Post Non-Farm Payroll trading has been a quiet affair, with both stocks and mortgage backs off just a few ticks. Friday’s payroll report echoed the theme in terms of retail job losses in a lousy economy with the final quarter of 2008 eliminating over 1 million jobs. We see this period as the time when jobs were the “baby, bathwater, and the sink” being thrown out the window. 2009 should be a year of recovery both in jobs and the economy. Trouble is the pace will be slow.
The week ahead has some heavy hitters such as PPI and CPI, inflation at both the wholesale and consumer level. They should show a period of disinflation. Given the expectations for low inflation, a suffering economy, poor corporate earnings, etc. etc., we seen treasuries staying bid, trading a range between 2.25% and 2.50% into the foreseeable future. Mortgage backs and their associated pricing should hang in there as well, trading up a little, down a little, until housing finds a bottom.
The Fed buying MBS paper will continue to have a positive effect. Currently, the 10 year note is up 17/32’s (yield 2.35%), mortgage backs are off 4/32’s, and stocks are down 95 on the big board.
- Courtesy PrimeLending Capital Markets Group
4th Quarter GDP fell 3.8%, the slowest quarterly pace in 27 years. The number however, was better than market expectations of minus 5.5%. The drop was due in large part to another sharp decline in consumer spending. Business investment was also down, falling 19.1%.
The Employment Cost Index was also released, up .5% and up 2.6% for the year ending 2008, the slowest pace since 1975. Month end buying is helping the long end of the yield curve and helping MBS for that matter as current coupon FNMA/GNMA are up 2 to 3/32's.
Just released, the Chicago Purchasing Mgrs report fell 1.8 points to 33.3. A reading above 50 signals expansion while a print below 50 points to business contraction. The production component within this index was an eye opener, falling 29.7% , the worst in nearly 30 years.
The Fed has been in the market as well, purchasing 1.7 billion of GSE paper (MBS). Not much but it is supportive for our mortgage pricing and rates.
Technically, the buying this morning has approached the overhead resistance at the 2.75% yield mark where sellers re-entered. Yesterday, that level was support but once taken out (when we traded to 2.90%), the level now becomes resistance. The response (selling) tells you that the bears are still in control but very close to the channel bottom at 2.93%.
Given stocks are floundering, off 93 on the Dow, and the economy is still on life support, we expect the mortgage rates will hold steady (at current levels) and try to improve as we enter a new month.
-Courtesy PrimeLending Capital Markets Group
Rational market behavior is not the theme for today.
Economic data was downright nasty yet bonds and mortgage backed secutities are both in the red. Weekly Unemployment Claims hit the tape up 3K to 588K while Continuing Claims rose to record highs. Durable Goods orders were no better, falling 2.6% and excluding transportation, dropped 3.6%. We need to go back to 2002 to match that print.
Part of the atypical trade can be blamed on 30 billion of 5 year notes coming to market, leveraged accounts selling into the long end of the treasury curve, and mortgage originator/servicer selling into month end production. The other part seems to be that the market is still crabby about yesterday’s FOMC statement not going far enough to help the credit markets. Call it the “Fed’s Balk, Market Walks”.
With no pre-commitment to buy treasuries, traders do what traders do. Sell. Unfortunately, they are taking mortgage backs right along with them. Currently, the 10 year note is down 27/32’s (yield 2.75%), mortgage backs down a smooth ½ point, and stocks off 178 points on the Dow.
Technically, we’re just testing the bottom of the range with the market needing to make a stand right here (2.75% to 2.80%). Given the sour economic backdrop, we would expect the market to hold and make a comeback into next week. If we are wrong, the pain will be another point to the downside for the 10 year note (channel bottom) and at least ½ point of additional punishment on mortgage pricing.
Good time to use our float down program and play defense with this market.
The FOMC statement was the main focus for the markets today, with the long end of the treasury curve and mortgage backed securities taking the brunt of the selling after the release. Word has it that the lack of commitment by the Fed to buy long dated treasury issues sparked the selling, even though the statement verbatim said “The focus of the Committee’s policy is to support the functioning of financial markets and stimulate the economy through open market operations. The Federal Reserve continues to purchase large quantities of agency debt and mortgage backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchased and the duration of the purchase program as conditions warrant”.
