This Week.

This Week; its employment week for June data, in the meantime a few key reports will draw attention. The June ISM manufacturing and servicing sector indexes, May factory orders and June auto and truck sales. The stock market continues to improve on increasing belief the economy is improving; it is all in the eye of the beholder and there are a lot of eyes focused on economic growth.

The Fed stoked up the belief when Bernanke said the Fed was readying its exit from market supports because the Fed sees better economic growth ahead. The bond and mortgage markets remain bearish with rates unlikely to fall much from present levels; but like equity markets it is dependent on economic performance.

The week will; likely continue with increased volatility as has been the case for the last three weeks.
Overnight the US bond market traded a little better but by 9:00 this morning the price gains were
over and the 10 yr quietly down 2/32 at 2.49% +1 bps; 30 yr MBSs -3 bps. No US news early on as
markets continue to prepare for Friday’s employment report that is being seen as not quite as strong as in May. We don’t take that seriously though as the data usually surprises and the forecasts are relatively useless. If the June employment is actually weaker than what was expected it will support the bond market as markets will fall back to looking for the Fed to continue its QEs. This remains to be very much a moving target.

US stock indexes slightly weaker in pre-market trading this morning; in Europe a report
showed producer prices in the 17-nation bloc unexpectedly fell in the 12 months through May, buoying speculation the European Central Bank will keep monetary policy accommodative when it meets on Thursday.

Later today two Fed officials will be talking; at 12:30 NY Fed Pres. Bill Dudley, and later (5:45 pm)
Fed Governor Jerome Powell. The last time Dudley spoke out he tried to ease markets’ concerns that were riled when Bernanke said the Fed was ready to begin reducing its monthly purchases of treasuries and mortgages. He is going to speak on economic conditions. Markets likely will sit quietly this morning until Dudley’s comments hit.

At 9:30 the DJIA opened -22, NASDAQ -2, S&P -1; 10 yr note -1/32 2.49%. 30 yr MBS price unchanged from yesterday’s close.

At 10:00 May factory orders, the only data today, were expected to be up 2.0% from April; orders
increased 2.1%, April orders originally reported up 1.0% were revised to +1.3%. No noticeable reaction to the report. After opening slightly lower at 9:30, at 10:00 the key indexes were improving. Mortgage prices also gaining momentum since 9:30, at 10:00 up 9 bps from 9:30.

June auto and truck sales will be released through the day; Chrysler already out with an increase of
8.2% about where analysts were forecasting. Estimates are for sales to have increased 15.6% the best pace since Dec 2007. Ford +13.4% hit at 9:30. Looks like truck sales from both Chrysler and Ford were extremely strong.

With the June employment report out on Friday we expect markets will remain within narrow
ranges unless Fed officials shake things up. The bond and mortgage markets will close early tomorrow ahead of the 4th on Thursday. Tomorrow the ADP private jobs report may roil the markets pending on what is reported, the present estimates are for an increase of 165K. The shortened day tomorrow will be the set up for traders into the Friday employment report from the BLS; current estimates call for an increase of 161K non-farm jobs and +175K for private jobs, the unemployment rate at 7.5% down from 7.6%.

Here are the ‘what ifs’; if the employment report is stronger than estimates the 10 yr note yield and
mortgage rates will likely move back to the recent high rates. If the employment report is weaker than
expected look for the bond and mortgage markets to improve taking the 10 yr down to about 2.35% (-13 bps from present levels) and mortgage rates down about 8 bps from present rates.

The technicals in the bond and mortgage markets are still bearish; we expect that to remain the case
unless the June data report is weak. Employment reports are difficult to forecast and usually set up
volatility when reported and are well off the estimates the majority of the time.

Contact a mortgage professional at Specialty Financial Services, Inc. to keep you fully up to date with the
market trends and advise you on how to proceed and close your loan at the best rate and terms available.

- Michael Corboy