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Monday, January 30, 2012

Market Update for Jan 30, 2012

Monday, January 30, 2012

The rally in the bond and mortgage markets is continuing this morning, Europe stock markets weaker and US equity markets set to open lower at 9:30. Dec personal income and spending at 8:30 was in line with estimates; income up 0.5% against estimates of +0.4%. Dec spending unchanged against estimates of +0.1%; more evidence that holiday shopping didn’t meet those early lofty estimates. Spending stalled in December as Americans used a jump in incomes to restore depleted savings, indicating the biggest part of the economy will not be a driver of the expansion.

Last week Greek officials were “confident” that they could make a deal with creditors to fend off another debt default cliff. Nothing happened, not necessarily a surprise as we have been subjected to the continual uncertainty and lack of progress for two+ years now. Greece signaled opposition to economic oversight in exchange for aid, taking Italian interest rates higher this morning and driving equity markets lower. European Union leaders gather in Brussels today for their first summit of 2012 to put the finishing touches on a German-led deficit-control treaty and endorse a 500 billion-euro ($661 billion) rescue fund to be set up this year. Greece and its private creditors said Saturday they expect to complete a deal in coming days after bondholders signaled they would accept a bigger cut in their debt holdings----it never ends.

The DJIA opened -100; 10 yr note +17/32 1.83% -7 bp and MBS 30 yr prices +6/32 (.18 bp).

This week’s elephant is the Jan employment report on Friday; current estimates are an increase of 160K non-farm jobs and private non-farm jobs +170K, the unemployment rate at 8.5%. The actual unemployment rate is closer to 16% however, that the “official” rate is at 8.5% is evidence that many have simply dropped out of looking for jobs. Until the Fed revised estimates for growth downward for 2012 and 2013 last week and Q4 GDP advance report was weaker than forecasts (+2.8% against +3.1% expected) there was an increasing belief the economy was gaining a little momentum. Now economic bulls are re-thinking that idea.

The bellwether 10 yr note is working on a key resistance level at 1.80% this morning. In early trade it dropped to 1.82% and at 10:00 sitting at 1.83%. The MBSs are pushing into new highs in prices not seen in over a year. The Fed’s decision to leave the FF rate at 0.0% for the next three years and with no inflation now or on the horizon, the long end of the curve is seeing buying as investors seek yield. The safety trade over Europe’s debt crisis has ebbed recently but still plays a role in the decline in rates.

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