no return to low unemployment or significant increases in consumer spending or a return to the kind of housing sector we were used to until 2008. It is that new normal that Mohammad El Erian at PIMCO coined and was roundly criticized by many. The new normal isn’t really new, it is more a return to an economy that will expand but with less leverage and more prudent spending by consumers.