WeeklyBasis 10/29: Jobs, Fed, ECB Center Stage

Rates were even to end last week after +/- .25% daily swings, and are still up .25% from all-time record lows set October 3-4. Another huge week ahead: Fed and ECB rate meetings, October jobs report, lots more earnings, and Europe’s debt crisis slogs on.

Below I recap last week, then preview what’s coming. And please note: you can see if you qualify now for HARP II, the new refi plan for underwater homeowners, but loans won’t be made until November 15 at the earliest.

RECAP OCTOBER 24-28 MARKET WEEK
Home Prices: Case Shiller’s reported home prices rose 0.2% July to August, the fifth straight monthly gain but a tiny gain. Prices are down 3.8% since August 2010 and stuck at 2003 levels. So: Is owning a home smart?

GDP: The first of three 3Q2011 GDP readings showed the economy grew at 2.5%, compared to 1.3% for 2Q and 0.4% for 1Q.

Europe Debt Deal: Rates rose Thursday on news of the EU debt deal but reversed Friday as skepticism grows. Next week’s preview below.

Consumer inflation: The Fed’s preferred measure of consumer inflation, the Personal Consumption Expenditures Index (PCE), was within their 2% annual cap. They focus on ‘Core’ which excludes food and energy prices. From Sept 2010 to Sept 2011, all-inclusive PCE was 2.9% and Core was 1.6%. Inflation ok for now.

PREVIEW OCTOBER 31 – NOVEMBER 4 MARKET WEEK
Here are next week’s economic calendar highlights with rate impacts:

Manufacturing: Tuesday is the Institute for Supply Management October manufacturing report. September was 51.6 with 50 as dividing line between expansion and contraction. Good news: 26th months of growth. Bad news: barely growing. Also, manufacturing is weak as measured by two other October surveys: Philly Fed (PA) was 8.7, up from September’s -17.5, the first positive in 3 months. Empire State (NY) was -8.48, fifth straight monthly contraction. For PA/NY surveys, 0 is line between growth/contraction. ISM shouldn’t be a blowout number so rates even.

Fed AND European Central Bank Meetings: The Fed’s meets two days with a policy announcement Wednesday. Rates dropped after their September 21 meeting because they recommitted to mortgage bond buying (not QE!). The Fed is unlikely to surprise markets, but Thursday’s European Central Bank meeting is huge: the first with new ECB President Mario Draghi (bio). His stance on ECB policy and EU debt crisis is key. Rates even to down on Fed meeting. Rates are wild card for ECB meeting.

Jobs Report: Markets expect Friday’s jobs report to show 88k-100k new jobs created in October and unemployment to hold at 9.1%. The economy added 103k new jobs in September, plus August was revised from zero to 57,000 jobs created, and July was revised from 85k to 127k. I think this one will be close to consensus. If so, rates even.

Europe Debt Crisis: Besides Thursday’s ECB meeting, there’s a G20 Summit Thursday and Friday. Both may elaborate on last week’s debt deal, which helped stocks and hurt rates. Another wild card for rates.

Corporate Earnings: Another big earnings week including reports from Pfizer, Kraft, Nissan, Honda, Comcast, Clorox, Mastercard, AIG, Unilever, Credit Suisse, Anadarko, Time Warner, News Corp, Sony, LinkedIn.

Technical Trading Factors: Last Thursday, the S&P 500 broke clearly above it’s 200 day moving average of 1274 for the first time since August 2, and closed at 1285 Friday. Also Thursday, mortgage bonds—namely the 3.5% Fannie Mae coupon most lenders use to price consumer rate sheets—dropped clearly below the 50 day moving average they were hugging since October 7. Mortgage bonds regained much of Thursday’s sharp post-EU news losses Friday, but they’re still below the 50 day moving average.

Bottom Line For Rates: These technical factors suggest stocks and rates could start the week stable, but volatility will remain extreme as politicians and central banks hog center stage. Also the 10yr Note yield, a key benchmark for rate markets, has risen enough (now 2.32%) to create upside rate rate risk near-term. Long-term, a rate spike isn’t warranted by weak global economic conditions. But next week is key to determine whether rates rise near-term or hold this volatile-but-steady range we’ve been in since October 7, which is .25% above record lows.
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