Market Analysis

Bond markets opened down but mortgage bonds recovered during the day. US Treasuries remained down but were improved from morning levels. Stocks opened higher but closed lower. The news which drove markets in the morning was this weekend’s announcement by China that they would gradually let its currency rise against the dollar. US exports would be a lower cost to the Chinese with a stronger currency.

Below is a recap of the economic calendar for this week:

Monday, June 21, 2010

• Economic calendar vacant

Tuesday, June 22, 2010

• May Existing Home Sales – expected up to an annualized pace of 6.1 million from 5.77 million in April
• May New Home Sales – expected down to a 430,000 annualized pace from a pace of 504,000 in April

Wednesday, June 23, 2010

• Federal Reserve Federal Open Market Committee (FOMC) Rate Decision and Post Meeting Statement – no change is expected to the short term bank lending rates the Fed controls and no change in language is expected in the Fed’s post-meeting statement

Thursday, June 24, 2010

• May Durable Goods Order – expected down 1.3% vs up 2.8% in April. Excluding the transportation component, expected up 1.3% vs down 1.1% in April.
• Initial Jobless Claims week ended 6/19/10 expected down 12,000 to 460,000
• Continuing Jobless Claims week ended 6/12/10 0 expected up 9,000 to 4.58 million

Friday, June 25, 2010

• 3^rd Estimate 1^st Qtr GDP – expected up 3.0%, no change from the 2^nd estimate
• University of Michigan Final June Consumer Sentiment Index – expected 75.5, no change vs initial estimate.

Despite stocks incurring heavy selling this morning and US Treasury note yields moving down, mortgage-backed securities (MBS) offerred by Fannie Mae and Freddie Mac are only marginally improved this morning, as the flight-to-safety trade is gravitating to US Treasuries.  The Federal Reserves appears to be getting ready to sell part of its $1.25 Trillion in MBS purchased last year.   Investors concerns about additional supply hitting the market and its impact on current MBS issues could be keeping a cap on mortgages this morning.

In economic news, stocks are responding to reports of slowing growth in China and the Conference Board's June Consumer Confidence Index which fell to 52.9 vs expectations of a 62.0 reading.

Bonds are improved this morning but so far that improvement has not flowed through to mortgage rate sheets. It is possible if momentum can build during the day we will receive updated rate sheets during the day.

Below is a recap of this week’s economic calendar:

Monday, June 28, 2010

• May Personal Income – up .4% vs expectations for a .5% increase and a similar .5% increase in April.
• May Personal Spending – up .2% vs expectations for a .1% increase and a 0% change in April.
• PCE (Personal Consumption Expenditure) Index – this measure of inflation at the consumer level came in up .2% vs expectations of a .1% increase and a .1% increase in April.

Tuesday, June 29, 2010

• June Consumer Confidence – expected 62.0 index vs 63.3 in May.

Wednesday, June 30, 2010

• June ADP Employment Change (private sector) – expected increase in private sector jobs of 61,000 vs 55,000 increase in May
• June Chicago PMI (Purchasing Mgrs Index) – expected 59.0 reading vs 59.7 in May.

Thursday, July 1, 2010

• Initial Jobless Claims week ended 6/26/10 – expected up 1,000 to 458,000 from 457,000 the prior week.
• Continuing Jobless Claims week ended 6/19/10 – expected down 38,000 to 4.510 million from 4.548 million the prior week.
• May Construction Spending – expected down .9% vs an increase of 2.7% in April
• June Institute of Supply Management Manufacturing Index – expected 59.0 reading vs 59.7 in May.
• May Pending Home Sales – expected down 10.5% vs a 6.0% increase in April.

Friday, July 2, 2010

• June Non Farm Paryolls - payrolls expected down 100,000 vs up 431,000 in May (primarily due to temp census workers)
• June Unemployment Rate – expected to increase to 9.8% vs 9.7% in May.

Yesterday bonds turned negative as profit taking set in.  The general rule of thumb for market watchers is that on days stocks do well bonds do not and visa versa.  The logic behind this rule is that when stocks are weak demand for bonds is higher (as money exits stocks).  This is not always the case though with yesterday providing an example of an exception to the rule.  This morning bonds opened down but have turned around in mid morning trading so that they are now positive.  It is possible we may have an improved rate sheet mid day if bonds continue to improve through the morning.  Stocks opened down but also are reversing some of their losses and moving back towards breakeven. 

