Rates Drop on Fed Surprise: The first FOMC meeting of 2012 surprised markets by indicating the Fed would target overnight bank-to-bank Fed Funds Rate at 0 to .25% through late-2014. Before they were saying mid-2013. Rates dropped as mortgage bonds rallied on the news. The Fed also re-confirmed their Operation Twist strategy of shifting debt holdings from shorter into longer durations, and a ongoing reinvestment of proceeds from their existing mortgage bond holdings into new mortgage bonds, which helps keep mortgage rates low. Fed meeting summary.

Pending Home Sales Reverse Gains: The NAR’s December Pending Home Sales index was -3.5% to 96.6, a stark contrast from a 19-month high of +7.3% in November. This stat is new purchase contracts to buy existing homes that are expected to close in 60 days. Even with December decline, November-December numbers were best since March-April 2010. And December 2011 was +5.6% higher than December 2010. So this stat is trying to improve, but not helping is the fact that 33% of NAR realtors have reported cancelled deals on existing home sales October through December.

New Home Sales Questionable: December’s New Home Sales were 307,000 (seasonally adjusted, annualized), down 2.2% since November, and down 7.3% since December 2010. Average December sale price: $266,000. Estimated 302,000 new homes were sold in 2011, 6.2% below the 2010 figure of 323,000. New home sales are well below the 700k annualized needed for a healthy market. This long-term chart tells the story.

Home Prices Hanging On: The Federal Housing Finance Agency’s (FHFA) home price report was +1% for November but -1.8% since November 2010. FHFA’s report also said home prices are down 18.8% from their April 2007 peak. But this report isn’t as widely followed—nor does it impact rates—because it’s only for homes with Fannie/Freddie mortgages, so doesn’t include a broad enough sample as home price reports from Case Shiller and CoreLogic. The next Case Shiller report is Tuesday, and highlighted below.

GDP Not Looking Good: The first of three GDP readings for 4Q2011 was 2.8%, below estimates of 3%. But the trend for all of 2011 was that subsequent readings were cut. The third and final 3Q reading was 1.8% after being cut twice: second reading was 2%, first reading was 2.5%. Net result: 2011 GDP was just 1.7% vs. 2010 GDP of 3%. And it might go lower if 4Q is revised down.

Jobless Claims Still OK Despite Up Week: For the week ended January 21, claims for unemployment insurance rose 21k to 377k. Despite the rise, claims are still well below 400k, a threshold under which the job market is considered to be improving. The 4-week moving average is at 377,500, also below 400k. This is a good trend, but this report doesn’t count jobs added. We’ll get that data with Friday’s BLS report, previewed below. And also Jobless Claims are reported every Thursday.

PREVIEW JANUARY 30-FEBRUARY 3 MARKET WEEK

Next week’s economic calendar is busy. Plus it’s another big earnings week, and Greece’s debt deal will be top of mind for traders. Highlights below with rate impacts.

Flat Inflation Likely To Continue: December’s personal consumption expenditures index (PCE) is Monday. It’s the Fed’s preferred inflation measure. November’s annual figures were 2.5% total and 1.7% excluding food and energy. Same story with flat or declining monthly and annual PPI and CPI. December’s annual PPI was 4.8% total and 3.0% excluding food and energy. Annual CPI was 3.0% total and 2.2% excluding food and energy. No rate change on this PCE data, unless it’s an upside surprise, then rates up.

Home Prices Down Again?: November’s S&P Case Shiller home price report is Tuesday. Prices of existing single family homes across 20 major U.S. metro areas fell 1.2% in October and fell 3.4% since October 2010. It was second straight down month after a five-month ’20-City’ streak of modest rises. Still, dataset co-creator Robert Shiller said then: it’s a good time to buy a home, and last week did a detailed home price Q&A with Business Insider.

Manufacturing Growth Streak: January’s Institute for Supply Management (ISM) Manufacturing Index is Wednesday and estimates call for 55. December ISM was 53.9, up from 52.7 in November, with 50 as dividing line between between expansion and contraction. This was the 29th month of growth and a 6 month high. It’s slim growth, but a resilient streak. And of course consumers must still buy what’s being manufactured for this to translate into real economic growth. Rates even to up slightly.

