Market Analysis

Investors appeared to place little validity on the data from the Commerce Dept which showed that New Home Sales in January fell 11.2%.  According to Larry Baer with Market Alert, the historical standard reporting error for January new home sales data is plus or minus 14%.

Stocks improved today on testimony to the House Financial Services Committeee from Fed Chairman Bernanke that pointed to continued low rates due to the weak labor market.   Bernanke reiterated, however, that the Fed would stick to plans to end buying mortgage-backed securities (MBS) in March.  He put out what appears to be a new spin, which is that just but holding the $1.25 trillion of mortgages (vs beginning to sell them), the Fed would be supporting the market albeit he didn't go so far as to say "at current levels." 

The economic calendar was vacant today and markets were relatively calm.  Below is a recap of the economic calendar for this week:

Monday, February 22, 2010 

• US Treasury auctions $8 billion of 30-year inflation indexed bonds – demand slightly weaker than expected and required yield higher. 

Tuesday, February 23, 2010 

• December Case-Shiller 20-city Index – expected 3.1% annual decline vs 5.3% in November 
• February Conference Board Consumer Confidence Index  – expected 55.0 reading vs 55.9 in January 
• US Treasury auctions $44 billion of 2-year notes. 

Wednesday, February 24, 2010 

• January New Home Sales – expected up 13,000 to 355,000 on an annualized basis. 
• US Treasury auctions $42 billion of 5-year notes 
• Fed Chairman Bernanke presents semi-annual monetary policy testimony to House Financial Services Committee 

Thursday, February 25, 2010 

• Initial Jobless Claims week ended 2/20 – expected down by 15,000 
• Continuing Jobless Claims week ended 2/13 – expected up by 7,000 
• January Durable Goods Orders – expected up 1.5% vs .3% increase in December 
• US Treasury auctions $32 billion of 7-year notes 

Friday, February 26, 2010 

• 4^th Qtr 2009 GDP Second Estimate – expected up 5.7% , no change from the initial estimate. 
• Chicago PMI Business Conditions Index – expected 59.0 reading vs 61.5 in January 
• February University of Michigan Consumer Sentiment Index – Final Reading – expected 74.0 reading vs 73.7 initial estimate. 
• January Existing Home Sales – expected up to an annualized pace of 5.5 million from 5.45 million in December

Yesterday was an adjustment day for mortgage investors.  Typically there is a small event which triggers a mindshift.  Yesterday, that event was the Treasury dept announcing that it would be auctioning $126 billion in government notes next week, which was a larger supply than the market had been anticipating.

If one factors in ever-increasing government debt auctions, the Fed stepping away from mortgage-backed security purchases and China's slow tapping on the brakes of their US debt purchases, the support for 30 year fixed mortgage rates in the high 4's does not appear to be sustainable, barring a major correction in the stock market which would drive a "safe haven" flow of money to US Treasury debt and Fannie and Freddie mortgage-backed securities (MBS).

For icing on the cake, yesterday evening in what was more of a symbolic move than a strategic action to raise rates, the Federal Reserve raised the discount rate, the rate it charges banks seeking emergency loans, by a quarter-percentage point, to 0.75%.  According to CNN Money, "The bank said the change reflects improvements in the economy and not a move toward tighter policy. Fed Chairman Ben Bernanke indicated a move was coming last week. However, such changes typically don't occur between Fed meetings and the timing of the move surprised markets. The move doesn't have much impact on a day-to-day basis and won't impact consumer or corporate borrowing costs. The more widely used fed funds rate, the overnight rate banks charge each other, is expected to remain at historic lows near zero for the foreseeable future."

Bonds experienced additional pressure yesterday afternoon as investors reacted to released minutes of the last Fed meeting.  The Fed indicates it plans to divest itself of all non-Treasury assets, which includes mortgage-backed securities (MBS).  However, it could take several years to do this. 

In economic news, Initial Jobless claims for the week ended 2/13 were up by 31,000 vs expectations for a 10,000 decrease.  Continuing Claims for the week ended 2/6 were unchanged at 4.563 million (the prior week was revised up from 4.538 million to 4.563 million) vs expectations for a drop in claims to the 4.5 million level.  This news bolstered bonds in early morning trading.  The January Producer Price Index (PPI) showed a higher than expected increase of 1.4% (vs expectations of a .8% increase).  However, the Core Rate (excluding food and energy) was up only 0.3% (against expectations of +0.1%).

Bonds turned negative again though once January's Leading Indicators were released.  Even though at +.3% they were up slightly less than the +0.5% expected, January was the 10th month in a row the Leading Indicators index has shown gains.  The Philadelphia Fed's February business index came in better at 17.6 vs expectations of a 17.0 reading and a 15.2 reading in January.  An index value over zero is considered expansion.

