We warned of increased volatility this week, the rate markets are near term bearish but with not much enthusiasm for massive selling. Yesterday mortgage prices started better, this morning starting lower. We suggest floating to start the day, but remind to stay close for our updates. Not willing to press the markets but with the pricing this morning lower we hang in there for a pop. Unless prices improve frm morning levels we will lock at the end of the session if not sooner based on market movements.

Treasuries were weak from the get-go this morning with the stock indexes roaring higher; the DJIA at 8:00 was trading +90. The 10 down 13/32 and mortgages off 7/32. At 8:30 the 10 -21/32 at 3.42% +7 bp, and mortgages -13/32. At 9:00 the 10 yr -16/32 3.41% +6 BP, mtg prices -15/32 and the DJIA +109. JP Morgan profits were well above forecasts (about 7 times better), and is driving all bank and financial stocks higher this morning, taking the entire market up with it. Most all earnings in Q3 are beating the Street estimates although only a few are out so far. Intel is saying sales will to $1B and earnings from Alcoa and others have been better. In China their exports were down 15%, but that is the best in a year. At 9:30 the DJIA opened +90, 10 yr note -14/32 3.40% +5 BP and mortgages at 9:30 -11/32 on 30s, -9/32 on FHAs and -7/32 on 15s.

Sept retail sales hit at 8:30, better than expected; -1.5% overall but when auto sales are extracted +0.5%, expectations were for a 0.2% increase. August retail revised to +2.2% frm +2.7% overall and ex autos +1.0% frm +1.1%. The initial reaction to the better ex auto sales sent treasuries and mortgages lower but both managed to recover a little from the knee jerk. The DJIA and the other key indexes are on fire this morning on better Q3 earnings being reported. No signs of any weakness in the equity markets as the DJIA is now seen headed to 10K.

Earlier this morning at 7:00 the weekly MBA mortgage applications index fell 1.8%; purchases declined 5.0% while re-finance applications were down 0.1%. 64.7% of all apps were for re-finances. The four week moving average for the seasonally adjusted Market Index is up 5.6%.  The four week moving average is up 1.6% for the seasonally adjusted Purchase Index, while this average is up 8.0% for the Refinance Index.  The average contract interest rate for 30-year fixed-rate mortgages increased to 5.02% from 4.89%, with points decreasing to 1.11 from 1.13 (including the origination fee) for 80% loan-to-value (LTV) ratio loans. The average contract interest rate for 15-year fixed-rate mortgages increased to 4.44% from 4.32%, with points remaining unchanged at 1.04 (including the origination fee) for 80% LTV loans. The decline in apps on an increase of 13 basis points in rates tells a big story. With interest rates headed higher the volume is likely to continue to fall until buyers and re-financers believe the best has likely passed for rates.

August business inventories were out at 10:00, expected to be down 0.9%, inventories were down 1.5%; sales were up 1.0%. The inventory to sales ratio at 1.33 month frm 1.36 months in July.

At 2:00 the FOMC minutes are the day’s biggest known-unknown, with the market sniffing for hints of dissention on rate hike timing among the ranks and inflation concern. We know what the statement said, what markets will look for in the minutes is the debate that focuses on when the Fed will decide to wind down the easing. Most Fed watchers are expecting the Fed will start by doing re-pos to drain money from banks before it actually starts raising the FF rate. No matter, the bond market will as usual be ahead of what the Fed actually does, so we don’t wait to see the whites of the eyes before markets discount any tightening. While no one is expecting a tightening move from the Fed for many more months until unemployment bottoms, markets will be way out front in driving rates higher—-slowly, but moving higher.

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Mortgage prices are already lower than at 9:30 as seen below. The 10 yr has taken out its support at 3.28%, the next level of support is right where the market is at 10:00, 3.32%, the 20 day moving average. We suggested locking yesterday, still really don’t like the risk. If you float today pleas keep alert for our rate alerts. After the recent decline in rates, markets are rejecting the low yields.

Treasuries and mortgages started a little better early this morning; at 8:30 the 10 yr +2/32, mtgs +1/32, but didn’t hold. Stock index futures were lower, the DJIA -26 at 8:30 on a better dollar. At 9:00 the 10 yr note fell out of bed, -12/32 at 3.30%, mtgs -6/32, the DJIA futures -12. At 9:30 the DJIA opened +5, 10 yr note -10/32 at 3.29% and mortgage prices -4/32.

August trade deficit was slightly better than expected, -$30.71B against estimates of -$33B; no reaction to it as usual. The world knows the US runs trade deficits, importing a lot more than exporting. There are no more data feeds the rest of the day. Today is all about Fedspeak; Fed officials are speaking everywhere today. Lockhart of ATL (8:30) vice-chair Kohn (12:00) and St. Louis’s Bullard (2:00).

Last night Bernanke reiterated again that he will be ready to remove stimulus when “the economy has improved sufficiently”. “My colleagues at the Federal Reserve and I believe that accommodative policies will likely be warranted for an extended period,” he spoke at a Board of Governors conference in Washington last evening. “At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road.” “Looking at the amount of excess capacity in the economy, looking at the low rate of inflation, we believe that conditions will warrant policy accommodation for an extended period,” he said.

