Market Analysis

The mortgage market opened in negative territory, with all the economic data released today stronger than expected.  In later morning trading bonds are getting closer to breakeven. 

In economic news, initial estimates of Q4 GDP showed an increase of 5.7% which was much better than the 4.5% expected.  For all of 2009, the initial estimates show  the economy shrank 2.4%, the worst single-year performance since 1946.  The January Chicago purchasing manager's index came in at 61.5 which was much better than the 57.4 expected.  The University of Michigan final consumer sentiment index for January came in at 74.4 which was better than the 73.0 expected.

Bonds opened weaker in front of today's US Tresury $32 Billion 7 Year Note acution and then could not gain a footing even when the stock market weakened and despite good results from the auction.

In economic news, December's Durable Goods Orders were up .3% which was slightly better than the .2% increase expected. Excluding transportation items, orders were up .9% which was better than the .5% expected increase.   Initial jobless claims for the week ended 1/23/10 were down to 470,000 which was down 8,000 from last week's 478,000 revised #.  Claims had been expected to drop to 450,000.  The stock market was responding to the continued gloomy jobs picture.  Continuing claims for the week ended 1/16/10 were down to 4.602 million which was higher than the prior week's 4.599 million claims, but lower than the prior week's revised figure which was 4.659 million. 

The bond market started stronger in the morning on a weak December New Home Sales report, but lost ground late in the afternoon after the post Federal Reserve Open Market Meeting statement.  The Federal Reserve maintained its position that the mortgage backed security purchase program will end at the end of March.  They continue to leave the door open to reevaluating this position.

In today's economic news, December's New Home sales were down 7.6% to an annualized pace of 342,000 units.  The US Treasury auction of $42 Billion in 5 year notes was well bid.

Bonds improved early in the morning on weakness in the stock market which was partially caused by speculation that Japan's sovereign debt may be down graded due to their large deficits.  In mid morning trading the stock market improved on a better than expected consumer confidence index but before damage could be done to bonds, results of today's 2 yr Treasury note auction were released which showed strong foreign bidding.  As such bonds held their morning gains.

In economic news today, the November Case Shiller home price index showed a 5.3% YTD drop which was very close to the 5% expected drop and an improvement from October's 7.27% YTD decline.  The Conference Board's Consumer Confidence Index increased to 55.9 which was higher than the 53.5 expected value. 

Despite the Dow falling 138 points the bond market did not gain much ground in early morning trading.  However, we are now seeing further deterioration in stocks and some improvement in bonds.  It is not clear yet whether or not the improvement will translate into updated rate sheets mid day because the early stock market declines may abate.  Stocks are a critical juncture right now, with the S&P 500 and Dow testing key support levels.

Stocks are responding to higher Initial Jobless Claims for the week ended 1/16/10.  Claims were expected to be down by 4,000, instead they were up by 36,000.  However, according to Bloomberg News, "distortions cloud what on the surface is a negative jobless claims report..... The Labor Department said claims piled up due to short holiday staffing at state processing centers. Market News International is quoting a Labor Department analyst as saying the week's gain is 'not economic, but administrative.'"   Continuing claims data did show improvement, down 18,000 to 4.599 million.   They were expected to be up by 4,000.  However, at least in part, the decline in continuing benefits reflects the expiration of benefits as the unemployed fall out of the insured workforce.

In other economic news, the Conference Board's December's Leading Indicators index climbed to 1.1%, which was stronger than the .7% expected increase.  The January Philadelphia Fed Survey came in weaker than expected with a 15.2 reading vs expectations for 18.8.

Bond markets were closed today in observance of MLK day.  This week will be light on economic reports.  Also, the US Treasury auction calendar is vacant this week.  Thursday, though the Treasury is expected to announce approximately $120 billion of 2, 5 and 7 year notes.  Trading in the bond markets will be most influenced by the trajectory of the stock market this week.  If stocks fall further that will be supportive of steady to perhaps fractionally lower interest rates.  If stocks rebound, interest rates may inch higher.

Below is a recap of this week's economic calendar.

Wednesday, January 20, 2010

December Housing Starts and Building Permits - Housing Starts expected up to 575,000 from 574,000 in November.  Building Permits expected down to 580,000 from 584,000 in November.

December Producer Price Index (PPI),  a measure of inflation at the wholesale level - Expected unchanged vs up 1.8% in November.  The Core Rate (excluding food and energy) expected up .1% vs up .5% in November.

Thursday, January 21, 2010

Initial jobless claims week ended 1/16/10 - expected down 4,000 from 444,000 last week.

Continuing jobless claims week ended 1/09 - expected up 4,000 from 4,596,000 the prior week.

Conference Board December Leading Indicators - expected up .7% vs up .9% in November

January Philadelphia Fed Survey - expected reading of 18.8 vs reading of 20.4 in December

Despite a NY region manufacturing report which was much better than expected and a December industrial production report that hit expectations, the stock market is down today and bonds are benefiting as funds are moving from stocks to bonds.

The economic reports of the day showed the the December Consumer Price Index (CPI) at .1% increase which matched expectations.  The Core Rate (excluding food and energy) was down also up .1% vs expectations of a .2% increase.  January's Empire State (NY) Mfg Survey jumped to 15.92 vs expectations of an 11.25 reading and the New Orders component of the report surged to 20.48 from 2.77 in December.  December's Industrial Production report showed a .6% increase as expected and Factory Utilization increase to 72% from 71.5% in November.  The University of Michigan's initial Consumer Sentiment Index for January came in a 72.8 which was slightly lower than the 73.8 expected value but still better than the 72.5 reading at the end of December.

