Mortgage Market Update

Stocks and all major indices relating to the equity market are trading  at 12 year lows, hurting your 201K but helping our mortgage pricing.  "Sometimes the burden seems more than one can bear; it's not dark yet, but it's getting there" (Dylan). 

The sharp sell of in stocks (Dow down 212 at 6841) has driven the flight to quality crowd off the couch (10 year note up 38/32's).  Mortgage backs have seen a nice bounce, up 9/32's as we speak.  Consumer spending rose .6% this morning, better than market expectations while Income was up .4%.  After adjusting for taxes and taxes, real disposable income rose 1.5%, the largest increase since May.  Good sign that the patient (consumer) is coming off life support. 

Construction Spending was also released, down 3.3%, double the expectations.  Cutbacks in State, Federal, and Local  building took the legs out from underneath this index. 

Last on the docket, February ISM (Institute for Supply Management) rose to 35.8 form 35.6.  The employment component fell however to 26.1, a new record low.  The lack of inflation within the index is a bright spot, along with the index itself starting to level off. 

The week ahead will be chock full of data, starting with Pending Home Sales tomorrow, ADP Employment estimates and the Beige Book on Wednesday, Weekly Claims and Factory Orders on Thursday, and Big Daddy, the Employment Report for February on Friday.  Big week usually means big volatility so buckle up. 

Technically, the market went right to the edge of the cliff (once again) but didn't jump.  Buying has pushed through the resistance level below 2.99% which in itself is a good sign but not a savior.  Think of this as more of a stabilizing move, one that should keep the market close to current level or doing a little better.  The stability should take us right through the week until Friday's market mover (Employment Report ) hits the tape. 

More on our guess this Thursday.  For now, take advantage of the mini rally and use the float down. 

The Ides of March are upon us.

Fast market conditions exist as the 10 year note has gone from plus 9/32’s to down 9/32’s in the last 15 minutes. Short term patterns that pointed to higher levels (rally), met their objectives and have slipped away from the best levels of the day. Nothing huge but we are now trading up 2/32’s, the “trend is not your friend”.

Earlier today, Personal Income hit the tape down .2% while Personal Outlays rose .2%. After adjusting for inflation and taxes, real disposable income fell .4%, the first decline since August.

Michigan Sentiment Survey was also released, up .7 to 57.3. The surprise improvement seems to have its roots in recent Fed and Treasury actions, building a little consumer confidence.

Overall, the supply/demand technical’s of mortgage back security trading favor steady to slightly improved rates into the foreseeable future. While mortgage banker types like us are selling 3 billion a day, the Fed is in buying 6 billion a day. 2 to 1 ratio is strong, giving traders panic attacks every time they try to short the market.

There’s an old saying among traders, “don’t fight the Fed”. Certainly fits in today’s market and maybe we should add “let the big dog eat”. Until they're full, it’s steady as she goes.

Have a great weekend.

-Courtesy PrimeLending Capital Markets Group

Treasury traders have had to be quick as a cat , sidestepping the land mines such as China, Fed, Treasury, Capitol Hill, 98 billion in auction paper this week, and Barney Frank lifting their wallet.

Less than a week a ago, the 10 year note was trading near 2.50% post FOMC shock and awe. Today, the note is off 15/32’s, trading at a yield of 2.71%. Mortgage backs are down as well, off another 4/32’s from yesterday’s close. Point being, trust is something that traders have little of due to the multitude of moving parts. Kind of like the shell game where you had to guess which shell was covering the ball. I could never win at that game. Maybe President Lincoln said it best; “ you can fool some of the people all of the time, and all of the people some of the time, but you cannot fool all of the people all of the time”.

Our market seems to be caught in a period of congestion, trying to thread the needle between auction consolidation and Fed buying of treasury paper and MBS. None of the latter has surfaced so far this week.

We believe the slow grind to higher yields, worsening mortgage pricing has nearly run its course. In the mean time, stay on defense with your pipeline.

-Courtesy PrimeLending Capital Markets Group

Both bonds and stocks have slumped today after the Wednesday/Thursday stealth rally.  Speaking of the rally, it was straight up until late morning (yesterday) and then started to give back gains, closing in negative territory by day's end. 

Today has seen follow through in both bonds and stocks with the Dow currently down 125 points and the 10 year note off 13/32's (yield 2.64%).  Mortgage backs has followed suit, down 11/32's today and over 3/4^th from yesterday's early morning pricing.  

Market wise, we see this as a period of consolidation, one that is more about fatigue.  So much has been going on with TARP, TALF, AIG, FOMC, and U and ME that the market is simply wore out.  Given the firepower the Fed is willing to throw at the market via Quantitative Easing, we would not expect to see mortgage rates rise much further.  We are however very close to a worsening price change so if you have anything to do, you know the drill. 

