It is a little after noon and high time to get this update delivered to you as you may be wondering where it is.  I just arrived back from a flight from St. Thomas where the day was beautiful, though I actually forgot what day of the week it really was in all honesty.  Unfortunately, the mortgage backed securities market is far from being beautiful and the outlook remains ugly.

Last week saw many headline events that brought some confusion into the bond markets.  With continued job market weakness, the Jobless Claims reaching a rolling 4-week average of 619K and painting a very bleak future, at least for the short term.  Inflation was also on the minds of traders as yet another stimulus package was signed into law by Barack Obama and followed by increases in the PPI numbers.  CPI calmed the markets a bit, but if you look solely at the core numbers, inflation is far from being thrown into the back seat and may simply be a sleeping giant.  By week’s end, mortgage rates had bounced around and ended basically where they started.

This week will start of slow, but will have plenty of data coming into play.  Despite the level of data, however, the only typically major player will be Friday’s Chicago PMI numbers.  Here is this week’s schedule of data and known events…

• Monday:  3-month T-Bill Auction (1:00), 6-month T-Bill Auction (1:00)
• Tuesday:  Case-Shiller HPI (9:00), Consumer Confidence (10:00) Bernanke Testimony (10:00), 4-week T-Bill Auction (11:30), Duke Speech (12:00), 2-year T-Note Auction (1:00)
• Wednesday:  MBA Purchase Applications (7:00), Existing Home Sales (10:00), Bernanke Testimony (10:00), EIA Petroleum Status (10:30), 5-year T-Note Auction (1:00)
• Thursday:  Jobless Claims (8:30), Durable Goods Orders (8:30), New Home Sales (10:00), Money Supply (4:30)
• Friday:  GDP (8:30), Chicago PMI (9:45), Consumer Sentiment (9:55)

As I mentioned before, the Chicago PMI is the only major player typically.  However, you have Bernanke testifying to the Senate on Tuesday and the House on Wednesday, each of which could stir the markets.  Additionally, other data may play a larger than normal role, such as the Jobless Claims have been lately.

As we look at the charts, the picture is not very bright to say the least.  Mortgage backed securities have failed to penetrate their overhead resistance for the forth time, two of those times within the last week.  Adding to that fact, stochastics have again turned negative with a negative crossover pattern and plenty of space remaining before becoming oversold again.  In a normal market, these signs all point to mortgage rates climbing, but we are not in a normal market so things can change quickly.

What is abnormal about the markets?  Actually, not a whole lot.  The abnormalities rest primarily in Bernanke and his government buddies.  They have the ability to talk up, or otherwise artificially inflate the markets, as they have done so in the past.  Currently, mortgage bond traders have seen through the crap and are trying to drive mortgage rates higher.  This can be seen in the markets because the Fed increased their buying of FNMA 4.5% coupons, having purchased $8.0B last week alone and failed to get prices through resistance.

The bottom line is that it appears the markets are stronger than the Fed right now, which means mortgage rates will continue to hold steady, or break out higher unless the Fed manages to push them through the ceiling, a task they have been unable to accomplish thus far.