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Week of August 10th

August 11th, 2008 9:03 PM

There is no relevant economic data scheduled for release today, but the rest of the week brings us five reports for the bond market to digest. The first is June's Trade Balance report tomorrow morning that gives us the size of the U.S. trade deficit. It is the week's least important report and likely will have little impact on the bond market and mortgage rates. Analysts are expecting to see a $61.9 billion deficit, but it will take a wide variance to directly influence mortgage pricing.

July's Retail Sales data will be released early Wednesday morning. This data is very important to the financial markets and mortgage rates because it helps us measure consumer spending. Since consumer spending makes up two-thirds of the U.S. economy, any data related to it can cause a fair amount of movement in the markets. A smaller than expected increase would indicate that consumers are spending less than previously thought, potentially slowing the economy. This is good news for the bond market and mortgage rates as it eases inflation concerns and makes long-term securities such as mortgage-related bonds more attractive to investors. Current forecasts are calling for an increase of 0.5%.

The most important data of the three is July's Consumer Price Index (CPI) at 8:30 AM Thursday. The CPI is one of the most important reports we see each month. It measures inflation at the consumer level of the economy. There are two readings in the report- the overall index and the core data reading. The more important of the two is the core data because it excludes more volatile food and energy prices. Current forecasts call for an increase of 0.4% in the overall and 0.2% in the core data reading. Smaller than expected increases should lead to a bond rally and lower mortgage rates. However, stronger than expected readings will likely cause a spike in mortgage pricing.

There are two pieces of data scheduled for release Friday. The first is Industrial Production data for July. This report gives us a measurement of manufacturing sector strength by tracking output at U.S. factories, mines and utilities. It is considered to be of moderately high importance and may cause movement in mortgage rates. Analysts are currently expecting to see no change in production between June and July. N increase in output could lead to higher mortgage rates Friday, while a weaker than expected figure should help push rates lower.

The second report of the day will come from the University of Michigan who will release its Index of Consumer Sentiment for August at 9:45 AM. This index gives us a measurement of consumer willingness to spend. If confidence is rising, then consumers are more apt to make large purchases. This helps fuel consumer spending and economic growth. A drop in confidence will probably boost bond prices, leading to lower mortgage rates. If the index rises, indicating that confidence is rising and spending is likely to continue, we may see mortgage rates move higher Friday.

Overall, look for the most movement in bond prices and mortgage rates the middle part of the week. Wednesday or Thursday will likely turn out to be the most important days. If we get stronger than expected results in the Retail Sales and CPI releases, I fear that we may see mortgage rates spike higher fairly quickly. If those reports do further ease inflation concerns, I will likely be shifting to a float recommendation across the board. But, the risk versus reward comparison short-term still favors the risk side in my opinion, therefore, I am holding the lock recommendations for short-term closings for the time being.

Summary -

Mortgage backed securities trade based on appetite and cycles. Friday there was a large equity sell off based on some news released Thurs with corporate earnings, Freddie Mac, and some other various factors that scared the market and shifted where the funds were invested. When ever this happens more often than not, we have nice gains to end the week on and people run scared Fridays to get out of the market, and then reallocate based on what live markets are doing. This has been 100% what happened this week. We had gains Weds-Friday pushing the tolerances of running averages, and sure enough the market regrouped and we're down 56 bps on the day and 34 down since 10 am when many rate sheets came out. This has been bouncing up and down, and many of the investors posted rates a little later than that and if not probably priced some of those losses in.

Oil is now trading at $115 which is still low compared to recent trading. If Oil continues to slip, you can bet your pretty pennies that money is getting sucked right out of bonds and put into oil futures. Bond traders have been testing the waters, and with out fail we approach trading lows that we have plenty of pressure to rebound from, but then we approach that 25 day moving average and just can not break that barrier.

The Federal reserve voted 10 to 1 to keep rates as is, and with oil low that gives them a lot of ammo to move at the next FOMC meeting. The interesting part to that is prior to an election the FOMC has only made a rate move one time. If history repeats itself, we'll have some nice inflation and weak dollar issues for the president to deal with...but who didn't see that coming?

We've settled right in between the trading highs and lows and may be now at the lowest point until some outside influence starts to affect it either way. The Balance of trade reports which indicate out import/export deficit are released tomorrow. An increased deficit means increased consumption which shows a strengthening economy. The biggest day is weds with HUGE reports on Retail Sales, Retail Sales Ex-Autos, and Crude Inventories, followed by Thursdays reports on Consumer Price Index, Core CPI, and Jobless Claims. No true trading markets can be shown until markets balance, and these numbers can impact trading.