ADP Jobs Report Expectations Vary: Payroll provider ADP’s January jobs report is Wednesday and expectations are broad from 175-250k. December’s ADP was a blowout: 325,000 private jobs created versus of 178,000 and November’s 204,000 figure. Still rates didn’t rise on this data last month. More in BLS jobs report preview below.

Rates May Hold Despite Better BLS Jobs Report: The Bureau of Labor Statistics January jobs report is Friday and expectations call for 170-225k nonfarm jobs created and unemployment unchanged at 8.5%. December’s BLS nonfarm jobs report showed 200k new non-farm jobs created vs. the 100k created in November, and unemployment dropped from 8.6% to 8.5%. Encouraging news since people need jobs to spend, but this chart shows just how much ground there is to regain from the recession depths. That link also explains that rates didn’t rise despite a second straight improving jobs report because Europe’s debt troubles loom larger for rate markets.

Greece Debt Deal Imminent, Unpredictable: Headlines and trading this week will focus on two main issues in Europe: (1) Greece’s months-long negotiations with private bond investors that involve exchanging outstanding bonds for new ones (with coupons as low as 3.6-3.75%) and taking 50-70% losses. If most private investors don’t agree, it could trigger credit default swaps, then banks come under pressure, then we’d have a European bank liquidity issue, which is really a global issue—U.S. rates would drop in this scenario. (2) Monday’s EU summit will focus on tighter fiscal union across the EU. But short-term, all sentiment hangs on the Greece deal. Volatility will reign, with most probable scenario being lower rates as investors focus on U.S. mortgage and Treasury bonds.

Earnings Highlights: Earnings season rolls on this week, including lots more that give us a feel for consumer strength: Philips Electronics, Gannett, Exxon Mobil, Honda, UPS, Pfizer, Amazon.com, Aflac, Oshkosh, Tyco, Aetna, Whirlpool, Tupperware, Qualcomm, Chipotle Mexican Grill, Las Vegas Sands, Allstate, AstraZeneca, Merck, Royal Dutch Shell Unilever, Sony, Kellogg, MasterCard, Allergan, Viacom, Cigna, Blackstone, CME Group, Pulte Group, Royal Caribbean, Clorox, Estee Lauder, Aon, Tyson Foods.

RATE & STOCK OUTLOOK

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The Fed will also continue Operation Twist to shift their debt holdings from shorter into longer durations, and continue reinvesting proceeds from their existing mortgage bond holdings into new mortgage bonds, which helps keep mortgage rates low.

I explained why this strategy keeps rates low when they announced it in September. Read it here.

The Fed didn’t explicitly confirm rumors about QE3 to buy more mortgage bonds this year.

Mortgage bonds (FNMA 3.5% coupon) rallied big on the news, closing up 39 basis points at 103.05.

Rates drop when bond prices rise like this, and vice versa.

If this mortgage rally holds or expands tomorrow, rates will reclaim record lows of 3.75% 30yr fixed single family home loans to $417k with zero points. Coming into today, rates were slightly higher at 3.875%.

Markets digested 3 housing reports today, plus we’ll get December new home sales tomorrow and 4Q2011 GDP Friday.

Here’s a preview of each item with rate impacts:

Tomorrow’s December’s New Home Sales estimates call for 310k-320k. November’s new home sales were 315k (annualized), 1.6% better than October, 9.8% better than year ago. This was the best since April, but well below the 700k needed for a healthy market, and 2011 looks to be the worst year ever for new home sales—we’ll also get the full 2011 number tomorrow. Average November new home sale price: $242,900. Rates would rise slightly new home sales was an upside blowout but that’s unlikely.

Friday’s first of three 4Q2012 GDP readings estimates call for 3% to 3.2%. The third and final 3Q reading was 1.8% after being cut twice: second reading was 2%, first reading was 2.5%. These cuts were a common pattern for 2011 GDP. But if we’re at the high side of estimates, rates could give up today’s gains as mortgage bonds sell on the initially positive perception.

