October 5th, 2011 2:29 PM by Lehel S.
Mortgage markets opened a little weaker this morning on a better ADP Sept jobs report than was expected. ADP re;ported non-farm private jobs increased by 91K, the estimate was for an increase of about 60K to 75K. Treasuries and mortgages were lower in price prior to the 8:15 report but didn't fall more after the release. Stock indexes a little better at 9:00, however there was not much reaction on the data. At 9:00 the 10 yr note off 8/32 at 1.85% +3 bp, yesterday it dropped to 1.72% during the day but couldn't hold; mortgage prices yesterday ended -13/32 (.41 bp) on 30 yr conventionals. The intraday volatility yesterday was extreme, MBS prices swinging .15 bp at a time through most of the session.
Over the previous six reports, ADP’s initial figure was closest to the Labor Department’s first estimate of private payrolls in March, when it understated the gain in jobs by 29,000. The estimate was least accurate in June, when it overestimated the increase in employment by 100,000. Last month, ADP’s initial figures showed a 91,000 gain in company payrolls for August, while the Labor Department’s data showed an increase of 17,000 private payrolls. ADP data is interesting but its the BLS report Friday that is the so-called "official". Current estimates for Friday's report is an increase of 90K, earlier n the week the estimate was +83K. The unemployment rate in Sept is expected unchanged at 9.1%.
Earlier this morning the MBA mortgage applications declined last week. Purchase applications fell 0.8% in the September 30 week in a soft ending to a solid month. Mortgage rates, the lowest since the 1940s, are a positive for housing demand as they are for refinancing demand. The refinance index, though down 5.2% in the latest week, has been rising sharply. The report notes that many refinance borrowers are deleveraging by moving to 15-year terms with the maturity making up 27% of the week's refinancing volume for the highest share on record. The average 15-year rate is 3.49%, up three basis points in the week. Total applications were down 4.3%.
Nothing new from Europe on a plan to give Greece more money to avoid default, now instead of getting funds in Oct it looks like it may be in Nov as there is no consensus among the ECB, IMF and the EU. Greece didn't meet the austerity measures laid out in order to get another injection of money.Greece is the poster country in the Euro region for the other countries on the edge. Europe's banks are unwilling to take increased write-offs on Greece debt they hold, fearing it would be the first of four more huge write downs on debts of Italy, Spain, Portugal and Ireland. Moody's downgraded Italy's debt rating three levels to A2 and said it may lower those of other European countries with debt rankings below its top level. It cut the rating on concern Prime Minister Berlusconi’s government will struggle to reduce the region’s second-largest debt amid weak growth. Moody’s gave the lower rating a negative outlook.
At 9:30 the DJIA opened -25, the 10 yr note -11/32 to 1.85% +3 bp and mortgage prices down 5/32 (.15 bp).
At 10:00 the Sept ISM services sector index was expected at 52.9 frm 53.3 in August. As reported the overall index hit at 53.0; new orders component at 56.6 frm 52.8, employment at 48.7 frm 51.6 and prices pd at 61.9 frm 64.2. Employment fell to contraction, under 50 the level between expansion and contraction. The initial reaction turned stock indexes from lower to slightly higher, no change in the bond and mortgage markets from prior to the 10:00 report.
Treasuries and mortgages are hitting a wall; once again the 10 yr fell to 1.72% yesterday then moved to close at 1.82%; two weeks ago the 10 dropped to 1.67% then ran up to 2.03%. The same pattern is occurring again suggesting that the low rates may have been achieved for the moment. That said, technicals still are bullish for treasuries and MBS markets. Yesterday's very volatile action is reflective of what we have noted previously, that when the 10 is under 2.00% it sets up uncertainty and whether rates can move lower. We can expect high levels of intraday volatility to continue.