Just a quick side note...despite the poor mortgage backed market, rates on FHA and the 15 yr fixed have improved over Thurs and Friday of last week. This is normally due to traders hedging on the down cycle to account in their margins for lock fall out. In a rising environment they can afford to tighten those margins. Keep an eye on these trends always because with bad news comes good news if you have the right angle of reference and how to capitalize on them.

Posted by Edward Woodhead on August 11th, 2008 9:03 PMPost a Comment (0)

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Friday August 22nd

August 25th, 2008 10:43 AM

From Friday August 22nd

As always we sit in interesting times. Fed Chairmen Ben Bernanke spoke today at 10 am commenting on the current markets we face and problems still persist threatening. According to Bernanke, the threat of rising oil prices is the toughest challenge we've ever had to face. Oil futures to be executed in November and December are pricing around the $200 a barrel range where we now sit in the low $100s. The good part he noted was as oil reached record levels it was apparent that the market could not sustain just a level showing that inflationary fears may be on the wane. With that said, there's still a lot left to be determined when the issues of Russia and Georgia threats prices. The softening economy and rising unemployment concerns are the primary fears on the table at this point so the central banks will keep rates at 2% until there's blue skies on the horizon. They also made comments that the meeting to follow in September and October should remain unchanged as well. Most analysts would agree that inflation is not out of control but the longer rates stay low the worse the possibility of inflation drifting away becomes a fear.

All the talk of Freddie Mac and Fannie Mae doesn't seem to end as they are basically the sole purchasers of mortgage paper with the exception of Ginnie Mae purchasing government backed loans. Warren Buffet made comments in interviews this morning that the 2 institutions are way too big to fail, under basic financial principles both institutions would have gone under a long time ago, and he hasn't held a position in them since 2001. Both agencies grapple with their business structures as investors are demanding dividends and higher stock prices than the approximate $5 / share they are trading at now, at the same time congress is demanding them to bail out credit markets, and they've been failing at both. A full government take over may soon be needed since such conflicts can never allow the current arrangements to work. Ben Bernanke added in his comments today that regulators coming in thinking that restricting financial institutions and credit policy is not the answer, and they need to be very cognoscente of how it is worsening the markets in these times of turmoil.

Some other interesting news is that Lehman Brothers, previously one of the largest firms buying non agency mortgage paper, is now trying to sell 70% of it's company stake but it's current balance sheet issues are scaring off any potential buyers. Without a strong financial purchaser, companies like these will be hard pressed to reenter the credit markets. They are hoping to find a buyer that will allow them to buy a stake back down the road as markets recover. This would lead one to believe that a large bank with tons of cash may come to the rescue, but who is really left? JP Morgan Chase has already inherited the issues of Bear Sterns, Bank of America has taken over the failed mortgage giant Countrywide, and the federal government only has so much money to throw around when the primary concern is the solidity of Freddie Mac and Fannie Mae.

Looking at mortgage rates and prices we've seen the past 2 days of rates jumping up as most would expect. We experienced some gains on mortgage backed securities for 5 days straight, which is not only the longest run we've seen in a while, but rates were also the best they've been in over 4 weeks. The interesting thing we've seen is no matter what the Fed does to rates, they just keep climbing at a clear and definite pace. The correlation between treasuries and mortgage backs is completely unseen at this point, and the pricing spreads between them is the worse we've seen. Added comments from Warren Buffet bring attention to the question of why this would be when treasuries appear to be over priced and mortgage backed securities are just as safe since the government is indirectly protecting the assets with much better returns. Rates are basically where one would expect them to be and hovering right on the 50 day moving average with little movement today after a two day loss. Mortgage applications are at their lowest point since March of 2000, which I find rather refreshing considering how busy we are. While most people viewed Ben Bernanke as a polar opposite of Alan Greenspan in early parts of his career, lets not forget he is one of the brightest minds in the financial market, though unconventional in his methods. The Greenspanian era solved problems with rate adjustments, and looking back it caused many of the problems we have today because it was thought trying to use other influencing factors stepped over boundaries and had little direct affect. We now have seen that no matter what we do with rates, mortgage rates will not drop and in many cases go up making credit harder to obtain at affordable pricing. If there's credit to be given...inflationary fears have eased a little, the recession we are feeling may take a long time to get out of but it's not as deep as it could be, and we are in a global recession where other markets are at least inline or way worse than us. Plus the DOW has seen it's biggest gain in 2 weeks which I'd assume is largely due to the Feds outlook on markets. If mortgage rates are going to substantially drop anytime soon, it will only be as the government announces a take over of Freddie Mac and Fannie Mae subsiding investor fears in mortgage paper and stimulating the demand that they should have.

