This morning we read;
This Week; one of the busiest in months with most attention on Central Banks in the US and Europe. The FOMC meets on Tuesday and Wednesday with the policy statement Wednesday afternoon. It is widely believed in markets that the Fed will start another QE, the question at the moment isn’t will they but when. Some believe the Fed will announce an easing move on Wednesday while others are saying at the Sept FOMC meeting. The European Central Bank will meet on Thursday, an even more important event than the FOMC meeting. Last week interest rate markets were rocked when the President of the ECB said in a speech the bank will do whatever it takes to save the euro. Since then Germany and Italy in talks over the weekend sounded upbeat. Last week on the Draghi comments the 10 yr note and mortgage rates jumped; the 10 yr yield up 14 basis pointsince Wednesday and mortgage rates up 7 to 9 basis points in rates. This morning European stocks rose to a four-month high and Spanish bonds extended a rally on speculation that policy makers will take action to ease Europe’s debt crisis.
European Central Bank President Mario Draghi meets with U.S. Treasury Secretary Timothy Geithner in Frankfurt today after leaders in Berlin, Paris and Rome backed him by saying they will do what’s needed to protect the 17-nation euro. Draghi’s proposal involves Europe’s rescue fund buying government bonds on the primary market, buttressed by ECB purchases on the secondary market to ensure transmission of its record-low interest rates, two central bank officials said July 27 on condition of anonymity. Further ECB rate cuts and long-term loans to banks are also up for discussion, one of the officials said.
Adding to the importance of the week; the July employment report on Friday, early estimates call for private job growth of 105K with unemployment rate unchanged at 8.2%. The two key ISM reports also out this week, manufacturing index expected about unchanged at 49.9 and the services sector at 52.2 frm 52.1 in June. Easing from the Fed and the ECB meeting are the dominant focus this week but the data also important. We expect an increase in market volatility this week; technically the US interest rate markets are trading at critical levels.
At 9:30 the DJIA opened +1, NASDAQ +7, S&P +1; the 10 yr note at 9:30 unchanged at 1.54% with 30 yr MBSs.
Markets’ total focus this week will be on central banks and what the banks may do to ease interest rates lower. The ECB meets Thursday, after comments last week from its President Mario Draghi that the bank will do whatever it takes to save the euro, and that it essentially has enough bullets to do it, the safety trades that had driven US interestrates to historic lows are lightening up with investors and traders backing down on the view the EU might break apart. Meanwhile the Fed may or may not ease on Wednesday. In many respects the Fed is out of ammo in terms of helping the overall economy and lowering the unemployment level; nevertheless it is believed the Fed may announce an increase in MBSs in efforts to force mortgage rates lower.
From the technical perspective; last week’s heavy selling in the bond and mortgagemarkets took the 10 yr and 30 yr MBSs to their respective support levels. The 10 yr note found some support at its 40 day moving average while the MBS 30 yr tested its 40 day average and also held. This morning mortgage prices are holding minor gains from Friday’s close. The strong bullish bias has lessened but so far we do not have outright sell signals. We now define the market as neutral; bot bullish, not bearish—-on the cusp pending how the trade goes today and tomorrow into the FOMC policy statement.