In economic news today, 1st Qtr GDP growth was revised down from 3.0% to 2.7%.  The University of Michigan final June Consumer Sentiment index was up to 76.0 vs expectations of a 75.5 reading.

Stocks are down this morning and US Treasury Notes are slightly improved but mortgage bonds are flat.  Yesterday mortgage bonds moved closer to breakeven after opening stronger.  With bond prices as high as they currently are, bond investors have a tough decision.   Sell now and take profits (which, in mass would put upward pressure on rates).  Wait and risk it? Also, the question then arises what to do with cash from the sale.  Is it getting safer to bet that Europe's problems were overblown?  In Europe there are better yields and the upside of currency appreciation if the Euro recovers.  All of these factors and the trajectory of the equity markets are swirling around bonds these days.

In economic news, Initial Jobless Claims for the week ended 6/19/10 came in at 457,000 a slightly lower amount than the 460,000 projected.  Continuing Jobless Claims for the week ended 6/12/10 came in at 4.548 millioin which was lower than the 4.580 expected.  Durable Goods Orders for May came in down 1.1% which was better than the 1.3% decline analysts had been expecting.  Excluding the transportation component, Durable Goods Orders were up .9% which was slightly worse than the expected increase of 1.3%.

Stocks lost steam yesterday afternoon on a downgrading of Greece's debt to junk status by Moody's.  The downgrade was actually not a surprise.  S&P had already downgraded Greece's debt to junk status six weeks ago. Also, recent news out of Europe has actually been better than expected.  Stocks are shrugging off yesterday's news and are currently up with the Dow up approx 70 points to the 10,250 level.  Mortgage Back Securities issued by Fannie Mae and Freddie Mac (MBS) moved into positive territory on yesterday's late weekness in stocks and have held their gains this morning despite strength in the stock market.

In economic news, the June Empire State Manufacturing Survey came in at 19.57 which was slightly lower than the 20.0 expected but better than the 19.11 index value for May.

Bonds improved Friday afternoon and then deteriorated this morning as the stock market continues to improve on signs that the situation in Europe may not be as dismal as some were projecting. A report on industrial production in Europe this morning came in better than expected and concerns about a Greek default and about Greece leaving the EU are easing. Investors remain skittish, and as such we haven’t seen a stampede yet away from bonds, which remain at levels that many analysts would describe as “over-bought.” However, if it becomes more certain that the situation in Europe may be managed to avert catastrophe for the European Union and their shared currency, then we could see US long term rates move up from their near record low levels.

Below is a recap of the economic calendar for this week:

Monday, June 14, 2010 – economic calendar vacant

Tuesday, June 15, 2010

• June Empire State (NY) Manufacturing Survey – expected index value of 20.0 vs May value of 19.11.

Wednesday, June 16, 2010

• May Housing Starts and Building Permits – Starts expected down 17,000 to an annualized pace of 655,000. Permits expected up 21,000 to an annualized pace of 631,000.
• May Producer Price Index – expected down .5% vs a .1% decline in April. The core PPI (excluding food and energy) expected up .1% vs up .2% in April
• May Industrial Production and Capacity Utilization – Production expected up .8% , a similar increase as in April. Utilization expected to be up to 74.4% vs 73.75% in April.

Thursday, June 17, 2010

• Initial Jobless Claims week Ended 6/12/10 – expected down 2,000 to 450,000
• Continuing Jobless Claims week Ended 6/5/10 – expected up 13,000 to 4.475 million
• May Consumer Price Index - expected down .1% , a similar decline as in April. The core CPI expected up .1% vs no change in April
• May Conference Board Leading Indicators – expected up .5% vs down .1% in April.
• June Philadelphia Fed Survey – expected index value of 20.0 vs 21.4 in May.

Friday, June 18, 2010 – economic calendar vacant

Bonds opened down slightly this morning. Stocks opened up slightly after a very negative day for equities on Friday due to a May Non Farm Payroll Report that showed significantly lower private sector hiring than had been expected – of the 431,000 higher payroll figure reported, 411,000 was attributed to the hiring of temporary census workers. The Euro continues to fall with the value now just below the 1 Euro = $1.20 US Dollar level. While this represents devaluation of the Euro, it is not uncharted territory – it is simply the lowest level since early 2006.

