Market Commentary Report

This week brings us the release of five important economic reports for the bond market to digest. Several of these reports are considered to be of high importance, meaning we will likely see volatility in the financial markets and mortgage pricing over the next several days. There are also plenty of corporate earnings releases scheduled for the stock markets this week along with the minutes from the last FOMC meeting.

The first piece of data comes Tuesday morning with the release of June’s Producer Price Index (PPI). The PPI is very important because it measures inflationary pressures at the producer level of the economy. It is expected to show a 0.8% increase in the overall reading and a 0.1% rise in the core data reading. The core reading is the more important of the two because it excludes more volatile food and energy prices. The bond market should react quite favorably if we get weaker than expected readings, but a larger than expected jump in the core reading could send mortgage rates higher Tuesday. June’s Retail Sales report will also be posted Tuesday. The Commerce Department is expected to say that sales at retail establishments rose 0.5% last month. This data is considered to be of high importance because it measures consumer spending. Consumer spending makes up two-thirds of the U.S. economy, so any related data is watched closely. A smaller than expected increase in sales could help fuel a bond rally and lead to lower mortgage rates, depending on the results of the PPI report.

Next on tap is Wednesday’s release of June’s Consumer Price Index (CPI). It is a mirror of Tuesday’s PPI with the exception that the CPI measures inflation at the more important consumer level of the economy. Analysts have forecasted a 0.6% increase in the overall index and a 0.1% rise in the core data. The core data is also considered to be the key reading because it gives us a more stable measure of inflation. Higher than expected readings could raise inflation fears and push mortgage rates higher both days. June’s Industrial Production data will also be posted Wednesday morning. This data measures output and U.S. factories, mines and utilities, giving us an indication of manufacturing sector strength. It is expected to show a 0.6% decline in production, indicating that the manufacturing sector showed weakening conditions during the month. That is basically good news for bonds, however, with seasonal shutdowns and auto-related weakness likely included, a sizable decline should not surprise many.

Also worth noting about Wednesday is the release of the minutes from the last FOMC meeting. There is a possibility of the markets reacting to them following their 2:00 PM ET release, especially if they show some divisiveness by its members during discussion and voting at the last meeting or give any indication of the Fed’s possible next move with monetary policy.

There is no relevant monthly or quarterly data scheduled for release Thursday. Friday’s only relevant data is June’s Housing Starts report. This data gives us an indication of housing sector strength, but is not considered to be of high importance. Analysts are currently expecting to see a small decline in new starts of housing projects. However, I don’t see this data having much of an impact on mortgage rates Friday unless it varies greatly from forecasts.

Overall, I think we will probably see the most movement in mortgage pricing Tuesday or Wednesday due to the importance of the economic releases those days. The week’s corporate earnings also have the potential to heavily influence bond trading and mortgage rates via stock market swings. If the major earnings reports show better than expected results, we can expect to see the major stock indexes rally. This would lead to a shift of funds from bonds to stocks and in the process bonds will fall. The results would be higher mortgage rates. The other possibility is weaker than expected results from the key companies that would lead to stock selling and a bond market rally. One thing is safe bet though- it will likely be an active week for the markets and mortgage rates. Accordingly, please proceed cautiously if still floating an interest rate.

©Mortgage Commentary 2009 Please E-mail us your opinion of this report.

Mortgage Market News for the week ending July 10, 2009

Strong Treasury Auctions Lower Mortgage Rates

With a light schedule for economic data, Treasury auctions had the greatest impact on mortgage rates during the week. Strong demand for the auctions and declines in the stock market helped mortgage rates end the week lower.

In recent months, mortgage rates have been heavily influenced by concerns about the enormous amount of debt the government needs to issue to pay for all the stimulus programs. The risk is that investors will require significantly higher yields to continue purchasing an expanding supply of bonds. Strong demand from both domestic and foreign investors at this week's 3-yr, 10-yr, and 30-yr Treasury auctions eased those concerns. Longer-term Treasuries are comparable investments to mortgage-backed securities (MBS), which are the basis for the level of mortgage rates, so the results from 10-yr and 30-yr auctions are particularly important. The willingness of investors to purchase longer-term bonds (including Treasuries and MBS) at the current low rates is very encouraging.

