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I am floating rate locks again to start the day. The equity markets hold the key to break rates into new recent lows (yields). Lower stock indexes today are critical to improving mortgage rates; if we get a lower close in the indexes the 10 has a good chance to re-test resistance at 3.28% and mortgage rate to decline 10 to 15 basis points.

No trending movement in the rate markets, just chop with the 10 yr and mortgages trading in a 10 basis point range for the past two weeks. Yesterday, one of the more volatile days in months, drove the 10 yr to 3.52% momentarily, then back to close at 3.41%, covering the entire trading range on the note in the last couple of weeks, mortgages also churning with no real changes.

At 8:00 this morning the 10 yr was unchanged, mortgages were +2/32 frm yesterday’s close. At 8:30 weekly jobless claims were expected to be up 5K to 550K, as reported claims declined 21K; continuing claims also dropped, from 6.26 mil last week to 6.138 mil. The reaction pushed the 10 down 4/32 and mortgages at 8:45 down 2/32. Stock indexes were flat prior to the claims data but increased 31 points on the DJIA. At 9:00 the DJIA futures was +10; 10 yr note +1/32 and mortgages +2/32. At 9:30 the DJIA opened +49, 10 yr +2/32 and mortgages +3/32. (see below for 10:10 levels)

August existing home sales at 10:00 were expected to be up 2.0%, they fell 2.7% to 5.10 mil units against 535K expected. Prices fell 12.1% annualized, inventory levels at a 8.5 month supply, the lowest level in 2 yrs. Government tax credits for first-time buyers and foreclosure-induced price declines are helping the housing market recover from the worst slump since the Great Depression. Not any initial reaction to the report n the bond market, the equity markets however, went negative after being up 60 points on the DJIA earlier.

G-20 meeting begins today in Pittsburg at 6:00 PM and concludes at 4:00 PM tomorrow with a press conference; however nothing will come of it in terms of market movement. Leaders of the G-20 nations have to confront $9T of global debt created to keep the financial systems from complete collapse. Their next challenge will be to reduce the resulting debt before it sparks higher bond yields and erodes their governments’ creditworthiness. The International Monetary Fund says G-20 debt will reach 82.1% of gross domestic product in 2010, almost 20 percentage points more than two years ago and the equivalent of about $37 trillion. US debt is now 84% of GDP, a level that markets have yet to fully understand as it impacts global growth.

Yesterday’s action in the stock market, closing lower than the previous day after making a new multi-month high earlier in the day, may have a significant impact on the near term outlook in the equity markets. A new high, then closing lower than the previous day, is a technical key reversal. Whether it is meaningful depends on today’s trading, a lower close will add to the view stocks may finally be setting up for a major correction. Many times a key reversal pattern leads to a change in direction, but there has to be a lower close today to add conviction and confirm the reversal yesterday. Significant for the rate markets; to drive mortgage rates lower the bullish bias in equities has to be shaken.

One more auction to go through today; $29B of 7 yr notes at 1:00. Yesterday’s 5 yr was not as good as we hoped, the rate was slightly higher than where it traded ion the WI (when issued) market earlier in the day, demand was decent however.

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High volatility today in the rate and stock markets; treasuries were under pressure after the 5 yr note auction had a higher yield than what was expected pushing the 10 yr down 18/32 at one point with its yield jumping to 3.52% for a very short time. Mortgage prices at 2:00 were down 16/32 on the day. At 2:15 the FOMC statement was released and flipped the markets hard; the 10 rallied from -18/32 to +11/32, the yield dropped from 3.52% to 3.41% and mortgage prices from -16/32 to +6/32. Most lenders held the line on the early afternoon selling, and also didn’t bite on the knee jerk rally on the statement. The DJIA jumped to +80 on the statement, but also fell back to close on the lows of day—-buy the rumor, sell the fact?

The FOMC statement had little new in it as far as we saw other than a reaffirmation that the Fed would likely keep rates low for a long time as the economic outlook, while improving isn’t likely to grow much with unemployment high and home price wealth lost. Nothing really new in the statement, just confirmation rates are likely not about to increase much. The 10 yr once again has held its support at 3.50% on a closing basis. While treasuries were volatile today, mortgage prices were even more so. The statement in its entirety follows.

