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Interest rates spiking higher this morning, the stock indexes jumping; both moves huge. The August employment report has nailed the bond and mortgage markets that had already looked very weak this week. Early this morning the 30 yr FNMA Sept coupon is trading below its key 20 day moving average, the first time we have seen that since last April. The 10 yr note yield at 9:00 this morning up 13 more basis points at 2.76%, mortgage prices down 18/32 (.56 bp) from yesterday's closing levels. At 9:30 the DJIA opened +95, the 10 yr -32/32 at 2.74% +11 bp, mtg prices at 9:30 -13/32 (.41 bp) on 30 yr mtgs.

The August unemployment rate at 9.6% was right on, up 0.1% from July; non-farm payrolls declined just 54K against general estimates of -100K, private job payrolls reported up 67K against estimates of +20K. The BLS reported revisions to June and July; the original totals for the two months was a decline of 351K jobs, revised to -229K. While employment remains a serious impediment to economic growth, the surprising improvements in the data released this morning are sending interest rate higher and stock indexes opening strong. The take away on the data is that while the economy is struggling, it isn't going off the cliff.

Some better news on the housing sector yesterday, July pending home sales were up 5.2% while estimates were for a slight decline. Pending home sales, contracts signed but not yet closed. While better, the housing sector remains in depression.

Yesterday afternoon in a surprise announcement the White House announced the President would make a statement at 10:00 this morning. Markets expecting some announcement on tax reductions for small businesses, as this is being delivered he hasn't begun his remarks.

At 10:00 the August ISM services sector report; the estimates for the overall index was a read of 53 frm 54.3, it fell to 51.5 the second lowest index reading this year. The employment component fell to 48.2 frm 50.9, new orders slipped to 52.4 frm 56.7 and prices 60.3 frm 52.7. The weaker data stopped the selling in treasuries and mortgages and took some wind out of the buying in equities. (Any index over 50 is considered expansion, under 50 contraction).

We have been warning for over a week that the interest rate markets were softening, after the employment report today the 10 yr note yield had jumped 20 basis points in rates since the close on Wednesday, mortgage rates on 30s up 7 basis points. Trading over the past two weeks implied investors were becoming less interested in treasuries as safety moves with the rates so low it had changed the risk equation between hiding in treasuries and accepting a little more risk in equities. While rates are increasing it is unlikely they will increase too much more; the worst we can expect for the 10 yr is another 25 basis points higher to test 3.00% and mortgage rates up another 15 basis points on 30s. We continue to expect high levels of trading volatility; we suggest taking advantage of any rallies in the bond market, it is very likely we have seen the lows now for mortgages and treasury rates. While the news today (and this week) was stronger than expected, it was not really great news, but the Treasury market seemed to be priced to a worst case scenario.

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