Also this week, there was mounting speculation about the passage of a second round of fiscal stimulus before the end of the year. Given the weaker than expected June Employment data, the political pressure is increasing to take additional steps to create jobs. If another stimulus package is passed, the increase in the supply of debt required to pay for it could pressure mortgage rates higher.

Weekly Market Report for the week ending July 2nd

Mortgage Rates Hold Steady

There was very little daily movement in mortgage rates during the holiday-shortened week, and they ended the week nearly unchanged. The economic news during the week contained few surprises.

Following better than expected results for May, investors were closely watching the June Employment report for clues about the timing of any economic recovery. Thursday's data showed that the economy lost -467K jobs in June, and the Unemployment Rate rose to 9.5% from 9.4% in May. Average Hourly Earnings, a proxy for wage growth, rose at a slim 2.7% annual rate. High unemployment and slow wage growth have caused consumers to save more and spend less. Since consumer spending accounts for about 70% of economic activity, the slowdown in spending has had a large impact on economic growth. For mortgage rates, however, low wage inflation and slow economic growth are favorable.

While the Employment report may have captured the most attention, the week began with a significant announcement from Chinese officials. According to the head of China's central bank, there will be no sudden changes to China's foreign reserve policy, meaning that China will not pull back from buying US bonds. Over recent months, investors have been concerned that foreign central banks would decide to scale back their purchases of US bonds, so this was very welcome news. Recent Treasury auctions have confirmed that foreign demand remains strong.

Demand Strong for Treasury Debt

With major economic data, large Treasury auctions, and a Fed meeting on the schedule, it was a busy week for mortgage markets. In the end, it was the Treasury auctions which had the greatest impact on mortgage rates. Demand was very strong at the auctions, which pushed mortgage rates lower. Wednesday's Fed announcement and mixed economic data were roughly neutral for mortgage rates.

Much of the rise in interest rates we saw in late May and early June was due to concern about the enormous supply of debt the government needs to issue to pay for all the stimulus programs. The question was whether investors would require significantly higher yields to continue purchasing bonds. Strong demand from both domestic and foreign investors at this week's Treasury auctions eased those concerns for now and helped mortgage rates to reverse some of their recent increases.

As expected, the Fed made no change in the fed funds rate. However, investor expectations varied widely for the Fed's statement, but the statement revealed no significant shifts in policy. In particular, there was no change in the timing or the quantity of future MBS and Treasury purchases. In addition, the statement contained no discussion about exit strategies to eventually unwind Fed stimulus programs. Overall, the Fed simply held the course, and mortgage rates were nearly unchanged after the news.

In the housing sector, May Existing Home Sales rose 2.4%. It was the first time since September 2005 that Existing Home Sales increased for two months in a row. The inventory of unsold homes declined to a 9.6-month supply from a 10.1-month supply in April. A NAR survey revealed that 29% of sales were to first-time homebuyers, helped by the $8,000 tax credit, low mortgage rates, and favorable affordability levels.

The Week Ahead

Next week, the important Employment report will come out on Friday. As usual, this data on the number of jobs, the Unemployment Rate, and wage inflation will be the most highly anticipated economic data of the month. Early estimates are for a loss of about 370K jobs in June. Before the Employment data, the Chicago PMI and ISM national manufacturing indexes will come out on Tuesday and Wednesday. Pending Home Sales, a leading indicator for the housing market, will be released on Wednesday. Consumer Confidence, Construction Spending, and Factory Orders will round out the schedule. Mortgage markets will be closed on Friday ahead of the July 4th holiday.

Weekly Market Report for the week ending June 19th

Tame Inflation vs. Economic Growth

Tame inflation data helped mortgage rates move lower early in the week, but stronger than expected economic data turned them higher later in the week, leaving mortgage rates nearly unchanged from last week. The announcement of larger than expected Treasury auctions next week ($104 billion) also was negative for mortgage rates.