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January 25 FOMC Statement (first 2012 Fed meeting)

Information received since the Federal Open Market Committee met in December suggests that the economy has been expanding moderately, notwithstanding some slowing in global growth. While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed. Inflation has been subdued in recent months, and longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth over coming quarters to be modest and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that over coming quarters, inflation will run at levels at or below those consistent with the Committee’s dual mandate.

To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Sarah Bloom Raskin; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who preferred to omit the description of the time period over which economic conditions are likely to warrant exceptionally low levels of the federal funds rate.

Homebuilder Confidence Inching Up: January’s homebuilder confidence index was 25, the fourth straight monthly gain and highest since June 2007. But still a long shot from 50+ mark that signals a healthy market—hasn’t hit that level since April 2006. Here’s how it looks 1985-Present.

Home Construction Drops, But Single Family Homes Resilient: Housing Starts (aka new construction) dropped and Building Permits were flat for December. Starts were down 4.1% to 657k (seasonally adjusted, annualized). Still below 1.5m needed to keep in line with population growth and scrappage, but Single Family Starts were up 4.4% to 470k, the highest in 2011 and since April 2010 when homebuyer tax credit boosted production. The more volatile Multi-Family Starts were down 13% to 187k. As for Building Permits, they were barely up: 0.1% to 679k, but still holding to highest levels since March 2010.

Existing Home Sales 11-Month High: December existing home sales hit their highest market in 11 months at 4.61m annualized. This is up 5% in December and up 3.6% since December 2010. For all of 2011, existing home sales rose 1.7% to 4.26m from 4.19m in 2010. Unsold inventory dropped to 2.38m, which is a 6.2 month supply, the lowest level in 7 years. But cancelled deals remain high: 33% of Realtors reported at least one cancelled contract in December, same for previous two months, up sharply from 18% in September and August, and up from 9% in December 2010. Buyers still very jittery, plus loans and appraisals are tough.

Manufacturing Better Again: Two key January U.S. manufacturing reports showed a consistent (but modest) up-trend, and both have 0 as dividing line between expansion/contraction. Empire State Manufacturing was 13.48, highest since May 2011 and third straight monthly gain. Philly Fed was 7.3, down from a from a revised 6.8 in December (was 10.3). But even with revision down for December, the January figure still marks a fourth straight monthly gain.

Inflation Still Flat: Flat producer (PPI) and consumer (CPI) inflation continues. December’s annual PPI was 4.8% total and 3.0% excluding food and energy. Annual CPI was 3.0% total and 2.2% excluding food and energy. All December annual (and monthly) figures were flat or down vs. November. There’s little near-term inflation fear which keeps rates low for now.

Jobless Claims Fall Sharply: For the week ended January 14, claims for unemployment insurance dove 50k to 352k. This was the biggest weekly drop since September 24, 2005, and the lowest reading since March 2008. The 4-week moving average is at 379k, also below 400k, a threshold under which the job market may be improving. This is a good trend, but this report doesn’t count jobs added. The job market is still weak despite a decent run for claims. Next report Thursday 1/26.

PREVIEW JANUARY 23-27 MARKET WEEK

Next week’s economic calendar starts slow then picks up steam Wednesday. Plus it’s another big earnings week, and Greece’s debt deal will be top of mind for traders. Highlights below with rate impacts.

First Fed Rate Decision of 2012: There’s two camps on Wednesday’s first Fed rate decision of 2012: those who say we’ll get a QE3 signal, and those who say we won’t. I’m in the latter. I think the Fed confirms their three current strategies: overnight bank-to-bank Fed Funds Rate targeted at 0 to .25%, a continuation of Operation Twist to shift debt holdings from shorter into longer durations, and a ongoing reinvestment of proceeds from their existing mortgage bond holdings into new mortgage bonds, which helps keep mortgage rates low (here’s how). The U.S. economy has been improving enough to have them hold on explicit QE3 signals. This could hurt stocks, and also hurt rates as bonds sell slightly.