The bottom line here is that the Fed will do anything within its power to grease the wheels of the credit markets. Given the text, I think both treasuries and MBS overreacted. With the Fed being the A player, we do not expect mortgage rates or treasury yields to go much higher.
Technically, the trend has been bear one day, bull the next. Bears won today and could take the market to the bottom of the channel line at a yield of 2.73% (currently 2.66%). 2.73% should put the brakes on the selling and start a new trend towards lower yields and better mortgage pricing.
Hang in there.
A quiet, yet positive trade has developed today with month end and nasty weather setting in.
Earlier this morning, S & P Case Shiller Home Price Indices continued to set new record lows as the 10 city index fell 27% and the 20 city index fell 25%. Phoenix and Las Vegas posted the largest declines, year on year of 33% and 32% respectively. Miami, San Francisco, Los Angeles, and San Diego followed with declined between 26% and 31%. Dallas and Denver were the best of the worst but still posted record month declines. All 20 cities posted yearly price declines.
Consumer Confidence for January was also released, falling to 37.7, a new record low. Rising unemployment seems to have displaced any confidence we might have gained when the Obama administration took over.
Looking to the positive, the FOMC has started day one of their two day meeting, no doubt talking about how to finance the stimulus package(s) and how to help grow the economy. With the Fed Funds target rate at zero, the Fed will need to use more “aggressive” tools to stabilize the economy. Watch for the policy statement tomorrow at 1:15 pm cst. It will tell the tale of the tape.
Expect the tight range trade to continue.
Markets are mixed to start the week as stocks are positive and bonds/mortgage backs are not so positive.
Early news on the economy was bearish as Caterpillar announced layoffs of 20K plus, Home Depot of 7K, and a few others pink slipped another 1K or more. Even McDonalds reported sales off 23% on a global basis. Forget about cutting the dividend, my grandsons are worried about cutting the toys in Happy Meals. No doubt, the recession is effecting just about everyone.
Early trade had stocks off and bonds unchanged to plus a tick or two. Then Leading Economic Indicators and Existing Home Sales were released. Existing Home Sales caught the most attention, posting sales up 6.5% to 4.74 million units. The surprisingly positive release followed through as inventories fell by 11.7%. The only depressing number within the release was the median sales price which fell to $175,400.00. All regions of the country has positive gains with the exception of the Northeast, which fell 1.0%. Good news on the housing front yet traders are still apprehensive as one month does not make a trend.
Leading Economic Indicators surprised to the upside as well, rising .3% in December. Economists expected the print to fall .3%. In December, 5 of the 10 components has increases, the most since April 2008. Although the number looks good on the surface, once we strip out the effects of the money supply, the number would have been a minus .7%.
The week ahead will be jam packed with data along with 70 billion in Treasury supply (cash management bills through 20 year TIPS) hitting the auction block. Could give us a nervous, volatile week.
Currently, the 10 year note is down 11/32’s, trading at a yield of 2.66%. Mortgage backs are off 4/32’s and stocks are plus 99 points in the big board. Buckle up, could be a wild week.
Wall Street Dealers report moderate volume in 10 year notes (540K), 30 year bonds (185K), and 5 year notes (265K) while our MBS market is getting a little lift into the close. Traders talk has it that the Fed is back in the saddle, buying MBS paper while originators and servicers are willing to sell. It’s about time they reentered the market.
The buying hasn’t been huge, 3 to 4 hundred million but enough to rally the market for 5/32’s or so. The 10 year note went right to the edge of the cliff (on the chart) and reversed, giving the pattern a better look as we enter the new week. Even stocks boot strapped themselves back to a small loss on the day, down 45 points on the big board. Nice way to end the week.
Next week will not only be the end of the month but one filled with economic data. Existing Home Sales, Leading Economic Indicators, Consumer Confidence, FOMC meeting, Durable Goods, New Home Sales, GDP advanced 4th Qtr (that will be a doozie), and Chicago PMI will all grace the screen.
No Fed in the market buying MBS paper results in the a slow drip towards worsening mortgage pricing. Nothing huge but we are off 4/32's as I bang the keyboard. Treasuries are under pressure as the ongoing credit crisis continues to bear down on the economy, causing bond traders to worry about future fiscal stimulus (and inflation). Take for example the 30 year bond which is off another 2 and ½ points today, trading at 3.37%. The 10 year note is not much better, off nearly 1 point at a yield of 2.68%.