This week's Consumer Price Index (CPI) and Producer Price Index (PPI) data indicated that inflation is not a concern in the short-term. A significant decline in energy prices from one year ago resulted in a very low overall annual inflation rate. Even Core CPI, which excludes food and energy, rose at a tame 1.8% annual rate. However, the benefits from the favorable inflation news was offset by stronger than expected economic growth data. In particular, the Philadelphia Fed manufacturing index showed surprising improvement. In addition, May Housing Starts rose 17% from April, while Building Permits, a leading indicator of future activity, also exceeded expectations. This week's data sets the stage for next week's Fed meeting. With inflation currently low but at risk of increasing if the economy continues to improve, the Fed may be reluctant to introduce more stimulus, opting instead to wait and see how the economy performs.

President Obama this week proposed broad new rules for regulating the financial system. One proposal under the Obama plan would create a consumer protection agency which would have the authority to set rules for the mortgage industry. The details may not be known for quite a while, as the plan now faces a lengthy debate in Congress

Monday 02/9/09:
Super-Size My BailoutBy Frank Bocchino, OpenClose

If I did the math, it would work out that I frequent a McDonald's about every 10 years. But during bad economic times, low-cost fast food establishments do well with added patronage from cash-poor Americans. In these days of "super-sized" bailouts and stimulus packages, it's then apropos that McDonald's Corp. announced today that its same-store sales rose 7.1% in January with total sales rising 2.6%. But now, watching what's going on in the Senate regarding the stimulus bill, it leads me to pose one question: Do you want fries with that?

The $827 billion stimulus bill should pass in the Senate according to most reports despite all the grand standing on both sides of the aisle. The pink elephant in the room, however, is reconciling that bill with the House's $819 billion version of the bill that passed. Democrats and Republicans have had at each other in what I've dubbed "The Senatebowl." President Obama is shooting for mid-February to sign the bill.

As for mortgages, Obama has been quoted about earmarking $50-100 billion to help the foreclosure hemorrhaging. What that plan will include is still unannounced though. That is partly why many investors seem more in tune with the administration's plan to roll out the $700 billion financial bailout package. Already passed by Congress, Treasury Secretary Geithner had scheduled to announce the plan today, but the speech was postponed until tomorrow.

After a great Friday on Wall Street with the Dow rising more than 218 points, S&P 500 futures fell 5.6 points to 862.10 and Nasdaq 100 futures fell 6 points to 1,269.80. Dow industrial futures fell 39 points to 8215. U.S. stock futures fell after Treasury Secretary Geithner delayed the announcement of the administration’s financial-recovery plan until tomorrow.

The 10-year note dropped to 106-4/32 and its yield rose to 3.02% from 2.99% Friday. The 30-year bond fell 17/32 to 113-25/32 and its yield rose to 3.72% from 3.69% Friday. Federal Reserve officials still debate on whether or not to purchase long-term Treasuries. Instead the Fed has been concentrating on a program to purchase $200 billion in consumer and small-business loans and on a plan to buy $600 billion in home-finance debt some report.

The 3-month Libor rate ticked down a tad to 1.23% from 1.24% Friday. The overnight Libor rate was unchanged from Friday at 0.31%.

Oil prices rose 48 cents a barrel to $40.65. The dollar fell versus major currencies like the euro, the yen and the British pound.

So what will be on Tim Geithner be his Treasury menu Tuesday? Hopefully whatever it is, it will be low-fat, and conducive to a healthy economy. If it's not, I'll soon have to acquire a taste for 49-cent hamburger Wednesdays.

source: LionMTS: a division of OpenClose

Tuesday, December 23rd Mortgage Market Update

Tuesday Mortgage Market Update

Stocks are slightly ahead in choppy trading this morning and Treasuries are narrowly mixed. Pre-holiday trading volumes are thin and market participants are attempting to maintain an even keel. However, the lack of liquidity leaves the markets vulnerable to exaggerated price moves. Stocks may be eventually feel the pressure from today's weak housing news and bond traders are facing more supply today.