Most economists surveyed by Bloomberg are rather pessimistic on the outlook for increased consumer spending in Q4; with unemployment exceeding 10% next year consumers are likely to refrain from the pace of spending in the past quarter. According to the survey of 50+ economists consumer purchases will increase just 1.0% this quarter after increasing 2.4% in Q3. Household spending will grow at a 1.5% pace in the first three months of 2010, and 1.8% in the second quarter, the survey showed.  Obama is considering, and likely will do it, extending the first time homebuyers credit, extending unemployment insurance past the current 27 weeks (if that occurs continuing unemployment claims will increase again after recent declines).

The US, world’s largest economy, contracted 3.8% in the year ended in June, the worst economic slump since the 1930s.

Normally when a market holiday occurs on Monday the bond and mortgage markets close the previous Friday at 2:00; today not the case, markets will not close early. Not a big deal except for traders looking for an early exit.

The 10 yr note, driver for the mortgage markets, hit 3.10% last Friday on the initial reaction to the higher than expected job losses in Sept but rebounded to close at 3.18% that day. Since then the 10 yr note rate has slowly increased to 3.31% at 10:00 this morning and mortgage rates, while holding well against the increase on the 10 yr, are also edging higher. We do not expect the 10 can fall below 3.00% unless the outlook for the economy swings 180 degrees from the current overwhelming consensus that the worst is behind us and recovery will continue. 30 yr bond traded briefly under 4.00% yesterday morning (3.96%) until the auction; the 30 yr is unlikely to fall below 4.00%. Mortgage rates for 30 yr fixed with 20% down are not likely to decline much more from present levels if the economic recovery outlook remains as it is now.

For more information, or to get started on an Arizona FHA, VA or USDA loan, call my office at (602) 291-4362

Monday October 5, 2009

Begin the day by floating; technically the rate markets remain bullish but with added underlying volatility. As long as the 10 yr note manages to hold under 3.25%/3.28% yield the technical outlook will remain bullish for the mortgage market in the near term.

The bond and mortgage markets opened a little better this morning after a volatile session last Friday on the larger decline in Sept job losses than expected. At 8:30 the 10 yr note +5/32, mortgages +2/32, the DJIA index futures +20. At 9:00 the 10 +9/32, mortgages +4/32 and the DJIA +18. At 9:30 the DJIA opened +21, 10 yr +10/32 3.18% -4 BP, mortgage prices at 9:30 +5/32. (see below for 10:10 levels) These are good signs for any FHA, VA or USDA loan

This week is headlined with more borrowing from Treasury, today its one yr bills (no problem for markets) and at 1:00 Treasury will auction $7B of 10 yr inflation-indexed notes. It really gets underway tomorrow and through Thursday with $71B of notes to be sold. Recent strong demand for treasuries is expected to continue so we are not experiencing any price declines in the treasury market. For three months now demand for the record borrowing from Treasury has been exceptionally strong surprising many; now it is taken as gospel the demand will continue from domestic and foreign investors. No inflation fears out there and we believe investors behind the scenes are increasingly concerned the economic recovery will not be a V but a W, expecting stocks to trade back lower. So far however the stock market stands tall with only minor setbacks as investors continue to step on any declines in the key indexes. Investors are extending duration by stepping into the long end of the curve; amazing how strong the bond market are given the recent decline in rates over the last few weeks.

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Friday’s larger decline in job losses (-263K) has prompted Pres Obama to think about another stimulus package. A huge mistake according to former Fed chief Greenspan, once considered the best Fed chief ever before the economy caved in. Greenspan was on ABC’s “This Week” yesterday pointing out that only 40% of the $787B stimulus plan passed last spring has been put in place; he warns Obama to hold off and let the rest of the stimulus plan work. “We are in a recovery and I think it would be a mistake to say the September (unemployment) numbers alter that significantly,” he said. Still, to stop unemployment from rising the economy needs to add jobs at a rate of “more than 100,000 a month,” the former Fed chief said, adding he is “particularly concerned” about the number of people unemployed for six months or longer. The BLS report said 5.44 million people have been unemployed for 27 weeks or longer, a 9% increase over August.

At 10:00 the Sept ISM services sector report, the overall index was expected to have increased to 50.0 frm 48.4 (50 is pivot from contraction to expansion). The services sector overall index increased to 50.9; new orders component at 54.2 frm 49.9, prices pd declined to 48.8 frm 63.1 and employment component increased to 44.3 frm 43.5. Any index under 50 is considered contraction, over 50 expansion. No initial movement on the report.

This week the economic calendar has little to chew on, but what there is is significant in the running debate on the future of the economy. Only two more series to draw focus.

