As we do, we will start the day by floating; however, unless mortgage prices increase at least 6/32 (.18 bp) from morning pricing we will likely lock and keep flat over the long weekend. Next week the bond market has to face supply and given the relentless (albeit flat for the past month) stock market and that the 10 yr note so far has failed to break resistance at 3.28% (currently 3.35%) the rate markets are vulnerable to some retracement.

Prior to 8:30 treasuries and mortgages were trading weaker this morning. At 8:30 the long-awaited August employment report hit. the unemployment rate jumped 0.3% to 9.7%, 0.2% higher than markets were expecting. However, the non-farm payrolls declined only 216K, about in line with estimates and better than what we were expecting. July NFP jobs were revised lower by 30K. The average hourly earnings increased 0.3%, a little better than 0.2% expected; yr/yr average hourly earnings are up 2.6%. The unemployment rate in August us the highest since June 1983.

The initial reaction was as you would expect, a lot of volatility. The stock indexes were trading better ahead of the employment rate and rate markets were being pressured; on the knee jerk the 10 yr note rallied back to unchanged, the stock indexes fell to unchanged. But in 15 minutes the stock indexes were improving while the 10 yr note and mortgages also improved from the initial reaction but were still weaker on the day. The employment report had something for everyone; bears and bulls. The jump in unemployment, a stat done by telephone interviews is troublesome, implying jobs are scarce while the 216K job losses is a lot better than ADP estimates and actually better than what traders were whispering yesterday. Bottom line, the report didn't change a thing; markets continue to believe we can have an economic recovery without the consumer, while the bearish view remains that without the consumer there will be no noticeable recovery. In the meantime stock markets want to shrug off any negativity and keep on kneepan on. At 9:00 the 10 yr note -5/32 at 3.36% +2 BP, mortgage prices -3/32 and the DJIA index +25. At 9:30 the DJIA opened +7, 10 yr note -4/32 and mortgages -2/32. (see below for 10:00 levels)

No matter how you slice it, the employment report isn't good news; 9.7% unemployment is seen this morning by some as probably the high in unemployment in this recession. Not a chance in our view, unemployment is very likely to top 10.0% and maybe 10.5% before we see the high. Businesses are not hiring in any significant way and those that are are entry level low income jobs. Recall the geniuses in Washington lead by the President increased the minimum wage two months ago, a drag on hiring. The other side of the debate goes like this; since the number of people losing jobs is slowing to just 200K+ a month businesses will soon begin hiring. After jobs were being cut by 700K a month early this year, chopping 1.6 mil jobs, cutting 200K a month is seen as good news and signs of recovery. Can't keep up cutting jobs by 700K a month or we would be in very deep water. Job cuts obviously had to slow, but new jobs of sizeable numbers is not on the radar for many months. One dude on CNBC this morning, "consumers are back", an ostrich in street clothes. And, we don't have to bring up the recession in housing or consumers up to their bellies in debt and have no desire or ability to borrow more.

This is a very short day; the bond and mortgage markets close at 2:00. The three day weekend will likely keep markets in check. Looking to next week, Treasury will auction $70B of 3 yr, 10 yr and 30 yr debt, always a factor in the rate markets. The stock market, for all the positive spin this morning on the less job losses than were expected, isn't doing much so far.

PRICES @ 10:00 AM

10 yr note: 102.08 -2/32 3.35% +1 BP

5 yr note: 100.12 +1/32 2.29% -1 BP

2 Yr note: 100.06 +1/32 0.91% -1 BP

30 yr bond: 105.10 -12/32 4.18% +3 BP

Libor Rates: 1 mo 0.253%; 3 mo 0.314%; 6 mo 0.712%; 1 yr 1.288%

30 yr FNMA 4.5 Oct: 100.13 +1/32 (+1/32 frm 10:00 yesterday)

15 yr FNMA 4.0 Oct: 100.27 unch (+1/32 frm 10:00 yesterday)

30 yr GNMA 4.5 Oct: 100.14 -3/32 (.09 bp) (+1/32 frm 10:00 yesterday)

15 yr GNMA 4.0 Oct: 101.16 +1/32 (+1/32 frm 10:00 yesterday)

Dollar/Yen: 92.85 +0.41 yen

Dollar/Euro: $1.4204 -$0.0039

Gold Dec: $988.40 -$9.40

Crude Oil Oct: $67.55 -$0.41

Goldman-Sachs

Commodity Index: 439.48 -0.88

DJIA: 9351.78 +7.17

NASDAQ: 1986.20 +3.00

S&P 500: 1004.62 +1.38