Wednesday, 2/3/10 4:13 PM

Again today, not much movement in the financial markets; the stock market ended a little lower, the rate market prices declined a little but still within the range that the 10 yr note has maintained for over two weeks now. Employment reports generally keep markets in a tight range until the actual data is revealed and that won't happen until Friday. Always the biggest data series each month, this month may be even more important with markets looking for jobs to actually increase a little. 

No matter what the employment report reveals about employment, the job markets are nowhere near at their bottom and consumers are nowhere near increasing spending. The housing sector is painted with a glowing brush, that defies the data as long as one is willing to look. Wall Street is so totally convinced the economy is on the way to recover back to the days prior to the financial collapse, and jamming that idea down the throats of investors, that any bad news on jobs is going to take equity markets down and at very least support the bond and mortgage markets on safe haven moves. Conversely, a better employment report should push stock indexes up a little and brake the tight trading range in the bond and mortgage markets to higher rates.

No matter how we look at it, and simultaneously always willing to go with the trend in our trading, it is increasingly more difficult to build a mental case that all is OK in the economy and as many believe, good times are here again. The US economy is built on housing, autos and consumer spending; none of those areas are recovering at the pace equity markets are expecting. Housing markets are still seeing prices dropping, foreclosures are still increasing and will do so for most of this year. The auto sector has shown some improvement but based on the worst sales in decades in 2008. Consumers are not spending as we did in the past, paying off debt and refraining from discretionary spending as the unemployment rate is closer to 17% than the 10% that The Street likes to talk about and the BLS employment data shows. The government is spending at a pace never before seen since WW II, notably with no real interest in curtailing it; federal debt now 13% of GDP and likely will be higher this year. The Q4 GDP released last Friday at +5.7% is not based on anything but businesses cutting costs, inventories and jobs; not a function of job growth, consumer spending or the housing markets. All said however, we are definitely the Lone Rangers in our weak opinion on the economic outlook.

Regulators saying today Fannie and Freddie will not increase mortgage purchases this year, rather focusing on their portfolios and foreclosures. With the Fed exiting the mortgage markets face the potential of an increase in rates of as much as 200 basis points. The TBA market (to-be-announced), the market that sets daily mortgage prices, is almost defunct and to re-build it will take time and capital along with higher interest rates. Sorry to have to say it, but once again Obama and his administration is way off reality. He ignored the economic collapse for too long favoring his health care program, it took a big loss in the Mass election to light the light; now he wants to re-tool the mortgage markets while the ship is barely treading water. WTF! Can't those politicians understand what will happen (more importantly not happen) if the current fragile mortgage markets are torn down now. Reform is nice and necessary but like the banking regulations, why hurry? Playing with fire usually gets all of us burned. 

Tomorrow weekly jobless claims are expected -15K at 8:30; Q4 productivity thoiught to be +6.0% and unit labor costs -2.5%. At 10:00 Dec factory orders are forecast to be +0.6%. 

PRICES @ 4:00 PM

10 yr note:                           97.10 -14/32 3.70% +5 BP

5 yr note:                             99.08 -6/32 2.41% +5 BP

2 Yr note:                             100.00 -1/32 0.88% +1 BP

30 yr bond:                          95.26 -30/32 4.64% +6 BP

Libor Rates:                         1 mo 0.229%; 3 mo 0.249%; 6 mo 0.383%; 1 yr 0.846%

30 yr FNMA 4.5 Feb:            100.27 -6/32 (.18 bp) ( unch frm 9:30)

15 yr FNMA 4.0 Feb:            101.19 -5/32 (.15 bp) (+1/32 (.03 bp) frm 9:30)

30 yr GNMA 4.5 Feb:           101.07 -4/32 (.12 bp) (+1/32 (.03 bp) frm 9:30)

15 yr GNMA 4.0 Feb:           102.09 -5/32 (.15 bp) (unch frm 9:30)

Dollar/Yen:                         90.97 +0.61 yen

Dollar/Euro:                       $1.3895 -$0.0065

Gold Apr:                            $1109.80 -$8.20

Crude Oil Mar:                    $76.93 -$0.30

Goldman-Sachs

Commodity Index:             504.12 -3.16

DJIA:                                 10270.55 -26.30

NASDAQ:                           2190.91 +0.85

S&P 500:                           1097.28 -6.04