In today's barrage of economic releases, the Commerce Department reported that, according to its final calculations, the gross domestic product contracted at a 0.5% annualized rate in the third quarter.

As expected, this was no change from the preliminary calculation reported last month but it was still the worst reading since a 1.4% decline in the third quarter of 2001. The advance estimate, released in October, was a contraction of 0.3%.

GDP is the market value of all final goods and services produced by labor or property in the country in a year?s time. Quarterly data is adjusted and annualized and changes from quarter to quarter indicate the strength and direction of the economy.

Today's report indicated that consumer spending declined at a 3.8% rate instead of the 3.7% cited in the preliminary report. But government spending rose at a 5.8% rate instead of the previously reported 5.4%.

The inflation data contained in today's report was positive for the markets. The GDP price index showed an increase of 3.9% for the third quarter, down from the preliminary reading of 4.2%. The core index for personal consumption expenditures (personal spending minus the volatile categories of food and energy) increased by 2.4% instead of the previously reported 2.6%.

Despite the improvements, however, the rise in the overall prices index was the largest since the first quarter of last year and the increase in the core PCE index was the biggest since the fourth quarter of last year.

The GDP news is having little impact on the markets as traders see it as old news. They are now focusing on the current and upcoming quarters. Recent estimates for the October through December period call for a contraction of between 3.0% and 4.5%.

In other news, the housing sales reports for last month were released this morning. The Commerce Department said that the seasonally adjusted, annualized pace of new home sales fell by 2.9% in November to 407,000, the lowest rate since January of 1991. Moreover, October's originally reported pace of 433,000 was revised down to 419,000.

The report said that the pace fell by 16.4% in the Midwest and by 7.1% in the South. The Northeast saw an increase of 14.3% and the West saw an increase of 11.0%.

With slumping sales, home builders are cutting back on new construction. The inventory level of new homes on the market (adjusted and annualized) was 374,000, the lowest level since February of 2004. At last month's sales rate, this represented 11.5 months of sales. Though down slightly from October's turnover time of 11.8 months, it was still high by historical standards

The average new home price rose by $8,000 last month to $287,500 but this was still 9.2% below the average of $316,800 posted in November of last year. The median price rose by $5,800 to $220,400 last month but was down by 11.5% from the previous November's $249,100.

In the larger category of existing home sales, the National Association of Realtors said that the pace fell last month by 8.6% to 4.49 million. October's originally reported rate of 4.98 million was revised down to 4.91 million. Forecasters had predicted a reading of about 4.90 million.
The decline was broad-based. The rate fell by 12.0% in the Northeast, by 10.9% in the South, by 7.4% in the Midwest, and by 4.3% in the West.

Inventories edged up from 4.198 million to 4.203 million. At the prevailing sales pace, this represented 11.2 months of sales, the highest turnover time since April.

The average existing home price fell by $5,500 in November to $224,200 and was down by 12.3% from the previous November's $255,700. The median price fell by $5,200 to $181,300 and was down by 13.2% from the $208,800 median price in November of last year.

The final news release of the day was stronger than expected. The final Consumer Sentiment Index for the month from the twice-monthly surveys conducted by the University of Michigan came in at 60.1, up from the preliminary reading of 59.1 and November's final reading of 55.3. Forecasters had predicted a weaker reading of 55.0.

The improvement came in consumers' outlook over the next six months. The expectations index rose by 54.0 from the preliminary 52.4 and November's final 53.9. The index of current conditions was little changed. It came in at 69.5, a tough higher than the preliminary reading of 69.4 but still a marked improvement over November's 57.5.

Still to come: The Treasury will be conducting its monthly offering of 5-Year Notes today. Last month's auction had mixed results. Bids exceeded the offer amount by 2.44 to 1, the highest in the last four auctions and above the average of 2.15 for the twelve auctions preceding November's. Noncompetitive bids, a gauge of individual investor demand, totaled about $101 million, up from October's $82 million and above the twelve-auction average of $90 million.

Today's offering has a record face value for a 5-year issue of $28 billion. The deadline for competitive bids is 1:00 PM Eastern Time. The deadline for noncompetitive bids is noon.