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upcoming week

July 12th, 2008 12:01 PM

Next week brings us plenty of important economic news for the markets to digest. Some of the key reports will give us inflation readings at the producer and consumer level of the economy and retail level sales from last month, along with the minutes from the last FOMC meeting. However, none of these releases come until the middle and latter part of the week so I am expecting the stock markets and related news to be a major influence on bond trading and mortgage rates the first couple of days. Look for more details on next week's events in Monday's post.

Posted by Edward Woodhead on July 12th, 2008 12:01 PMPost a Comment (0)

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Market Update

July 22nd, 2008 3:00 PM

With everything moving so fast, we are trying to provide as much insight as we can.

Does the news ever stop??? The market is again all over the place for a large number of reasons. The saga of Freddie and Fannie and major lenders continues as the Congressional Budget Office put a total cost estimate on the bailout required at $25B which they've urged Bush to prepare for. They also commented that there's a 50% chance they may not need the money...but also a 5% chance that it could potentially cost the government up to $100B. Secretary Paulson is urging congress to pass the ability to give the Treasury Dept broad but temporary powers to provide the agencies liquidity with an unlimited credit line funded by the government for 18 months and options to purchase stock in these technically privately held companies. At the end of last week the talk was leaning more towards a private sector assistance with a $10B public offering of preferred and common stock to take the burden off of the tax payers, but there were large objections from investors. The overall feeling is that no one truly knows what the portfolio looks like and how it is performing, and most Wall St investors feel there is not enough transparency in the portfolio to place a risk value on it. Freddie and Fannie's stock has dropping around 80% this year with most of those losses posted in early July.

To add to the negativity, Wachovia released quarterly earnings which resulted in just shy of a $9B loss. Due to many of these reports, oil has also dropped around $5 / barrel trading at $126. So here's some good news for mortgage rates. You have to look at markets in equities and bonds as a supply and demand market. Investors are making calls as to what the safe investment is, just to take a bath later and being proved wrong. You have a number of banks like Wells Fargo and Bank of America posting great earnings, and then a large bank like Wachovia posting a $9 loss. There's still a fear of how to define a bottom to the market, a bottom for financial institutions, and a bottom to the real estate market. When oil was trading at $143 / barrel analysts were saying it should make it up to $200 by the end of the year. It has in fact shifted the opposite way. When there's no safe harbor in the equity and commodity markets, a logical person can only make one safe & secure choice...and that is typically bonds and mortgage backed securities. The reason Alt A and Subprime business became so popular and profitable in past years was because you will rarely find those kind of returns you can get from them on an asset that is collateral based. This market tumbled due to over valued appraisals and a loosely regulated business from the mortgage brokers, to the bond rating companies like Standard & Poor's and Moody's, to the Walls St hedge funds and investment banks pushing them, right to the 401K plans that purchased them looking for huge returns with little risk. While regulation and realignment plays it's course like any economic cycle will, bottoms to the mess will slowly present themselves and start to correct the market. The tax burden of a federal bail out will never outweigh the potential collapse of so many other areas of the market. Loans being written now are about as secure of an investment as one could purchase in a free market, and as investors realize how clean newer books of loans have become...that appetite will be right back. For an investor to buy a pool of highly scrutinized quality loans at a discount with real estate backed collateral getting a yield of 6%, it's a no brainer compared to buying into an equity position where the market has had the worse percentage losses since 2003.

Few things are clear and definite, but you can count on a Fed rate hike to ease inflation fears. This is well priced into the market and expected based on the current movements in stock futures and oil prices. At 9:13 am mortgage backed securities were down only 16 bps, and by 10:30 were down 50 bps based on all of the released reports. Now at 2:30 the market is only down 28 bps which I think should lean towards some pricing improvements this afternoon. With all the ups and downs, lender pricing is getting hedged out conservative until the market calms down each afternoon. Then they can more accurately predict how mortgage backs will trade. Keep an eye on rates constantly and if you need advice on what to do please let me know. They are so up and down that no one can know or guess the best moves. The best thing you can do is make the most educated decision you can at the time assuming a half hr from now it could be totally different. AND I'M SPENT....

P.S. - There is more bad news coming for August...but we will save that for another time.

Posted by Edward Woodhead on July 22nd, 2008 3:00 PMPost a Comment (0)

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Week of 07/20/2008

July 21st, 2008 9:21 AM

This week will be interesting for the bond market and mortgage rates. There are six economic reports scheduled for the financial and mortgage markets to digest, but only one of them is considered to be of high importance to the markets. But with data being posted all but one day of the week, we may see some fluctuations from day to day in mortgage pricing.

The first report of the week comes tomorrow morning with the release of June's Leading Economic Indicators (LEI) at 10:00 AM. This Conference Board index attempts to measure economic activity over the next three to six months. While it is not a factual report, it still is considered to be of relative importance to the bond market. It is expected to show a 0.1% increase, meaning that we may see a slight increase in economic activity over the next few months. A decline in the index would be good news for the bond and mortgage markets.

The Federal Reserve will release its Beige Book report Wednesday afternoon. This report is named simply after the color of its cover, but it is considered to be important to the Fed when determining monetary policy during their FOMC meetings. It details economic activity and conditions by region throughout the U.S. With Fed Chairman Ben Bernanke's testimony last week, I don't think we will see any significant surprises in this report, and therefore will likely not cause much movement in mortgage rates Wednesday afternoon.