This week is light on economic data but there will Treasury auctions on Tuesday, Wednesday and Thursday. Investors are expecting these auctions to be well bid due to the flight of capital to US dollar denominated assets as a safe haven move.

Below is a recap of the key items on this week’s economic calendar:

Monday, June 7, 2010

• April Consumer Credit Balance – expected to decline by $2 billion compared to a $2 billion increase in March.

Tuesday, June 8, 2010

• US Treasury auctions $36 billion of 3 year notes

Wednesday, June 9, 2010

• April Wholesale Inventories – expected to increase by .5% vs a .4% increase in March.
• US Treasury auctions $21 billion of 10 year notes
• June Fed Beige Book – expected to show economic activity picking up in the 12 Federal Reserve districts but employment lagging.

Thursday, June 10, 2010

• Initial Jobless Claims Week Ended 6/5/10 – expected down 3,000 to 450,000.
• Continuing Jobless Claims Week Ended 5/29/10 expected down to 4.6 million from 4.666 million the prior week.
• April Trade Balance – expected to show a monthly trade gap of $41.2 Billion, up from $40.4 billion in March

Friday, June 11, 2010

• May Retail Sales – expected up .2% vs a .4% increase in April. Excluding the auto component, expected up .1% vs up .4% in April
• University of Michigan initial June Consumer Sentiment Index – expected 74.5 reading vs 73.6 in May.
• April Business Inventories – expected up .5% vs up .4% in March

Bonds opened weaker this morning but have moved closer to break even in midday trading.  Stocks opened up, but have since moved into negative territory.

In economic news, Initial Jobless Claims for the week ended 5/29 dropped 10,000 which exceeded market expectations for a 5,000 drop but the prior week's #s were revised higher by 3,000, so the final # closely matched expecations.  Continuing Claims for the week ended 5/22 increased to 4.666 million vs expectations for a 4.60 million figure.  Factory Orders for April were up 1.2% vs expectations for a 1.7% increase.  The Institute of Supply Management Service Sector Index came in at 55.4 vs expectations of a 55.6 reading.  Anything over 50 signifies expansion.  Tomorrow's May Non Farm Payroll report could cause significant volatility tomorrow.  Analysts are expecting payroll #s to show a gain of 500,000.  Even though such a # is built into current market expectations, the shock value of such a strong # if it materializes could cause rates to move higher.  If the # comes in higher than 500,000 and/or the number comes in on target and the # of census workers added is less than 100,000 (eg higher private sector hiring than expected) we could see more severe movement.   Alternatively if the #s are much weaker, that would be expected to support steady rates and/or perhaps slightly lower closing costs for the same rate.  The other factor playing into market dynamics is the European debt crisis and the Gulf oil spill.  Developments on those fronts have the potential to move markets as well.

Bonds edged slightly higher today on a weaker opening equity market.  Stocks have since moved into positive territory and bonWhile some are speculating that things will get worse  for equities in the US, others are speculating that stocks may have bottomed and that the current environment represents a buying opportunity.  Within this context, this Friday's May Non Farm Payroll Report will take on additional importance.  Analysts are forecasting the payrolls will be higher by 500,000, with approx 100,000 of the growth coming from temporary census workers.  If the number hits that mark, some are projecting a rally in stocks at the expense of bonds, assuming that there is not significant further deterioration in the European debt crisis.

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

Tuesday, June 01, 2010

April Construction Spending - expected up .1%, actual up 2.7% compared to March increase of .4% (revised up from .2%).

May Institute of Supply Management Manufacturing Index - expected 59.4 reading, actual 59.7, compared to 60.4 value in April

Wednesday, June 02, 2010

April Pending Home Sales - expected up 4.3% compared to 5.3% increase in March.

Thursday, June 03, 2010

May ADP Employment Change Report - expected increase of 56,000 in private sector payrolls compared to 32,000 increase in April.

Initial Jobless Claims week ended 5/29/10 - expected drop of 5,000 to 455,000 from 460,000 prior week.

Continuing Jobless Claims week ended 5/22/10 - expected drop of 7,000 to 4.6 million from 4.607 million the prior week.

April Factory Orders - expected up 1.7% vs up 1.3% in March.

May Institute of Supply Management Service Sector Index - expected 55.6 reading vs 55.4 in April.

Friday, June 04, 2010

May Non Farm Payroll Report - expected 500,000 increase in payrolls compared to 290,000 increase in April.  Unemployment rate expected to drop from 9.9% to 9.8%.