Tuesday;

1:00 $39B 3 yr note auction

Wednesday;

7:00 MBA weekly mortgage applications

1:00 $20B 10 yr note auction ($20B)

2:00 Sept Treasury budget statement (N/A)

3:00 August consumer credit (-$9.5B from -$21.6B in July)

Thursday;

8:30 weekly jobless claims (-9K to 540K)

10:00 August wholesale inventories (-1.0%)

1:00 30 yr bond auction ($12B)

Friday;

8:30 Aug trade deficit ($33B)

Friday the rate markets fell to their lowest levels since last April on the employment report, but by the afternoon the rally reversed and yields increased slightly on the session. The bellwether 10 yr note fell to 3.10% and mortgages slid under 5.00% before both ended the day a little higher in rate—but not much. Still an extremely uncertain economic outlook; although the stock market is betting on continued and quick economic recovery, the bond market appears to be betting the other way with demand for long term debt very strong. The recent decline in rates has most market thinkers scratching heads to explain the strong demand while equity market gurus are scratching heads wondering why the equity markets haven’t rolled over in a long awaited and expected correction.  Arizona FHA, VA and USDA loans have seen significant improvement in interest rates.

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I am starting today by floating; not willing to hold overnight however unless mortgage prices improve from morning pricing levels. We very rarely hold any positions in the market leading into employment reports.

At 8:00 this morning the stock index futures were trading weaker and supporting the rate markets; 10 yr note +4/32 and mortgages +3/32. At 8:30 economic data added more strength to the 10 yr and therefore mortgages; 10 yr +8/32 at 3.28% and mortgages +4/32, the DJIA -38. At 9:00 the 10 yr note was still unable top crack resistance, sitting at 3.28% +6/32, mtgs at 9:00 +2/32 and the DJIA index traded -16. At 9:30 the DJIA opened -26, 10 yr at 3.25% +16/32 and mortgage prices +4/32. (see below for 10:10 levels)

Weekly jobless claims were up more than expected, +17K to 551K against estimates of +7K; continuing claims at 6.09 mil, down a little from last week. The four-week average is at 548,000 — down nearly 25,000 from this time last month and the lowest level since early in the year. Continuing claims fell 70,000 to 6.090 million and show slight month-to-month improvement with the four-week average at 6.155 million vs. 6.220. A gradual improvement but not as swift as what equity markets want to see; however trade in the pre-open improved slightly from prior to 8:30.

August personal income increased 0.2% against estimates of +0.1%; personal spending was expected to be +1.0% but was up 1.3%. August income, originally reported unchanged was revised to +0.2%. Yr/yr income -2.6%. Personal spending yr/yr -0.3%. Spending in August is largely attributed to back to school spending.

At 10:00 Sept ISM national manufacturing index, expected to have improved to 53.5 frm 52.9 in August, hit at 52.6.

August construction spending increased 0.8% against forecasts of -0.2%, but July spending was revised to -1.4% frm -0.2%.

Finally today, the last of the scheduled data; August pending home sales, estimates were for +1.0%, as reported pending sales increased 6.4%. Pending home sales are contracts signed but not yet closed, the lag between existing home sales and pending home sales is due to the time it is taking to get to the closing table.

All of the economic releases this morning have put a strong bid in the rate markets; the 10 yr note broke its resistance and is now projected to fall to 3.10% on a technical basis, but won’t get there unless the stock market rolls over which looks more likely now than anytime in the past two months.

Bernanke is testifying this morning at 9:00 at the House Committee on Financial Services on regulatory reform. Likely nothing that will have any direct market impact.

At 11:00 Treasury will officially announce the amounts of next week’s auctions; likely in the $75B area for 3 yr, 10 yr notes and 30 yr bonds.

Beleagured BofA CEO Ken Lewis announced he will retire at the end of the year. He has been harassed by Congress and NY Atty General Cuomo for months about the acquisition of Merrill Lynch at the onset of the financial crisis, many calling for his head. Led by the likes of Barney Frank, a politician with the largest ego trip ever seen; and followed by Cuomo, the second biggest egomaniac. Frank’s chairmanship of the House Financial Services Committee is the worst consequence of a Democratic controlled House given his attack on the mortgage industry while sweeping away the real culprits, Wall Street and rating agencies that put lipstick on the sub-prime pig and sold them around the world to investors that only saw a AAA rating on the junk.

A very positive move in treasuries this morning, pushing mortgage rates lower. The 10 yr has actually cracked the resistance at 3.28%, a level that has been difficult to break through, we want a close below it however and that will depend on how equity markets trade the rest of the day and tomorrow’s employment report. If the 10 breaks 3.28% on the close the next target is 3.10% and will take mortgage rates down another 15 basis points from current levels. As previously noted, the bond and mortgage markets are bullish, but we need a close under the resistance to drop rates further. Mortgage rates are now on the way to their lowest levels in years.

Tomorrow’s employment report will dominate trade the remainder of the day. Always a hard one to estimate, usually sets off increased volatility. Recent data on the economy has been weaker than expected on almost all releases, putting the stock market in a vulnerable position. If non-farm job losses tomorrow are over 200K it may be enough to finally nail the equity markets. We believe recent treasury buying as equity markets were improving is large investors setting up safety moves when the stock market does give up in a corrective move lower.

This is very favorable news this morning for FHA, VA and USDA loans. Do you need to improve your credit score to get the best rates? I can help restore your credit

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