There are two housing sector related releases scheduled for Thursday and Friday, but I don't think they will have much of an impact on the bond market or mortgage rates. June's Existing Home Sales will be posted Thursday while New Home Sales will be released Friday. I would expect that other reports or factors will drive bond trading and mortgage pricing much more than these will.

Friday brings us the release of two of the week's most important reports. The first will come from the Commerce Department when they will post June's Durable Goods Orders at 8:30 AM ET. Current forecasts are currently calling for a gain of 0.1% after showing little change in new orders during May. This data gives us an indication of manufacturing sector strength by tracking orders at U.S. factories for big-ticket items. These are products that are expected to last at least three years. A stronger than expected number may lead to higher mortgage rates Friday morning. If it reveals a smaller than expected rise or a decline, mortgage rates should drop Friday.

Also being released Friday is the final revision to July's University of Michigan Index of Consumer Sentiment. Unless we see a drastic revision to the preliminary estimate, I think the markets will probably shrug this news off.

Overall, this is a moderately significant week for the bond market and mortgage rates. If we get weaker than expected economic results, we may see mortgage rates move lower for the week. However, stronger than expected results will likely lead to higher rates for the week. We also have a 5-year Treasury Note auction Thursday that may influence bond trading but will also give us an indication of investor appetite for bonds. Generally speaking, despite the lack of a data-packed calendar, I would still maintain constant contact with your mortgage professional.

Posted by Edward Woodhead on July 21st, 2008 9:21 AMPost a Comment (0)

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Mid Week review

July 16th, 2008 11:22 AM

The market is having a huge sell of bonds today since the open. PPI was released yesterday with an average price inflation increase of 1.8% which was over the 1.3% expectation. Year over year this shows an increase of 9.2% and is the largest increase since 1981. This created little movement yesterday but is catching up today. When you evaluate core data excluding food and energy, the inflationary rate was only .2% showing food and energy are the main cause of the spike. June's retail sales were also released at only a .1% increase vs. the estimated .4% increase. This shows links to consumer fears of inflation in the spending habits and that money isn't going back into spending. We'll see if those tax rebate checks ever have an effect considering the only people that received them are the people that will save them vs. spend it since the market is soft and they don't have the expendable income. Bernake's comments were that none of this came as a surprise, although that's interesting considering the #s were so far off of expectations. Of course a lot of the sell off also relates to Freddie and Fannies statements of their financial instability and the Treasuries poor plans of assistance to help out. We're about 56 bps off from yesterdays mortgage backed securities sales from yesterday at around 11:30. We'll have to see if this is knee jerking movements or a steady trend of selling off since we've already pushed the marks of the boarders of the 100 and 200 day moving averages, falling below the 50 day moving average, and are now falling back to the levels of the 25 day moving average sale prices.

Posted by Edward Woodhead on July 16th, 2008 11:22 AMPost a Comment (0)

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Week of 07/07/2008

July 9th, 2008 5:34 PM

Monday's bond market opened relatively flat with no relevant economic news scheduled for release. The stock markets kicked the week off in positive territory with the Dow up 70 points and the Nasdaq up 14 points. The bond market stayed nearly unchanged from Thursday's close.

Tuesday's bond market has opened relatively flat again as investors prepare for this week's earnings releases. The stock markets are showing small gains with the Dow up 23 points and the Nasdaq up 7 points. The bond market is nearly unchanged from yesterday's closing level, but we should see an improvement in this morning's mortgage rates due to strength late yesterday (3pm update - rates have improved).

There is no relevant economic news scheduled for release today. I am expecting the stock markets to continue to be the biggest influence on bond trading the rest of the day. If the major stock indexes remain near current levels, mortgage rates will likely follow suit.

I am remaining on the cautious side, particularly in the short-term outlooks

This week brings us the release of only two economic reports for the bond market to digest. It also is the beginning of corporate earnings season. Those quarterly earnings reports can lead to significant volatility in the stock markets, which could influence bond trading and mortgage rates.

The first piece of economic news that may affect mortgage rates is Thursday's weekly unemployment figures from the Labor Department. Analysts will be paying a little more attention to this week's release than usual because last week's report showed that claims had crossed above 400,000 the previous week. This is an important benchmark that will be watched closely. Last week's numbers didn't get much attention because they were posted at the same time as June's monthly Employment report. But with little data scheduled for release this week, I believe more focus will be made on Thursday's report.

Also worth mentioning are a couple of public speeches by Fed members including Fed Chairman Bernanke and a 10-year Treasury auction of inflation protected notes. The speeches will be watched closely for any possible hint of the Fed's next move. The Treasury auction likely will not have an impact on rates, but could influence bond trading slightly if it is met with a strong or weak demand from investors. In a very light week of economic news such as this week is, events like these sometimes have a greater impact on the markets than if they took place during a busy week of news.

Overall, I am e xpecting to see a fairly calm week in mortgage rates. Friday will be the most important day with two economic reports scheduled for release. If the corporate earnings reports that are scheduled for this week are a disappointment, we could see stocks move lower and investors seek safe-haven in bonds. This would likely help push bond prices higher and mortgage rates lower for the week.

Posted by Edward Woodhead on July 9th, 2008 5:34 PMPost a Comment (0)

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