Markets are closed in the US but an important event which could impact mortgage rates this week is occuring in Europe today and tomorrow. Finance ministers from the 16 country Euro zone (countries which have adopted the Euro as their sole legal tender) are meeting today to discuss a solution to Greece's inability to repay its debt under current terms.  Tomorrow finance ministers from the entire European Union will meet.  The Euro zone consists of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain.  If a viable solution is reached, the "flight to quality" that has supported the current rate environment may dissipate and we could see rates inch up.  If a solution cannot be reached we could see a further move of investments into "safer" dollar denominated assets including mortgage-backed securities issued by Fannie Mae and Freddie Mac.  This would support steady to perhaps slightly lower interest rates in the short term.

The uncertainty regarding sovereign debt in Europe and continued speculation that the US stock market is due for a correction have continued to provide a distraction to the ticking time clock surrounding the Federal Reserve's exit from their mortgage purchase program.  However, the clock keeps ticking and when the alarm rings in March most analysts are projecting rates to increase .5% unless the Fed decides to extend their program. 

This week's economic calendar includes no Treasury auctions but is fairly active in terms of data releases.  Below is a recap of the key releases:

Tuesday, February 16, 2010

February Empire State (NY) Manufacturing Index – expected 18.0 reading vs 15.92 in January.

Wednesday, February 17, 2010

January Housing Starts and Building Permits – Starts expected up to a 580,000 annualized pace vs 557,000 in December. Permits expected down to a 615,000 annualized pace from 653,000 in December.

January Industrial Production and Capacity Utilization – Production expected up .8% vs .6% in December. Capacity utilization expected up to 72.6% vs 72.0% in December.

Minutes of 1/26-1/27 Federal Reserve Open Market (FOMC) meeting released – in addition to scouring the minutes for details regarding the Fed’s exit from their mortgage purchase program, analysts will be reviewing the committee’s latest quarterly economic projections.

Thursday, February 18, 2010

Initial Jobless Claims for week ended 2/13/10 – expected down 10,000

Continuing Jobless Claims for week ended 2/6/10 – expected down 38,000

January Producer Price Index (PPI) – expected up .8% vs .2% increase in December. Excluding food and energy, the core rate is expected up .1% vs no change December.

Conference Board January Leading Indicators - expected up .5% vs up 1.1% in December.

February Philadelphia Fed Business Conditions Index – expected 17.0 reading vs 15.2 reading in January.

Friday, February 19, 2010

January Consumer Price Index (CPI) – expected up .3% vs up .1% in December. The core rate (excluding food and energy) expected up .2% vs up .1% in December.

Bond markets are improved this morning and stock markets are down on a knee-jerk reaction to China announcing the specifics of higher reserve requirements for their banks and on a low 4th Qtr GDP report for the 16 countries that make up the Euro-zone.  The higher reserve requirements in China were expected, but the specifics had been unknown.  These requirements are designed to reduce lending and growth to try to get in front of inflation.  In Europe, 4th Qtr GDP grew .1% vs expectations of .3% growth and vs .4% growth in the 3rd Qtr. 

January's Retail Sales were released today showing an increase of .5% as expected and, with the auto component, up .6% which was slightly better than the .5% increase expected.  The University of Michigan Consumer Sentiment index for February was 73.7, slightly lower than the 75,0 expected.

The big event for today was going to be Fed Chair Bernanke's question and answer session following his prepared testimony to the House Financial Financial Committee on “Unwinding Emergency Federal Liquidity Programs and Implications for Economic Recovery.”  However, the hearing was postponed due to snow and hasn’t been rescheduled.   The prepared statement was released this morning.   The document discusses methods the Fed plans to use to "drain hundreds of billions of dollars of reserves from the banking system quite quickly, should it choose to do so."  The Fed plans to begin testing these methods in the Spring.    Testing methods for getting ridding of mortgages is a much different direction than extending the mortgage purchase program.  Granted, the Fed can change its mind at any time if circumstance deem necessary, but it continues to appear unlikely that the Fed will extend its mortgage purchase program.  The bond market is relatively stable today.  The stock market sell off last week gave investors the jitters and they do not appear ready yet to stampede out of holding bonds.  The Dow is currently down 67 points to just below 10,000. 

In other news, yesterday's 3 Yr Treasury note auction was well bid, but resulted in a slighter higher rate than was expected.  The Treasury is auctioning $25 billion in 10 Yr notes today.   Results of these auctions will continue to be watched very carefully for signs of other governments and private investor's willingness to continue to finance the US deficit at such low interest rates.

