Treasuries and mortgages opened better this morning; this is employment week with Sept employment data out on Friday. Almost as important, the QE 2 easing that the Fed is expected to launch when the FOMC meets on Nov 2 and 3. In the meantime a few key data points to deal with. Outside of Friday's employment report there are three data points we will be looking at closely; the ISM services sector index, weekly jobless claims and August consumer credit.

At 9:00 this morning the 10 yr note +4/32 at 2.2.50% -2 bp; mortgage prices +2/32 (.06 bp) and the DJIA futures -33. At 9:30 the DJIA opened -2; 10 yr note +4/32 and mortgages +2/32 (.06 bp).

Market overall consensus is that the Fed will start QE 2 at the beginning of next month. While that is the consensus, we are uncertain about how the bond and mortgage markets will take it; we are not as bullish about a big decline in rates. The bond market has already discounted a lot of the move an easing announcement would have; at best the 10 yr may fall another 15 to 20 basis points and mortgage rates down just 5 to 7 basis points from present levels. Not much bang for the buck. Treasuries were little changed Friday even though New York Fed President Wm. Dudley said the outlook for job growth and inflation is “unacceptable,” and that more monetary easing is probably needed to spur growth and avert deflation. We are left with the thought and question; will lower interest rate do anything to jump start economic growth? So far the current historic low rates have not fueled much recovery; housing is still soft (and that is a kind description), consumers are paying off bills, and businesses are not hiring; lower interest rates may not help much.

Based on what the Fed bought in 2009, yields are trading as if it has already acquired an additional $315B to $670B of securities, according to Deutsche Bank AG, one of the 18 primary dealers that trade with the central bank. Policy makers will announce plans buy $100B to $1T in Treasuries before the year is out, a survey of 12 of the 18 dealers show. Based on what happened when the Fed began purchasing $1.725T of government debt and mortgage securities in 2009, lower yields are not a foregone conclusion. Treasuries lost 3.72% last year as a drop in bond prices drove the yield on the 10-year note to 3.84% from 2.22%.

TARP ended at the end of Sept. One of the most controversial programs in decades. According to present estimates the cost to tax payers is between $50B and $100B; it will take a year or two for the final cost to be determined however. ON the margin, given the panic that ensued in 2008 the program was not that bad.

Two reports at 10:00 this morning; August factory orders, expected -0.4%, were -0.5% but July orders were revised to +0.5% frm +0.1%. August pending home sales, contracts signed but not closed were expected up 1.0% but jumped 4.3%, the third month in a row that sales were up; compared to August 2009 however, sales are still down 20% frm a year ago. No immediate reaction to the two reports.

This Week's Economic Calendar:


             10:00 am ISM Services Sector index (51.8 frm 51.5)


             7:00 am MBA mortgage applications (N/A)

             8:15 am ADP employment est. for Sept (+18K new private sector jobs)


             8:30 am weekly jobless claims (+2K to 455K)

             3:00 pm Aug consumer credit (-$3.0B)


             8:30 am Sept employment data (private non-farm jobs +70K, overall non-farm jobs unchanged, unemployment rate 9.7% +0.1%)

             10:00 am Aug wholesale inventories (+0.4%) 

Financial markets are completely consumed with QE 2, more easing from the Fed. Listening to the multitudes of guests on CNBC one could expect all will be better with more easing from the Fed, there may be a lot of disappointment if it fails to do what most believe----increasing employment, increasing consumer spending and some kind of improvement in the depressed housing sector. We truly hope we are missing the point, but even 20 basis points lower in treasury rates and a few basis points lower in mortgage rates won't increase employment, consumer spending or increase home sales very much.



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