STAT OF THE WEEK-Pending Home Sales: December’s Pending Home Sales are Wednesday and estimates call for -3%. Stark contrast from a huge November: New purchase contracts to buy existing homes were up 7.3% in November and up 5.9% since November 2010. At 100.1, this NAR pending home sales index was the highest in 19 months. April 2010 was last time index was higher (111.5) as buyers rushed in to get federal homebuyer tax credits. Very strong report but 33% of realtors reported cancelled deals on existing home sales October through December, and this pending home sales report is a leading indicator of existing home sales expected to close in 60 days. As noted above, December Existing Home sales were better and didn’t reflect these cancelled contracts yet, so maybe pending home sales will. Rates would only rise if it was another upside blowout.

Will 2011 Be Worst New Home Sales Year Ever?: December’s New Home Sales are Thursday and estimates call for 310k-320k. November’s new home sales were 315k (annualized), 1.6% better than October, 9.8% better than year ago. This was the best since April, but well below the 700k needed for a healthy market, and 2011 looks to be the worst year ever for new home sales—we’ll also get the full 2011 number Thursday. Average November new home sale price: $242,900. Rates would rise if it was a big positive surprise but that’s unlikely.

Home Prices: Speaking of home prices, we’ll get the Federal Housing Finance Agency’s (FHFA) November home price report Wednesday, and find out if the -0.2% figure from October will continue or turn positive. But this report isn’t as widely followed—nor does it impact rates—because it’s only for homes with Fannie/Freddie mortgages, so doesn’t include a broad enough sample as home price reports from Case Shiller and CoreLogic.

Fourth Quarter GDP: The first of three GDP readings for 4Q2011 is Thursday and estimates call for 3% to 3.2%. The third and final 3Q reading was 1.8% after being cut twice: second reading was 2%, first reading was 2.5%. This was a common pattern for 2011 GDP. But if we’re at the high side of estimates, rates would get worse as bonds sell on the initially positive perception.

Europe’s Hottest Topics: There are two main Europe topics impacting global markets next week: (1) Greece’s months-long negotiations with private bond investors that involve exchanging outstanding bonds for new ones and taking a 50% or greater losses. Losses more than 50% could cause investors to sue, which could trigger credit default swaps, then banks come under pressure, then we’d have a European bank liquidity issue, which is really a global issue—U.S. rates would drop in this scenario. (2) Besides short-term debt auctions in 5 Eurozone countries next week, the Netherlands and Germany have 30yr debt auctions Tuesday and Wednesday. These longer auctions are important to test appetite for European debt—U.S. rates would also drop if European demand is weak.

Earnings Highlights: There are about 119 S&P 500 companies reporting 4Q earnings this week including lots of companies that give us a feel for consumer strength: Apple, Johnson and Johnson, McDonald’s, Verizon, Travelers, Coach, Yahoo, AMD, ConocoPhillips, ETrade, Netflix, Delta Airlines, Nokia, Colgate-Palmolive, United Continental, JetBlue, Starbucks, Time Warner Cable, Under Armour, Eastman Kodak, Ford, Procter and Gamble, Altria, Chevron.

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Retail Sales: December Retail Sales estimates were already modest at 0.4%, but the actual was only 0.1% and even worse at -0.2% if you exclude auto sales. And for the week ended January 7, ICSC-Goldman weekly chain store sales were -5.3%. Weaker than originally thought holiday season and slow start to year for consumer spending.

Europe Downgraded. EU Rescue Fund Next?: S&P issued ratings downgrades throughout the Eurozone Friday. This was telegraphed early-December so it wasn’t as shocking as headlines might suggest. The real issue now is whether the EU rescue fund, the European Financial Stability Facility (EFSF), will also be downgraded which would reduce it’s size and efficacy. More on Europe in next week’s preview below.

Jobless Claims Jump: Claims for unemployment insurance jumped 24k to 399k for the week ended January 7 following a down-trend four of the previous five weeks. Now they’re at the highest level since the end of November, but still below 400k, a key threshold. The job market is still weak despite a decent run for claims before last week. Next report Thursday.

PREVIEW JANUARY 17-20 MARKET WEEK

Next week’s economic calendar is busy, plus it’s a huge earnings week. Highlights below with rate impacts.