FOMC Policy Statement: Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn.  Conditions in financial markets have improved further, and activity in the housing sector has increased.  Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.  Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales.  Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability.  The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.  To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt.

The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010.  As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009.  The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets.  The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted. (end)

The $43B 5 yr drew 2.470% with a 2.40 cover and an indirect bidder take of 44.8%. This is against the 2.435% to 2.460% anticipated yield in the WI trade this morning and an average over the ’09 auctions of 2.22 and 43.1%.

Tomorrow markets finally have data to think about. Weekly jobless claims at 8:30 are expected to increase by 5K to 550K, continuing claims down to 6.195 mil frm 6.23 mil the previous week.At 10:00 August existing home sales are expected to be +2.0% to 5.35 mil units annualized.

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Monday September 21, 2009

Rate markets opened better this morning with the stock index futures trading weaker. At 8:30 the 10 yr note +12/32 3.44% -4 BP, mortgage prices +6/32 and the DJIA -57. Global stock markets were weak as many currently are re-thinking the levels to which global stocks have risen in the face of what will be considered a slow economic recovery. It is on again, off again with the equity markets; one day its pedal to the metal, the next its bullish but maybe too much too soon. In the end, so far there has been no sustained selling in the US or any other bourse; on any dips buying cuts off declines. At 9:00 the DJIA -57, 10 yr note +11/32 and mortgage prices +7/32. At 9:30 the DJIA opened -68. the 10 yr +11/32 and mortgage prices +6/32; (see below for 10:10 levels)

This week supply and the FOMC meeting are the dominate events. August existing and new home sales and weekly jobless claims are the key data points. Treasury will borrow $112B in 2,5 and 7 yr notes.

At 10:00 this morning August leading economic indicators, expected to be +0.7%, were +0.9%, July LEI revised to +0.9% frm +0.6%;the 5th straight month LEI has increased; LEI is a read that provides the economic outlook six months out and is a compilation of six other data reports. Generally LEI has little direct impact on the bond and stock markets unless it is well off estimates.

This week’s Calendar:

Tuesday;

10:00 FHFA housing price index (+0.5%)

1:00 $43B 2 yr note auction

Wednesday;

7:00 AM weekly MBA mortgage applications

1:00 $40B 5 yr note auction

2:15 FOMC policy statement

Thursday;

8:30 weekly jobless claims (+5K to 550K, continuing claims 6.195 mil frm 6.23

mil last week)

10:00 August existing home sales (+2.0% to 5.35 mil units)

1:00 $29B 7 yr note auction

Friday;

8:30 August durable goods orders (+0.3%, ex transportation orders +1.0%)

9:55 the U. of Michigan consumer sentiment index (70.5 frm 70.2)

10:00 August new home sales (+1.5% to 440K units)

The MSCI World Index is trading at its highest valuation since back in 2003; an increasing concern that the equity markets have overrun themselves based on the economic outlook over the next year. The MSCI World measure is valued at 27.7 times profit, the most expensive level since June 2003. The Dow Jones Stoxx 600 Index of European shares slipped for a second day, losing 1.1%. A 55% increase since March 9 has driven valuations on the gauge to 47.4 times reported profit, also the highest level since June 2003. Markets have been here before, looking for a pullback, in each instance when concern has increased for a pullback it has lasted less than three days before new buying pushed key indexes to another new high on the current run up.

This week the leaders of G-20 countries are meeting in Pittsburg to consider the plight of economic and financial reforms. Most of the world is looking to the US to get going with financial reforms and new regulations designed to eliminate in the future any debacle that lead to this present calamity. There is however, something to consider; whatever regs and new regulators are implemented, in the long run they will not work. May work for a couple of decades but in the end the financial markets will find a way (gradually) to get around them and greed will once again cause a serious financial mess. Greed is what keeps markets going and Wall Street in business.