The problem here is that the government will likely sell 66 billion of 3yr, 10yr, and 30yr paper next month on top of quarter refunding auctions that lie ahead. Totals for the 10 year note are something like 62.5 billion and with foreign buyers virtually out of the market, peddling the paper will be a "challenge". Technically, the 10 year note looks like a woofer, taking out good support at 2.58%. Strong sell signals have developed on daily studies and the failure to react to the triangle pattern reinforced the bearish trend. Treasuries will need to hold current levels and reverse the trend soon or worsening mortgage pricing (without the Fed buying) will be the theme.
All however is not lost. Next week the FOMC will meet, most likely talking about lending rates and loans. No doubt they will evaluate past performance and review their programs for both effectiveness and challenges. We also have the Fed on our side as we anticipate further mortgage back securities purchases, keeping mortgage rates low to bail out our housing industry.
So far its 8 days and counting with many mortgage types humming Paul Simon's lyrics, "Where have you gone, Fed Treasury Secretary? A nation turns its lonely eyes to you, Woo Woo Woo". Loved the little red rag top in the movie.
On another front, FHA fico score adjustments will be going higher by February 1st. Expect changes early next week which will change the 600 - 619 score to a hit of 1.0% and the scores from 580 -599 to around 2.0%. Performance in this segment of loans is terrible with regards to EPD (early payment default). It's not a HUD thing, it's investor driven.
For now defense is still in play with pipeline management while hoping for a little Fed action next week to stop the pricing pain.
Despite Weekly Jobless Claims jumping 62K (589K) and Housing Starts falling 15.5% to a record low 550K units rate, treasuries pricing and mortgage backed securities are painted in red. The 10 year note is currently down 22/32's, trading at a yield of 2.60%.
As we talked about yesterday, 2.58% is critical support on the daily triangle pattern and is now in jeopardy. The 30 year bond is really taking a bath, down almost 3 points to yield 3.28%. Easy to see when the Fed takes a buying break, few show up to take their place.
Mortgage backs and their related pricing have slipped another 7/32's this morning as the overall fixed income asset complex is under pressure. Stocks had done another "student body right" move as the Dow is off 240 points, wiping out yesterday's gains as the economic data stunk and Mr. Softy (Microsoft) fell short on the earnings and guidance front.
What you must realize here is that all of the markets are dysfunctional and very irrational. The lack of breath in buying, no matter what the instrument and the marching orders to be risk adverse are in total control. Treasury Secretary Geithner's confirmation has been approved, despite his nanny and tax problems which could help to settle things down. As a matter of fact, he supports pushing mortgage rates lower toward the 4.5% level which should come to our pricing rescue in the days to come.
Until the Fed and their checkbook return to purchase our paper, expect rates to hold steady at today's levels or suffer in small drips.
The best way to take advantage of this market is with the float down. Look at it this way, you lock a loan in today at 5.0%. With that lock, your upside rate is limited to no worse than 5.0% yet your downside, if and when the Fed returns to rally the market, can be as good as 4.625%. Everyone wins no matter which way the market trades. Biggest no brainer in mortgage banking history.
For now, stay defensive and don't play in the street (Wall Street). It's dangerous out there.
Light volume, small range trade has been the theme today as more eyes are on the tube (Geithner confirmation hearing) than on trading screens. Stocks have gotten a lift from better than expected earnings/news out of IBM along with Northern Trust (a bank did well?) as they blew away estimates of .44 cents a share by posting something in the neighborhood of $1.50 per share. Nonetheless, the Dow is up only 59 points as I bang the keyboard.
The 10 year note, along with the 30 year bond is shedding its value as the note is off 1 point and the bond down 2 and ½ points. What we are seeing here is a major curve steepening move as foreign sovereigns (China, etc.) shed duration by selling treasuries as well as stateside firms like Pimco. With the thought that inflation is just months away and given our governments need to finance TARP and other stimulus packages, the need for further supply of treasuries to hit the auction block will be massive.
That brings us to the fate of our paper, Mortgage Backed Securities (MBS). With the Fed being the only buyer of any size, our mortgage rates may be in jeopardy of staying low. The others we will need to step up are defensive or not interested at all. Given the need for low mortgage rates to kick start housing, one would think that the Fed will continue to support low mortgage rates. Question is how much and for how long.
