Thursday - July 31, 2014, 2:15pm ET

Current Trend Direction: Sideways and at the bottom of the trading range

Float/Lock Bias: Floating into Jobs Report - but read on

Current Price of FNMA 4.0% Bond: $105.16, +3bp

A hint of wage based inflation is pushing the Bond markets lower this morning, but have rallied back to near unchanged levels. However, the Bond selloff is being tempered by a decline in Stocks, due to Argentina defaulting on its debt obligations.

The Labor Department reported today that the Employment Cost Index (ECI) rose by 0.7% versus 0.4% expected in the second quarter, the fastest pace since the fall of 2008, due mainly to higher retirement and healthcare costs. So expect that trend to continue.

In addition, wages, which are 70% of employment costs, rose by 0.6%, its biggest increase since the third quarter of 2008. The ECI measures the growth of employee compensation (wages and benefits) and as wage pressures increase, so does inflation because compensation tends to increase before companies increase prices for consumers. This report will have to be watched closely going forward and will be on the Fed's radar.

Americans filing for first time unemployment benefits rose by 23K in the latest week to 302K, below the 310K expected. However, the previous week was revised lower to 279K, the lowest since May 2000. The labor markets have been steadily improving.

The Chicago PMI fell to 52.6 in July, well below the 62.6 recorded in June, and below the 61.8 expected. The news helped pushed Mortgage Bonds back to near unchanged levels.

In housing news, CoreLogic reported that there were 49K completed foreclosures in June, down from 53K in June of 2013. The report went on to say that approximately 648K homes in the US were in some stage of foreclosure last month compared to 1 million in June of 2013. The sector has been improving, but the total number of homes still in the foreclosure process remains almost 4 times as high as the average in the early 2000s.

The Fed statement was released yesterday and didn't reveal any major surprises. The Fed is continuing to taper announcing a reduction of a total of $10B split between Treasury and Mortgage Backed Securities. The Fed will now buy $10B in Mortgage Bonds and $15B in Treasuries for a total of $25B per month, down from the original number of $85B. The statement also read that the Fed Funds Rate will remain low into mid-2015.

Jobs Report Strategy

This week has been volatile given the economic data, the Fed statement and the geo-political headlines. But the big event of the week is tomorrow's July Jobs Report where it is expected that employers added 220K new workers in both the private and public sector, down from the June reading of 288K.

The number is very likely to meet expectations as 220K, which is about the average amount of Jobs being created in 2014.

With that said, it is all about how Bonds react to the number. After this recent slide lower and losses being extended this AM, we are inclined to actually float into this Jobs Report...which is obviously a very different stance than most Jobs Reports. Why? We are seeing both the 100 and 200-day Moving Averages not too far beneath current levels. Additionally - prices are near the bottom of the trading range with the lows matching those of May. If prices fall through this nearby floor of support, your clients should lock as the Bond will likely drop further. But until that time and seeing how Bonds have already improved well off the worst levels so far today...advise new clients to float for now, but if Bonds move lower and close beneath the aforementioned support, they need to consider locking.

Joe Shamie NMLS # 241432

First Choice Loan Services NMLS # 210764

First Choice Bank NMLS# 177877

866-970-3400 x-5135

jshamie@fcbmtg.com