Will Better Manufacturing Continue?: Two key January U.S. manufacturing reports are due Tuesday and Thursday, both of which have 0 as dividing line between expansion/contraction. Last month, they were both better: Empire State Manufacturing was 9.5, highest since May and second straight monthly gain. Philly Fed was 10.3, highest since April and third straight monthly gain after three months of contraction. January estimates call for almost no change to either index. Rates even.

No Inflation Again: Flat producer (PPI) and consumer (CPI) inflation for December is expected Wednesday and Thursday. November’s annual PPI was 5.7% total and 2.9% excluding food and energy. Annual CPI was 3.4% total and 2.2% excluding food and energy. All November annual (and monthly) figures were flat versus October. Rates even given that there’s little near-term inflation fear.

Homebuilder Confidence Inching Up: January’s homebuilder confidence index is Wednesday. December’s index was 21, the third straight monthly. Still a long shot from 50+ mark that signals a healthy market—hasn’t hit that level since April 2006. Here’s how it looks 1985-Present. Rates don’t move much on this report.

Will Home Construction Jump Again?: Construction (aka Housing Starts) and Building Permits for December are due Thursday and both are expected to decline slightly from November. Construction was up 9.3% in November to 685k (seasonally adjusted, annualized). Still below 1.5m needed to keep in line with population growth and scrappage, but highest since April 2010 when homebuyer tax credit boosted production. Excluding that one-time event, construction is highest since October 2008. Here’s the single family vs. multifamily breakdown. Building permits were up 5.7% to 681k, best since March 2010. Rates also won’t move on this report unless is was an upside blowout, then rates would rise.

STAT OF THE WEEK-Existing Home Sales: Not surprising that expectations for Friday’s December Existing Home Sales vary rather widely. Along with the November report, the NAR revised 2007-2010 sales down from 20,629,000 to 17,680,000, meaning 2,949,00 (or 14%) fewer existing homes were sold in those years than previously reported. As for November 2011, existing home sales were 4.42m annualized, up 4% in November and up 12.2% since November 2010. This is the highest mark in 10 months and 34% above mid-2010 low point. Also cancelled deals spiked again: 33% of Realtors reported at least one cancelled contract in November. Same for October, which was up sharply from 18% in September and August, and up from 9% in September 2010. Lots of interesting housing data in this report, but it won’t move rates much.

Europe’s Hot Topics: The only good thing about S&P’s Eurozone downgrades noted above is that it enables Merkel and Sarkozy to create more urgency toward an inevitable EU fiscal union. As for next week, there are many hot topics but the hottest is Greece resuming talks Wednesday with private investors on how those investors will take losses on Greek bonds. Those talks broke down last week. U.S. rates likely to remain low as EU fears remain front of mind and U.S. Treasury and mortgage bonds remain a safe bet.

Earnings Hit Full Stride: There are about 100 companies reporting 4Q earnings this week including key financials like Citigroup, Wells Fargo, Goldman Sachs, Bank of New York, Charles Schwab, Bank of America, Morgan Stanley. We also have big tech names like Google, IBM, Intel, Microsoft and EBay.

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This drop came despite improving jobs, retail sales, and manufacturing data. Below I recap, preview the rate and stock week ahead, and explain why rates are holding lows despite better economic data. Scroll to ‘Bottom Line’ if you’re on the run.

RECAP JANUARY 3-6 MARKET WEEK

Manufacturing Better Again: The Institute for Supply Management’s December manufacturing report was 53.9, up from 52.7 in November, with 50 as dividing line between between expansion and contraction. This was the 29th month of growth and a 6 month high. It’s slim growth, but a resilient streak. And of course consumers must still buy what’s being manufactured for this to translate into real economic growth.

Blowout ADP Jobs Report: Payroll provider ADP’s December jobs report showed 325,000 private jobs created, blowing away estimates of 178,000 and November’s 204,000 figure. Still rates didn’t rise. More in BLS jobs report below.

Jobless Claims Down-Trend Continues: Claims for unemployment insurance resumed their down trend the week of 12/31 after rising the week before—they’re now down four of the last five weeks. Jobless claims were 372,000 for week ended December 31, down 15,000 from previous week, and the 4-week moving average was 373,250, down 3,250. Average claims since 2000 are 390k, so so 1-week and 4-week numbers are better than long-term trend. More good U.S. economic news.