On Monday, the mortgage market was slightly negative despite the Dow falling over 100 points to close below the 10,000 level.  Per prior market analysis posts, while it is possible a stock market correction of greater magnitude than what has already occurred may support interest rates at current to possibly lower levels, the elephant in the room right now continues to be the impending Federal Reserve exist from their mortgage-backed security purchase program which most analysts believe will cause an immediate increase in rates of .5%.

This week's economic calendar is light.   The reports that are most likely to trigger volatility in the mortgage markets are both released Thursday morning.  They are the  Initial Jobless Claims for the week ended 2/06 (claims are expected to be down by 15,000) and January Retail Sales (expected up .5% vs down .3% in December and ex-auto expected up .5% vs down .2% in December).   Weaker than expected data from either of these reports would be expected to be supportive of current rates.  Stronger than expected data (or even Retail Sales hitting the .5 increase that is projected) may put upward pressure on rates.

The US Treasury is auctioning $81 billion in notes and bonds this week, with $40 billion of 3-year notes on Tuesday, $25 billion of 10-year notes on Wednesday and $13 billion of 30-year bonds on Thursday.  So far demand for the Treasury auctions has been strong and this week is not expected to be different.

On Wednesday, Fed Chairman Brenanke will testify before the House Financial Services Committee about plans to unwind various stimulus programs.   There will be a question and answer session after his prepared remarks.  Investors will be watching these remarks carefully.  If Bernanke makes it abundantly clear that the Fed really is going to stop buying mortgages, we could see pressure on rates.  

Today's big news was the January Non Farm Payroll report.  The employment report is actually two separate reports which are the results of two separate surveys (see next paragraph for explanation).  The reports provided two different pictures of the labor market.  The household survey showed that the unemployment rate dropped from 10% in December to 9.7% in January.  The establishment survey though showed 20,000 job losses in January and, in the annual revisions to the data covering the period from December 2007 when the Recession began, showed that the economy has lost 1.2 million more jobs than previously estimated for a total of 8.4 million.  The net result of the jobs reports was that the stock market fell for most of the day until recovering very late in the afternoon.  Bonds initially were flat but improved during the day and then weakened in the afternoon when the stock market recovered.  While we clearly welcome the improved market, it is very important to not get complacent.  We barely moved to 4.75% with 0 points during the afternoon which is really not much movement for the amount of selling pressure that occured with equities.   Most experts believe that without a change of course by the Fed in the coming weeks, mortgage rates will jump at least .5% to the mid 5's level and possibly higher.   It is possible that a large stock market correction could help create a flow of money into mortgages just as the Fed is pulling out. However, even though such an event is clearly possible, if you are closing a loan in the next 60 days it is probably safer to find your lender and get locked.

Below is info from Briefing.com which explains the two jobs reports

The household survey is a survey of roughly 60,000 households. This survey produces the unemployment rate.

The establishment survey is a survey of 375,000 businesses. This survey produces the nonfarm payrolls, average workweek, and average hourly earnings figures, to name a few.

Both surveys cover the payroll period which includes the 12th of each month.  The reports both measure employment levels, just from different angles. Due to the vastly different size of the survey samples (the establishment survey not only surveys more businesses, but each business employs many individuals), the measures of employment may differ markedly from month to month. The household survey is used only for the unemployment measure - the market focusses primarily on the more comprehensive establishment survey. Together, these two surveys make up the employment report, the most timely and broad indicator of economic activity released each month.

Below is Larry Baer with Market Alert's commentary for today:

Larry Baer:

Treading water.

There is nothing in the way of economic data for mortgage investors to trade off of today - so these investors will take directional cues for mortgage interest rates from trading action in the stock markets. Rising stock prices tend to drag mortgage interest rates higher while falling stock prices are generally supportive of steady to perhaps fractionally lower mortgage rates.

In my opinion -- if mortgage interest rates are going to muster a rally of any significance this week -- the rally won't likely occur before Friday's release of the January nonfarm payroll data (8:30 a.m. ET). A growing number of analysts are suggesting the headline jobs report will show the economy added more than 20,000 jobs than it lost last month. While such a number will be a definite positive for the prospects of further economic recovery - it will almost certainly serve to put additional upward pressure on mortgage interest rates as capital sources see an opportunity to demand a higher yield for their available investment dollars.

In the convoluted world of the mortgage market lousy jobs reports tend to be supportive of steady to perhaps fractionally lower rates. This time around it will likely take a surprisingly dismal jobs report showing a loss of 15,000 or more jobs together with a national unemployment rate exceeding 10.1% to power a notable move to lower mortgage interest rates. While such an outcome is certainly possible - it does not appear to be very probable.