AM Market Update

Prior to 8:30’s weekly jobless claims the 10 yr at 2.48% down 1 bp frm yesterday’s close. Bernanke’s testimony yesterday at the House Financial Services Committee didn’t light any fires, in terms of generating market movements it was a non-event. Today he goes before the Senate Banking Committee at 10:00 completing his requires semi-annual testimony. The Federal Reserve’s mixed messages on monetary policy are stoking volatility in the $4 trillion-a-day currency market, raising the odds that companies will have a harder time setting up exchange-rate hedges designed to protect overseas earnings. Weekly claims were expected to be down 16K, as reported claims fell 24K to 334K; the smoother 4 wk average declined 5250 to 346K. No immediate reaction to the data; the data is seen as being distorted due to the 4th of July holiday and that auto manufacturers that normally shut down this time of year for re-tooling are not shutting down this year.



CNBCs Rick Santelli hit the nail on the head this morning, commenting on Bernanke and his testimony and recent speeches. When asked about the economy he continues to say the economy is recovering and that the Fed expects it will continue to improve; then when asked, why then is the Fed continuing to buy $85B a month of treasuries and MBSs, Bernanke reverses his comments and says, oh no; we have to continue buying because the economy isn’t that strong. Fedspeak at its best.

At 9:30 the DJIA opened +18, NASDAQ unchanged, S&P +1; 10 yr note 2.50% +1 bp, 30 yr MBS price unchanged frm yesterday. Quiet this morning ahead of Bernanke’s appearance at the Senate Banking Committee. Will he get more direct and hard questions from the Senate than he got yesterday frm the House Financial Services Committee? He wasn’t pressed too much yesterday but Senators generally are more demanding.

The Bloomberg Consumer Comfort Index fell to minus 28.4 in the period ended July 14, its first drop in five weeks, from minus 27.3 a week earlier. The monthly Bloomberg consumer economic expectations gauge fell to a five-month low of minus 5 in July from minus 1. Higher prices at the gas pump and worker pay that is barely able to keep up with inflation weighed on consumer attitudes this month, as 28%, the fewest since September, said the economy was improving. What’s more, recent gains in the weekly comfort measure have been due to increases in sentiment among those who are better off financially rather than lower-income households.



The bond and mortgage markets this morning are at critical technical levels; the 10 yr at 2.50% is holding so far and unable to break below 2.47%, the low yield set on July 3rd the day before the June employment report that sent rates higher. The 10 went frm 2.47% to 2.73%, since then though the rate has worked lower on less fears that the Fed would begin letting the bath water out of the tub as early as Sept. Now with Bernanke walking the tight rope with conflicting comments the markets have settled down somewhat. The various technical indicators we track are generally neutral, not yet bullish. The 2.47% level for the note is key.

Based on current data I suggest floating your rate unless you are closing within the next 7 business days.