Once again the bellwether 10 yr note has successfully held its key and significant support at the 3.50% area (Friday’s close 3.48%); A week ago last Friday (9/11) the 10 yr note tested its key support at 3.38% but couldn’t hold it, last week the 10 yr moved back to the support levels. This morning the 10 yr has held again on the weaker open in the stock market, but with supply and the FOMC meeting this week we don’t expect rate markets will improve much until at least Wednesday afternoon and only then if investors increase selling and profit-taking on stocks.

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The rate markets are testing key support levels; still holding but looking more vulnerable with today’s price action. Suggest locking and not floating over the weekend.

The bond and  mortgage markets started badly early this morning and didn’t let up all day. Beginning to get a little concerned that lour forecasts for 5.00% mortgage rates may not happen anytime soon. Markets were treated to comments all through the week that the recession is over; Bernanke and Warren Buffet got the ball rolling at mid-week and added more conviction that worst is behind the economy. Even though Bernanke and many others have repeatedly said growth will be slow and likely the “new normal” will keep unemployment high for the next couple of years. The question now for fixed income markets is how much more money will be pulled out of notes and bonds to find a new home in the equity markets.

Today was a mirror image of yesterday; strong price improvements on Thursday were all erased today, suggesting that the 10 yr may be getting long in the tooth at these levels. Still holding support today but with $112B of treasury auctions next week rate markets may not be able to withstand the pressure if equity markets keep running higher.

On the week; rate markets were hanging tough until Friday’s heavy selling forced rates higher on the week, the first week n the past four rate markets will lose ground. The 10 yr note yield increased 12 BP, mortgage prices on the week, 30s -10/32, FHAs -4/32, 15 yr conventionals -4/32. The mortgage market performed better than treasuries this week. The DJIA +315, NASDAQ +51, and the S&P +25 on the week.

Next week; The FOMC meeting concludes on Wednesday at 2:15 with the statement. Nothing on the economic calendar until Thursday and Friday; weekly claims, August existing hm sales, August new home sales, August durable goods orders. Treasury supply will dominate; over the past three months investors have been bidding well for treasuries at the auctions, foreign buyers continue to support the US growing budget deficits. Will the demand continue to remain strong; traders are not likely to bet on it ahead of the auctions that begin next Tuesday.

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Friday, September 18, 2009

Treasuries and mortgages opened weaker this morning,

no follow-through from the strong rally yesterday. Pushing prices lower, the stock indexes started better pointing to a firm opening at 9:30. At 9:00 the 10 yr note -8/32, mortgages prices -5/32. At 9:30 the DJIA opened +52, the 10 yr -11/32 and mortgages -8/32 frm yesterday’s close. (see below for 10:00 levels)

There are no economic reports to deal with today; it is however a day that may see increased volatility with all financial options expiring as well as futures contracts, quadruple witching.

Yesterday’s better headline economic reports are getting the credit this morning for the better open in the equity market, but as we noted in yesterday’s afternoon report the interior data on the Philly Fed business index, weekly jobless claims, and housing starts were not so strong. Nevertheless, with Bernanke, Warren Buffet and about every analyst now convinced the recession is over, investors are continuing to buy equities. As long as the economic outlook remains positive lower interest rates will be difficult to achieve. Not much concern in the markets yet that the recovery will likely be at a snails pace compared to other recessions in the past 50 yrs.

Given the lack of follow-though frm yesterday so far this morning the rate markets may be vulnerable to more selling next week ahead of Treasury’s $112B of supply (2 yr, 5 yr, and 7 yr note auctions). Technically the 10 yr note and MBSs are still holding key moving averages and chart support levels, (3.50% for the 10 yr note and 100.03 on the Nov FNMA coupon now at 100.07). Still will hold to our slightly bullish outlook for rates but time and price equation is working against us; unless the 10 yr note and mortgages gain traction in the next few sessions both may turn technically bearish. The 10 can’t sit at this level for much longer before traders will turn more bearish. Mtg rates hovering at 5.00% levels have to break below it or that market also will give up the fight.