Posted by Edward Woodhead on August 25th, 2008 10:43 AMPost a Comment (0)

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Week of August 17th

August 18th, 2008 12:49 PM

Monday's bond market has opened up slightly following a negative open in stocks. The stock markets are starting the week in the red with the Dow down 56 points and the Nasdaq down 12 points. The bond market is currently up 3/32, which should keep this morning's mortgage rates near Friday's levels.

There is no relevant economic news scheduled for release today. However, there are two reports scheduled to be posted tomorrow morning. The first is July's Producer Price Index (PPI) that gives us an indication of inflation at the producer level of the economy. There are two readings in the report- the overall index and the core data reading. The core data is more important because it excludes more volatile food and energy prices that can change significantly from month to month. Current forecasts call for an increase of 0.6% in the overall and 0.2% in the core data reading. A larger increase may renew inflation concerns and push mortgage rates higher tomorrow mo rning. If it reveals smaller than expected increases, we could see mortgage rates improve as a result.

The Conference Board will give us the first data late tomorrow morning when it releases its Leading Economic Indicators (LEI) for July. This index attempts to measure economic activity over the next three to six months. A higher than expected reading is bad news for the bond market because it indicates that the economy may be strengthening. However, a weaker than expected reading means that the economy may slow in the near future, making stocks less appealing to investors. This also eases inflation concerns in the bond market and could lead to slightly lower mortgage rates tomorrow if the stock markets remain calm.

The second is July's Housing Starts data. This report gives us an indication of housing sector strength and mortgage credit demand. However, it isn't considered to be of high importance to the bond market or mortgage pricing and usually does n't cause much movement in mortgage rates unless it varies greatly from forecasts. It is the least important of the week's reports and is expected to show a sizable drop in new starts.

The Conference Board will give us the last piece of data for the week late Thursday morning when it releases its Leading Economic Indicators (LEI) for July. This index attempts to measure economic activity over the next three to six months. A higher than expected reading is bad news for the bond market because it indicates that the economy may be strengthening. However, a weaker than expected reading means that the economy may slow in the near future, making stocks less appealing to investors. This also eases inflation concerns in the bond market and could lead to slightly lower mortgage rates tomorrow if the stock markets remain calm. Current forecasts are calling for a decline of 0.2% in the index.

Overall, look for tomorrow to be the busiest day of the week with the P PI being released. The rest of the week will likely be influenced more by stock prices than anything else, which may be quite volatile. Therefore, keep an eye on the markets and maintain contact with your mortgage professional if you have not locked an interest rate yet.

Posted by Edward Woodhead on August 18th, 2008 12:49 PMPost a Comment (0)

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Week of August 3rd

August 5th, 2008 5:05 PM

All last week we saw improvements of mortgage backed securities of 150 bps in total before a little sell off yesterday that was inevitable.

Consumer inflation numbers yesterday posted a little over the Feds comfort levels. Although a rate hike today would help slow inflation and strengthen the dollar, it would also slow the ability for borrowers to finance at affordable costs. This put the Fed into a really tough spot so little was priced into the market.

Today's FOMC meeting has adjourned with an announcement that there was not a change to key short-term interest rates. This was the second consecutive meeting with no change and was widely expected. The post-meeting statement indicated that the Fed was aware and considered the economic slowdown but also was quite concerned about the threat of inflation. That created concern in the bond market since inflation erodes the value of a bond's future fixed interest payments.

Bonds have actually held up quite well during afternoon trading. Earlier the stock markets have extended their earlier gains with the Dow up 275 points and the Nasdaq up 50 points. The bond market is near morning levels, so I am not expecting a change to mortgage rates unless bonds fall from current levels.

There was no relevant economic news posted this morning. Stock started the day off strong as oil prices continue to fall, down to $120/barrel. High fuel costs have been noted by many sources as a contributing factor to the slowing economy. As oil prices fall well off their recent highs, that concern seems to be easing. This leads to better expectations for economic activity and corporate earnings.

On the flip side, uncertainty lies as we now enter hurricane seasons, threats of wiping out refineries, and all the other good excuses needed to jack pricing up again with fears of slowed production to meet demands and crude inventories are low.

There is no relevant economic data scheduled for release tomorrow. The next piece of news is Thursday's posting of weekly unemployment figures and those are not considered to be of high importance to the markets. This leaves the bond market to be influenced by stock and oil prices. If stocks continue to move higher, we may see bonds suffer and mortgage rates move higher until Friday's data is posted. If the major indexes begin to fall, bond could benefit and drive mortgage rates lower.

Posted by Edward Woodhead on August 5th, 2008 5:05 PMPost a Comment (0)

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