Mortgage backs are off 4 to 5/32's today and have lost .50 to .75 since Thursday. Lack of Fed buying is to blame. If you are expecting the market to trade on fundamental, forget it. Too dysfunctional and too risk adverse. Given our only buyer is a "one trick pony", pipelines need to lean on the defensive side, using the float down to improve rates when or if it happens. Those expecting rates below 4.25% should not hold their breath.
Technically, we're right back to the center of the larger range I talked about yesterday. The neutral inside day is further evidence of a lack of direction without a strong bias either way. For now, play this market very close to the vest.
Although today is filled with history, hope, and opportunity, someone forgot to tell the market. Stocks don’t like much of anything; earnings, additional capital injections for banks (global as well as stateside), and the continued vote of no confidence in the economy and additional stimulus packages.
Bonds have suffered since the Fed closed the checkbook on MBS purchases, stepping away from the market for a while, leaving traders to wonder whether they will or will not return. Interesting that Bill Gross was touting how Pimco’s Total Return Fund was 81% invested in MBS and then took the opportunity to unload a truck full of it to the Fed the last time they were in the market. That’s why market savvy types call him the “bond king”.
Mortgage backs are off a touch today, down 7/32’s as we speak. The 10 year note has also had a tough day, down 32/32’s at a yield of 2.43%.
Speaking of the 44th President of the United States, I though his speech was very good. Now it’s time for him to put his money where his mouth is, working to take this country out of the worst recession since FDR some 76 years ago. No doubt he will wake up tomorrow and wonder what he got himself into. We wish him the best of luck.
From our technical perspective, the 10 year chart has formed a triangle pattern and is currently testing the lower part of that triangle. The ideal target is equivalent to a yield of 2.53% which is nearby but not yet achieved. If the selling continues, we should reach 2.53% and on a stretch 2.57% before good support will enter the pattern. From that point, we would look for a rally taking the 10 year note to the top of the triangle pattern at 2.36%.
English translation is that there could be a little more pain before we get any gains in mortgage pricing. One word of caution, if the triangle pattern is violated ( yield higher than 2.58%), the market will make a full retracement to 2.65%, worsening mortgage pricing in its wake. Odds do not favor this outcome as housing is still in the toilet and the Fed will do most anything to keep interest rates low. Volatility will however continue to be high so be careful out there. Great time to us the float down and take care of your pipeline like a new born baby.
TGIF.
Consumer Price Index, the measure of inflation at the you and me level, dropped .7% while the core index was unchanged. The drop was less than the expected (-.9%) yet the trend toward deflation is certainly intact. Energy prices once again did the damage, down 8.3% in December and finished the year down 21.3%, another new record.
Industrial Production/Capacity Utilization were also released, down 2.0 points IP and 1.0 point CapU. The IP reading posted the lowest level in 7 years. December's reduced output was due largely to a 4.7% decline in durable goods output, including a 7.0% decline in the production of automotive products. Net foreign purchases of Long Term Assets (TIC data) posted a 21.7 billion dollar decline. No doubt those across the pond do not have the same appetite they did a year ago for our Treasury paper, choosing to keep their money at home and clean up their own nest.
This will become a concern sometime in the future as treasury pricing is at or near record low yields in what we would call a "bubble". When the correction comes, it will be a doozie. Mortgage pricing for the most part will diverge from any spike higher in treasury pricing as the Fed will continue to purchase MBS, keeping mortgage rates low to stimulate housing.
With the early close today and markets closed on Monday, volume has been light and trading mixed in the early going. Mortgage backs and our related pricing are off 8/32's, the 10 year note is off 21/32's (yield 2.27%), and stocks continue to sink, down 89 points on the big board.
Technically, the selling in treasuries today has pushed prices through multiple support levels including trend line and retracement targets. 14 day slow stochastics lead the list of bearish indicators and hourly charts are at levels that represent very overbought conditions. Expect to see a little more pressure on the 10 year note which could bleed into worsening mortgage pricing. Nothing big but slipping just the same.
Retail Sales hit the tape in the soup this morning, falling 2.7% while excluding autos, the index was down 3.1%. The results were much worse than expected and point to a dismal December holiday shopping season. Sales fell in every category in December except for health and personal care stores. The steepest decline came at the gasoline stations, falling 15.9%.
