Morning Report - Jobs Day

Vital Statistics:

	Last	Change	Percent
S&P Futures	1453.4	-0.2	-0.01%
Eurostoxx Index	2696.4	-4.8	-0.18%
Oil (WTI)	92.08	-0.8	-0.90%
LIBOR	0.305	0.000	0.00%
US Dollar Index (DXY)	80.84	0.460	0.57%
10 Year Govt Bond Yield	1.92%	0.01%
RPX Composite Real Estate Index	192.1	0.1

Markets are slightly higher after the economy added 155k jobs in December.  The unemployment rate came in at 7.8%, flat vs the revised upward Nov number.  The labor force participation rate was flat at 63.6%. Bonds and commodities have been getting hit since the release of the FOMC minutes yesterday, which indicated QE's days are numbered.  The 10-year yield has broken out of its 6 month trading range, and MBS are down about 1/4 of a point.

The minutes of the FOMC meeting revealed that the Fed will probably end QE some time this year. This has put pressure on Treasuries, as well as commodities like gold.  The Fed is predicting 2.3% - 3% GDP growth this year, which is above most other forecasts.  They debated whether to purchase Treasuries or MBS, noting that they haven't been getting the "spill-over effect" in MBS that they had hoped for by buying Treasuries.  They also said that they do not want to give the impression that they are setting monetary policy solely on two variables - the unemployment rate and the inflation rate.

The minutes explain why Treasuries refused to rally on the debt ceiling brinkmanship last year - the market knew the Fed was planning to end QE some time this year.  And the differing reactions of the stock and bond market is explained because stocks were paying attention to the machinations in Washington, while bonds were watching the Fed. So this was not the typical "bonds are right, stocks are wrong" dynamic you usually see.

Tim Geithner plans to leave the Administration by the end of the month, and won't stick around for the debt ceiling debate.  White House Chief of Staff Lack Lew is the favorite to replace him. Lew worked for Citi from '06-'08, but other than that has spent his career in government.  This will be the first non Wall Street / Fed Treasury secretary in a while, since the disastrous reigns of industry guys like the Paul (The Tin Man) O'Neill and John Snow in the Bush Administration.

The Fed examines why lending rates have not fallen in lockstep with QE in a new paper which asks why isn't the 30 year fixed rate mortgage at 2.6%.  It does try and provide some reasonable explanations, for example, it does cite the increase in G-fees.  It also cites (a) increased put-back risk, (b) the declining value of MSR's, and (c) higher origination costs due to increased regulatory scrutiny. That said, the academics tested the hypothesis that each of these individual items were driving the increased margins for lenders, but nothing was significant by itself. So they reject that hypothesis.  Since the t-stat is below 2, it doesn't count, I guess, so price-gouging must be the explanation, and not these other reasons, which are 100% controlled by the government.  Sigh.