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%.

BEA’s final GPD for 3Q2011 is now 1.8%. It started at 2.5% and was first revised to 2.0%. This “final” GDP will continue to be revised for years to come making one wonder WTF?

Some of the source of these revisions are understandable because investments, exports and imports only have two months’ data when the first release is issued necessitating guessing at the last month of the quarter.

Rick Davis of Consumer Metrics Institute has written extensively about this making the case that some of what BEA does lacks transparency because they use deflators (adjustments for inflation) which are out of line with CPI and PPI and for which BEA offers not explanation as to their primitive data or methods.

Initial Jobless Claims
-364,000 for week ended December 17
-Down 4,000 from previous week’s revised 368,000 (was 366k)
-4-week moving average was 380,250, down 8,000
-Below 400k signals improving jobs picture
-Average jobless claims since 2000 is 390k, so 1-week and 4-week numbers are less. Great trend.
-Continuing Claims for the week ended 12/10 were 3,546,000, the lowest level since GDP started back up.

Consumer Sentiment
Consumer Sentiment for December is 69.9 up from 64.1 in November. This is not hard data but a survey intended to measure predisposition to spend.

Leading Economic Indicators
LEI for November was +0.5%. Previous was +0.9%.

This is a rehash of 10 other bits of data. It is very much influenced by monetary policy (rates and money supply.) It is intended to forecast GDP growth 3-6 months in the future.

FHFA Home Price Index
Index level for October was -0.2% month/month and -2.8% year/year. Consensus for October was +0.3%. Home prices have not yet bottomed out. Add to that the admission yesterday by NAR that it had been overestimating Existing Home Sales for 5 years and one does not get imbued with confidence. This index isn’t the most credible barometer either because it only includes homes with Fannie/Freddie loans. Here’s the full report.

Corporate Profits
3Q2011 Corporate Profits were +6.2% year/year.