The bond market is up very slightly this morning. However, morning rate sheets are flat and for some rates slightly worse due to deterioration Friday afternoon that had not been priced into Friday’s rate sheets. For those looking to lock this morning, our current recommendation is to watch the markets during the day to see if mortgage-backed securities (MBS) can gain any traction during the day which might lead to slightly lower costs for a particular rate. However, we would watch the markets carefully and be prepared to lock should they turn negative due to the performance of today’s 30 year inflation indexed Treasury security auction.

The economic calendar is light this week. As such the markets will take most of their direction from trading activity in equities and from the performance on the US Treasury’s auction of $84 billion in 3, 10 and 30 year notes and bonds this week. Yields/rates for the longer term notes have reached levels that some believe will be very attractive to investors, particularly following last weeks worse-than-expected December Non-Farm Payroll report which cast doubts on the sustainability of the current stock market rally. However, others point to the fact that the US Treasury and Federal Reserve are no longer a buyers of US Treasury’s and that the medium-to-long term fundamentals point to higher rates due to the gigantic US budget deficits which will inundate the markets with supply of debt for the foreseeable future. Separately, for mortgage rates, the Federal Reserve, unless they change course, will be exiting the market for mortgage-backed securities in March and most analysts attribute their purchases to lowering rates from .5% to 1%. Unless the Federal Reserve extends is mortgage purchase program, almost all analysts are projecting rates in the 5.5% to 6% range by the end of the year.

Below is a recap of this week’s calendar:

Monday, January 11, 2010

Treasury Dept auctions $10 billion of 10-year inflation indexed securities

Tuesday, January 12, 2010

November Trade Balance – expected to increase to a deficit of $34.5 billion up from a $32.9 billion deficit in October

Treasury Dept auctions $40 billion of 3-year notes

Wednesday, January 13, 2010

Treasury Dept auctions $21 billion of 10-year notes

Federal Reserve’s Beige Book released – provides a detailed analysis of activity in each of the Fed’s regions.

Thursday, January 14, 2010

December Retail Sales – expected up .5% vs November’s up 1.3%. Excluding auto, expected up .3% vs up 1.2% in November.

Initial Jobless Claims report for the week ended 1/9/10 – expected down by 1,000 vs increase of 1,000 last week.

Continuing Jobless Claims report for the week ended 1/2/10 – expected down by 2,000 vs last week’s decrease of 179,000.

Treasury Dept auctions $13 billion of 30-year bonds

Friday, January 15, 2010

December Consumer Price Index (CPI) – expected up .1% vs no change in November CPI. Core rate (excluding food and energy) expected up .2% vs November up .4%.

January Empire State Manufacturing Survey - expected increase to 11.25 vs 2.55 for December.

December Industrial Production & Capacity Utilization - Industrial production expected up .6% vs up .8% in November. Capacity Utilization expected to be 71.8% vs November 71.3%.

January University of Michigan Consumer Sentiment Index – expected up to 73.8 vs 72.5 in December.

The bond market initially opened better but quickly flattened despite a December Non Farm Payroll report that showed 85,000 jobs lost which was more than the 20,000 analysts had been expecting.  The unemployment rate stayed flat at 10%. 

Analysts are saying that there is so much consensus in the investment community that rates will be moving higher next year, that even a worse than expected payroll report could not generate momentum to push rates lower in the short term.

Mortgage rates have been flat the past two days but volatility set in a bit this afternoon as investors prepare for Friday morning's December Non-Farm Payroll report.  Analysts have been revising their projections lower in terms of job losses, with some suggesting they could be as low as the 5,000 range.  In general, the market is expecting job losses in the 20,000 range.  A number that exceeds 20,000 should be supportive of steady to slightly lower mortgage rates.  A number that falls closer to the 5,000 range would be expected to put upward pressure on mortgage rates.

In economic news over the past two days, on Wednesday ADP reported 84,000 private sector job losses for December, which was higher than the 75,000 the market had been expecting, but much lower than the 169,000 reported in November.  The Institute of Supply Management (ISM) Services Sector index for December came in at 50.1, which was slightly lower than the 50.5 the market had been expecting.  On Thursday, Initial Jobless Claims for the week ended 1/2/10 were up by 1,000 which was better than the 13,000 increase the market had been expecting. Continuing Claims for the week ended 12/26/09 were down by 179,000 to 4.802 million which was much better than the expected increase of 57,000.  However, much of the reduction in continuing claims was most likely due to benefits running out for those individuals rather than from them finding employment. 

The bond market improved today despite a better than expected manufacturing sector report and strength in the stock market. Below is a recap of this week’s economic calendar.

Monday, January 4, 2010

December Institute of Supply Management (ISM) Manufacturing Sector index – Value of 55.9 vs expectations of 54.0 and November reading of 53.6.

November Construction Spending – down .6% vs expectations of a .1% decline and an October decline of .5%.

Tuesday, January 5, 2010

November Factory Orders – expected .5% increase vs a .6% increase in October.

November Pending Home Sales – expected 2% decline vs a 3.7% increase in October.

Wednesday, January 6, 2010

December ADP Employment Report – expected losses of 75,000 private sector jobs vs 169,000 in November

December ISM Service Sector Index – expected 50.5 reading vs 48.7 in November

Thursday, January 7, 2010

Initial Jobless Claims for the week ended 1/2/10 – expected increase of 13,000 claims vs decrease in claims of 22,000 for week ended 12/26/09.

Continuing Jobless Claims for the week ended 1/2/10 – expected increase of 59,000 claims vs decrease in continuing claims of 57,000 for week ended 12/26/09.

Friday, January 8, 2010

December Nonfarm Payroll Report – expected public and private sector job losses of 20,000 and an unemployment rate of 10.1%.

November Wholesale Inventories – expected decrease of .3% vs October increase of .3%.

November Consumer Credit Outstanding – expected decrease of $5 billion vs October decrease of $3.5 billion.