Holiday Retail Sales Looking Better: The Commerce Department’s December retail sales report is due next Thursday, and previewed below. But the ICSC-Goldman Sachs and Redbook Research chain store sales numbers each week give a more frequent pulse. Last week’s ICSC-Goldman and Redbook numbers continued the positive holiday shopping trend (driven by deep retailer discounts) for the week ended 12/31: ICSC +5.3 and Redbook +4.9 versus same week in 2010.

Better BLS Jobs Report: The Bureau of Labor Statistics December jobs report showed 200k new non-farm jobs created vs. the 100k created in November, and unemployment dropped from 8.6% to 8.5%. Encouraging news since people need jobs to spend, but this chart shows just how much ground there is to regain from the recession depths. And here’s a good explanation of how jobs are counted.

PREVIEW JANUARY 9-13 MARKET WEEK

Next week’s economic calendar is pretty light, but there are still many factors impacting markets. Highlights below with rate impacts.

Retail Sales: November’s retail sales were 0.2%, confirming that early reports of strong post-Thanksgiving Black Friday sales were overblown. Estimates call for a 0.4% rise in December’s retail sales report Thursday. The ICSC-Goldman and Redbook weekly sales reports discussed above were better year-over-year, but Thursday’s Commerce Dept. report still isn’t likely to be a blowout number. Rates even.

Treasury Debt Auctions: $66n in new Treasury debt will be auctioned as follows: $32 in 3yr Notes Tuesday, $21 in 10yr Notes Wednesday, $13 in 30yr Bonds Thursday. These auctions (not always same coupons) happen every other week. Overall, demand for this new Treasury debt has been strong the past couple rounds, helping mortgage bond (MBS) demand, which keeps rates low. Sentiment is cautious so bonds are in favor, but MBS are priced for perfection. So rates steady, even if strong auction demand.

Europe Front & Center Again: German and French leaders Angela Merkel and Nicolas Sarkozy meet Monday with some brief public comments after. This is likely be reiteration of previously announced debt crisis plans to centralize fiscal authority (which is inevitable and a long slog). They may also preview the agenda for the January 30 EU summit. Additionally, the first ECB meeting of 2012 is is Thursday where no rate changes are expected. And finally, markets expect ratings agency Fitch to downgrade EU credit outlook on Thursday. Such action would cause investors move into U.S. Treasuries and mortgage bonds, keeping rates low.

Lots of Fed Chatter: There are nine senior Fed officials making public speeches everyday but Thursday next week. Traders will be looking for signals about more government buying of mortgage bonds to keep rates low. On Friday 1/6, we got two such signals that stoked mortgage bond markets and brought rates down: (1) NY Fed president William Dudley said he thinks the Fed should continue accommodative policy to help housing, and (2) Boston Fed president Eric Rosengren was more explicit, saying “Further purchases of mortgage-backed securities would in my view help provide a more rapid recovery in housing.”

Stock & Bond Technicals: Looking at stocks, the S&P 500 closed at at 1278, up 1.61% on the week, ending in slightly overbought territory, and above its 200-day moving average of 1259. Earnings season kicks off next week but doesn’t hit full steam until the week after, so headline factors like Fed and EU issues noted above will drive sentiment. As for mortgage bonds (MBS), the 3.5% Fannie Mae coupon—a key benchmark lenders use to price consumer rates—rose 26 basis points on the week to close at 103.09. Rates dropped .125% as a result. MBS are now a comfortable 70 basis points above their 25-day moving average.

Bottom Line: I said rates would be even to up .125% last week on expectations of a stronger jobs report. We got the better jobs data but rates actually dropped .125%, mostly on Friday’s rather surprising comments from NY and Boston Fed presidents signaling more mortgage bond buying. Boston’s Fed president was especially explicit (excerpt above). Mortgage bonds are now priced for perfection, meaning any positive news would cause them to sell, pushing rates up a bit. But there’s not a lot of economic news next week. Only an impending ratings downgrade in Europe, more Fed speeches, and a rather light entry into earnings season. So rates will hold this range they’ve been in for weeks, and I expect them to be even to up .125%.