Treasuries and mortgages being hit early this morning on news tht the U.S. and five other central banks injected liquidity into markets in a move to lower currency swap rates. The move is aimed at easing strains in markets and boosting the central banks’ capacity to support the global financial system. The interest rate has been reduced to the dollar overnight index swap rate plus 50 basis points (bps), or half a percentage point, from 100 basis points (bps), and the program was extended to February 1, 2013, the Federal Reserve said in a statement in Washington. Eurpoean stocks extended their gains, the euro advanced against the dollar; treasuries and MBS’s fell after te announcement. With the program, the Federal Reserve lends dollars to the EBC and other central banks in exchange for currencies inluding euros. The central banks lend dollars tocommercial banks in their jurisdictions through an auction process.
Thenext hit to the bond market came at 815am on the ADP Employment Report;ADP was widely expected to report non-farm private jobs at +125k to +130k. ADP said private jobs increased 206k. Analysts are now re-working their estimates for job growth when the BLS Employment Report is released on Friday morning. Prior to the report estimates were for an increase of 150k private jobs from the BLS. Last month, ADP’s initial figures showed a 110k gain for October, while the Labor Department’s data two days later showed an increase of 104k in private payrolls.
At 830am Q3 Productivity was revised to +2.3% from +3.1% and Q3 Unit Labor Costs were revised to -2.5% from -2.4%. With the liquidity injection and the ADP report, the data was pushed into the background
Prior to the actual open of stocks the DJIA at 900am was +275. The 10-Year Note at 900am was -28/32 at 2.08% above its 20-day and 40-day moving averages. mortgage prices at 900am were -6/32 (.18 bps) from yesterday’s close. As the case has been, the volatility in the rate markets is confined mainly to treasuries. Treasuries have been highly volatile over the past three months as European leaders tried to convince investors that nations in the region will be able to pay their debts. The U.S. 10-Year Note uyield rost to 2.42% on October 28th, after reaching a record low 1.67% on September 23.
By 930am the 10-Year Note, which hit 2.10% early on was back to 2.06% and mortgage prices moved back to unchanged after being down 10/32 (.31bps) at 830am. The DJIA opened +243, the 10-Year Note at 2.06% and mortgge prices -4/32 (.12 bps).
At 945am the November Chicago Purchasing Managers’ Index, expected at 59.0 from 58.4, jumped to 62.6; the components, Employment at 56.9 froom 62.3, New Orders 70.2 from 61.3 and Prices Paid 60.2 from 66.0. The headline much better than thought and added to the ADP jobs report pushed the DJIA to +388 at 950am.
At 1000am September Pending Home Sales, contracts signed but not closed, was thought to be +0.1%. NAR reported Pending Sales jumped 10.4%; year-to-year Pending Sales +9.6%. More positive news.
Later this afternoon (200pm) the Federal Reserve will release its Beige Book, the Federal Reserve’s detailed economic report from all 12 Federal Reserve Bank Districts. Normally not much in it that markets are not already aware of but at times the details do attract interest. In this case it probably won’t with all the attention on the Employment Report on Friday and the continual unfolding drama out of Europe.
Some positive movement in the world of central banks, better job growth than thought and the regional Chicago Purchasing Managers Index all combine to send equity indexes roaring higher and pushing treasury interest rates higher. We have mentioned numerous times over the last couple of months that U.S. long-term interest rates would find it a huge hill to climb to trade for any extended time under 2.00%. The 10-Year Note, driver for mortgages, has tried a number of times since September to hold under 2.00% but has not been able to hold. We believe U.S. long-term interest rates are about as low as they may fall based on the present fundamentals. That said, Europe is a time bomb, if defaults actually occur it would change out outlook; until then at the 2.00% area is about the best we expect
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