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A better start this morning;

at 8:00 the 10 yr note yield had slid back to 3.41% frm yesterday’s close at 3.46%; the DJIA index traded +48. At 8:30 August CPI, expected to be +0.3% and the core +0.1%, hit at +0.4% overall and when food and energy are stripped out +0.1%—–generally in line with forecasts. Not much change on the initial reaction as inflation isn’t on the radar these days. Yr/yr the overall CPI -1.5% after bumping to -2.1% in July yr/yr. The yr/yr core -1.4%. The low inflation readings are one fueling factor for the low interest rates; longer term investors (insurance companies, pension funds and others whose focus covers years more than days) are now getting real interest rate returns of 4.90% when the negative inflation is added to the equation. At 8:40 the 10 yr note traded +14/32 at 3.41% -4 BP; mortgage prices were +5/32 on the session, the DJIA futures were +45. At 9:30 the DJIA opened +36; treasuries and mortgages earlier were strong but they are caving kin at 9:45 AM, 10 yr and mortgages were unchanged (see below for 10:00 levels)

The continual decline of inflation expectations will continue to add value to treasuries and thus to mortgages. Still thinking the 10 yr note has a good chance to run to as low as 3.00% by yr end, pushing mortgage rates to under 5.00%. PIMCO the largest bond fund in the world is adding to its treasury purchases, now the highest since Aug 2004. But PIMCO is lightening up on MBSs base on the return in treasuries slightly better than mortgages.

It is now “official” the recession is over; Bernanke blessed it yesterday, Warren Buffet this morning. Not many left out there now that believe we are n for a double dip. While overwhelming consensus is that the economic decline is behind us, there is equally an increasing belief the future will be slow growth and continued high unemployment. A consumer less economy can only mean slow growth; however slow is good for the rate markets, slow generally keeps inflation pressures low.

At 9:15 August industrial production, expected +0.7%, came at +0.8%; July industrial pro. was revised to +1.0% frm 0.5% originally reported. Also at 9:15 factory usage for August, expected at 69.1% was 69.6%, July usage was revised better, to 69.0% frm 68.5%; still very low factory use but a step in the right direction.

Earlier at 9:00; Treasury reported net outflows of $97.5B in July, a bigger negative flow than expected. Inflows of capital in July were just $15.3B from +$90.2B in June. On that news the dollar lost more ground.

Nothing else on the calendar today for economic reads. The bond and mortgage markets remain technically positive, yesterday the 10 yr moved to 3.4%, 4 BPs from its key support area at 3.50%, last week it dropped to its key resistance at 3.28%. Comfortable in that range at the moment. Tomorrow Treasury will announce the details of next week’s auction (2 yr, 5 yr and 7 yr notes), in the past two months the total has been $109B; so far foreign investors have continued to buy with strong demand, traders are not nearly as concerned with supply these days as they normally are.

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Treasuries and mortgages were lower early, prior to 8:30 data. At 8:00 the 10 yr was -1/32 and mortgages unchanged. At 8:30 data flowed; August PPI up 2.7% with the core (ex food and energy) +0.2%—-both were higher than expectations. August retail sales were a lot stronger than we or the markets were expecting; up 2.7% overall and when autos are extracted a strong 1.1%. We were expecting retail sales ex autos at +0.4%.

The N Y Empire State manufacturing index was also better; at 18.8, from 12.08 in August; markets were looking for 15.0 on the overall. New orders were up t0 19.84 frm 13.43 in August and employment did dip a little, to -8.3 frm -7.45. Any reading over zero is considered expansion.

The initial reaction to the three reports wasn’t good for the bond and mortgage markets; at 8:40 the 10 yr note -11/32 to 3.46% +4 BP; mortgage prices were down 6/32.

Time 12:30 edt:

Treasuries and mortgage markets opened weaker this morning and fell further in price on the 8:30 economic data. The NY Empire State manufacturing index, the surprising increase in August retail sales sent the 10 yr note to 3.49% and mortgages about 10:30 were off 11/32. There was little reaction or interest in the jump in August PPI; stronger than expected but markets are not concerned that inflation is a worry point yet.

Stock markets started strong on the data but so far have spent most of the session hanging around unchanged.

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