Setting up for the Nov employment report tomorrow morning. The rate markets fell apart rapidly on Tuesday, more selling yesterday and another big price decline today. As we noted previously the rate markets had become overbought on beliefs the fed would keep interest rates low through most of next year; not starting any tightening until into the third quarter. Recent comments from Fed officials however have dampened that outlook; Fed's Plosser (Philly Fed) said Monday he wants the Fed to begin tightening sooner rather than later. His comments and those of Richmond Fed Pres Lacker cooled the idea that the Fed was in no hurry to withdraw the punch bowl. When the Fed does step up to withdraw monetary support the first moves will be to drain liquidity from the banking system by offering reverse repos that will pay banks interest while the money is at the Fed. Don't look for the Fed to begin increasing the FF rate soon unless there is more strength demonstrated in the economic outlook.
Bernanke was at the Senate Banking Committee for his confirmation hearing. As expected Senators took the opportunity to launch into Bernanke and the Federal Reserve for allowing financial excesses to drive the economy into the deepest recession since the Big One in the 30s. The Fed is also being highly criticized for its bailout deals; the committee specifically focused on the AIG bailout where every party came out whole using taxpayers money. As if politicians really give a hoot; haven't seen a Congress in my lifetime that didn't waste billions, and now trillions on junk pork spending.
Legislation pending in both the House and Senate would limit the central bank’s ability to lend to troubled institutions and remove its rule-writing authority on consumer financial products. The House on Nov. 19 advanced a proposal to remove a three- decade ban on congressional audits of Fed interest-rate decisions. Bernanke today said the proposal could subject the Fed to political pressure and undermine its credibility. “My fear is that if we were to take what might be perceived as an unpopular step, that Congress would order an audit, which would be a way, essentially, of applying pressure or be perceived as a way of applying pressure on our policy decisions,” Bernanke retorted. After all the posturing, Bernanke will be confirmed by the Senate.
Then there was the job summit; have little to report but likely a lot of chatter but nothing material. The administration is hand-cuffed with the mostly failed stimulus package that didn't do what Obama said it would. No monetary policy is likely, if there is an actual plan of consequence it will have to be fiscally. The Fed and treasury are out of bullets; if more monetary stimulus were on the table the dollar would fall like the rock of ages.
This morning's Nov ISM services data was weaker than expected but really didn't have much negative impact, nor did it add any support to the rate markets. Weekly jobless claims were less than expected, possibly offsetting the ISM data.
Tomorrow the mother of all monthly reports; Nov employment. After the weaker than expected ADP estimate for private sector jobs yesterday (-169K against -150K expected) estimates for tomorrow's non-farm payrolls has seen an increase in the estimates; the consensus however is still at 100K jobs lost with the unemployment rate unchanged at 10.2%. While the markets want to ignore it; estimates of unemployment may be as high as 17% when those that have given up looking are taken into account.
Treasury announced the auction details for next week; $40B of 3 yr notes, $21B of 10 yr notes on a re-open of the current on the run 10 yr, $13b of 30 yr bonds, also a re-open of the current 30 yr.
The technical picture on the 10 yr; it sits right on its 20 day moving average on the yield chart. So far it has held. On the mortgage market it is the same thing, the 4.0 Dec FNMA coupon is trading on its 20 day moving average. Any additional selling will ad to the negative near term outlook. Likely the key is the employment report tomorrow; less job losses than expected will add to the price declines in treasuries and mortgages.