Import Prices were also released, falling for the 5th straight month, putting the index at minus 9.3% for 2008. This was the largest yearly decline since 1982. Last but not least, Business Inventories posted a .7% drop with Sales down a record 5.1%. Overall, it looks like the economy threw 9 straight pitches and struck out the side.
Early reaction to the numbers was bond bullish yet mortgage backs were up only 1 to 2/32’s. Since that time, we have traded into negative territory but are starting to boot strap pricing back towards unchanged. Flaky market on low volume in bonds. To us, traders are hesitant to buy MBS with pricing at nose bleed levels yet are afraid to sell knowing the Fed may come and purchase the paper at any time. Expect to ratchet around today’s pricing by .25%, both up and down.
Stocks look sick once again as the financial sector isn’t in favor of proposed TARP policy with the likes of Citi tearing down the super store and HBS needing a reported 40 billion in new capital to keep the doors open driving the fear.
Earnings season is also upon us and most are expecting the worse. So much for the President Elect’s “honeymoon” period.
Market expectations for tomorrow’s Employment Report are for Non-farm Payrolls to be minus 470K jobs, the Employment Rate to post 7%, Average Hourly Workweek to be unchanged as well as the Average Hourly Earnings.
Keep in mind that the ADP estimate released yesterday pointed to job losses of 693K. Our bias points towards 525K in job losses given the House Hold Weekly survey plus 20K in government jobs added. The 7.0% could be on the light side as 7.1% to 7.2% would not be a shocker. We believe the number will be terrible but a terrible number is already priced into the market.
From a mortgage interest rate perspective, any number of 500k to 650K keeps rates the same to slightly improved. Below 400K will probably give the market some heartburn and raise mortgage rates about .125%. In the middle will not improve the market yet the selling will be light.
All in all, odds favor an unchanged to slightly better mortgage rate environment. Buckle up! The news hits the wire at 7:30 am cst tomorrow.
-Courtesy of PrimeLending Capital Markets Group
I don’t think the Wallflowers had that in mind when they recorded that tune (global economy) but it sure seems to fit. With the economy being so disjointed in 2008, the time has come, given the money world powers are throwing at it, to return to fundamentals with supply and demand shaping the price action that will bring us toward a comfortable equilibrium.
Until we get there, volatility will be high. Will China, Japan, and other foreign sovereigns continue to buy our debt? Good question as Uncle Sam looks to finance a 1.2 TRILLION dollar deficient in 2009. What will the new stimulus package look like? So far, I like the tax cuts for both personal and corporate needs. What will happen to mortgage rates? They will remain low until the Fed stops buying MBS. When the checkbook runs out of checks, 4.50% will turn into 5.50% overnight.
The question is when.
ADP reported this morning that their estimation for Friday’s payroll report will be job losses of 693K. Eye opening and mind boggling yet not unexpected. Previous to this “guess”, market forecasters have been pegging the number at minus 470K. Our estimates will be released tomorrow afternoon.
Contrary to what you might think, the MBA released figures that show a dip of 8.2% in mortgage applications. All related to the Refi Index which fell 12.3% while the Purchase Index rose 7.3%.
Mortgage wise we have a couple of things going on. First, the Fed is in buying, just like yesterday. $500 billion is still the number to be purchased over the next two quarters. Number two is that the market, as usual, has many moving parts yet the gears are not all in sync. Capital base declining (Citi), hedge fund devastation, and a return to volatile conditions makes for a tricky market. Case in point, 10 year note yield trading at 2.52%, nearly a .30 basis points rise in seven days yet mortgage back securities up 1 point plus (rally) in the same period. Without the Fed as the buyer of choice, we would be .50 basis points higher in rate at the same price.
Treasury Secretary Paulson is recommending that the US restructure the mortgage credit market by creating private sector entities that buy and securitize mortgages with the help of a credit guarantee from the government. Makes sense to me. Just wished we would have done this five years ago. If so, we wouldn’t be in this mess.
Market’s for the most part traded to their early mark and have held steady since. Stocks have been down all day on the ADP report and Intel’s negative outlook. Currently, stocks are off 200 points on the big board. 10 year notes are off 8/32’s, trading at a yield of 2.53%. Mortgage backs have a mind of their own, currently up 4 to 7/32’s across the board on the government loans and 2 to 3/32’s on the conventional side.
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