Mel's Blog

Bonds are rallying this morning, erasing yesterday's losses.  The reason for the rally in Bonds is due to the Stock market being down significantly so far today.  The cause for the Stock market's decline started with a rumor that financial bellwether CitiGroup (NYSE: C) may have far greater losses in store from mortgage related investments.  Further, CitiGroup's lofty 5.25% dividend, was rumored to be in jeopardy.  This set the mood for a lousy Stock open, and money is - at least temporarily - being parked into Bonds. 

And before I get to today’s high-impact economic news, let's recap yesterday’s Fed move.   As I expected, the Fed cut rates by a quarter point, taking the Fed Funds Rate target down to 4.50%.  As we have seen in the past, the reaction by the inflation hating Bond market wasn’t very favorable. 

The Fed stated "Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation.  In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully".  The Fed’s concern about rising energy and commodity prices and their potential for fueling inflation weighed on the Bond market.  Additionally, the Fed left the markets with the impression that there will be no further rate cuts for the remainder of this year. 

Speaking of inflation, the Fed has to feel good about this morning’s read on consumer inflation, as it remains in check for the time being.  The Feds favored inflation gauge, the Core Personal Consumption Expenditure Index (PCE) for October rose 0.2%, which was in line with expectations.  This left the year-over-year Core PCE unchanged at 1.8%, which remains within the Fed’s target zone of 1 -2%.  This is good news to the inflation fighting Fed, especially after they had already cut a half point in September.

Personal Income and Spending for September were both reported essentially in line with expectations.  The Personal Savings Rate was reported at 0.9%, which is a slight improvement from the prior month's reading.  Overall, the report shows consumer spending remains strong, core consumer inflation is holding steady and people are saving a little more of their after tax dollars.

Initial Jobless Claims were reported at 327,000, which was slightly below expectations of 330,000 - and the devastating fires in Southern California may have boosted this number higher.  The recent trend in Initial Claims suggests a fairly tight labor market.

Jobs Report Strategy

The markets are expecting tomorrow's Jobs Report to show 80,000 new jobs to have been created for the month of October.  We think the number is going to come in above expectations and Mortgage Bonds will likely have a negative reaction to it.  We feel the recent improvement in the trend of Initial Jobless Claims and yesterday's higher ADP reading are signs that the labor market is stronger than what economists are expecting.  Additionally, the higher trend in revisions makes the case for more job gains.  The weaker Dollar is helping US companies sell more products to Foreigners, where US goods appear inexpensive when purchased with higher valued foreign currency.  And here in the US, shoppers see foreign goods costing more Dollars, so they may as well buy domestic.  This is good for jobs here at home.  Yes, the Housing and Mortgage sectors are struggling, but much of the job changes have already taken place.  

With Mortgage Bonds trading near resistance and signs pointing towards an upside surprise in tomorrow's report, it appears prudent to lock on today's rate sheet and ahead of tomorrow's Jobs Report.