For now, call this modest profit taking/consolidation in a neutral/bullish mortgage market.

-Courtesy PrimeLending Capital Markets Group

CPI, inflation at the consumer level, rose .4% in February, .1% higher than market expectations. The “core” index, which strips out food and energy prices due to their volatility, rose .2%. Again, .1% higher than we were looking for. Most of the gains are due to rising energy prices which grew at the fastest pace since July 2008. On a seasonally adjusted basis, overall inflation fell .5% annually. Not bad but something to watch as we move towards year end.

The big story of the day will be any change in Fed Funds rate (not expected) and what the FOMC has to say in their policy statement. The policy statement will be the key, either moving towards a more aggressive end to the recession (3^rd or 4^th quarter of 2009) or pushing out expectations well into 2010. The 2009 bias will rally stocks and put pressure on MBS and treasuries. The 2010 missive will probably rally our market and send stocks reeling. We also want to watch for their view on buying long term treasuries and the continuance of MBS purchases. All the news will hit at 1:15 pm cst today.

Currently, most markets are treading water with stocks down 80 points, the 10 year note up 10/32’s (yield 2.97), and mortgage backed securities up 2/32’s. We should continue to stay within the range, meaning that improvement towards a yield of 2.88% would be in order. One word of caution is that this pattern is coiling towards the apex which will eventually lead to a breakout. When that happens, the $64,000 question is always “which way”.

Today could be a game changer so pay close attention to the market’s reaction at 1:15.

-Courtesy PrimeLending Capital Markets Group

Import Prices fell .2% versus the .8% fall that was expected as petroleum prices rose for the first time in 7 months. Over the past 12 months, import prices are down 12.8%, the largest decline since they started to publish the index in 1982. Export prices fell .1% in the same time period and are off 3.6% over the last 12 months. Since the fall in import prices over the last 12 months exceeds that of export prices, America’s term of trade has improved. It also tells you that the global economic landscape has slowed dramatically compared to ours at home. The trade deficit for January fell 9.7% to 36 billion. The trade deficit has declined for the past 6 months as a slowing stateside economy has led to reduced imports.

The Michigan Sentiment Survey was the caboose of economic data releases for the week. The index surprised on the upside, rising .3 to 56.6. The increase was due to an improved outlook down the road and may be a sign of early stability coming back into the psyche of the consumer.

On the caution front, China’s Premier, Wen Jiabao made statements about the “safety” of U.S. Treasury debt and admits to being worried about their holdings. Maybe he will take Disney Land as additional collateral. Seriously, Treasury Secretary Geithner needs to do a little smoozing at the G-20 meeting this weekend to keep them happy. If the Chinese start selling their gazillion dollars worth of treasuries, mortgage pricing will get ugly fast.

That is not today’s case. Stocks seem to be taking a little profit (Down down 51 points), the 10 year note has snapped back from earlier losses, currently up 12/32’s to yield 2.84%, and mortgage backs are up a couple thirty twos after a drop of the same amount on the open. 2.81% is still the top of the range so take advantage of the pricing if you have a need.

One more thing, Fed Chief Bernanke will be on 60 minutes this Sunday. Should be worth the watch.

-Courtesy PrimeLending Capital Markets Group

Retail Sales hit the tape this morning, down .1% while the ex-autos component rose .7%. Both were better than expected. January sales were revised higher as well, up 1.8% from the previously reported plus 1.0%. The slight decline in February was due to a 4.3% drop in auto and auto parts sales, the largest decline since October 2008. Every retail sector reported sales growth except restaurants, building materials, and food/beverage. Given the print and revisions, 1^st quarter GDP could improve by as much as 1%. Not bad.

Weekly Unemployment Claims were a different story, up 9K to 654K. Continuing Claims really took a beating, up 193K to a record high 5.317 million. Getting people back to work will be the key to any economic growth going forward. President Obama, are you listening?

Last on the economic agenda for today was Business Inventories which fell 1.1% while Sales fell 1.0%. Inventories were down in all major sectors which is good if sales were flat to higher. Trouble is, sales fell proportionately, leaving the sales to inventory ratio unchanged at 1.43, the highest since September of 2001. Economic growth is not to be found in that release.

Results of the 25 billion dollar 30 year bond auction just hit the tape with strong numbers. The issue stopped out at a yield of 3.64%, 4.5 bps thought the screen with a bid to cover ratio of 2.40%. Trust me, it’s a good auction.

Whether it be the positive auction, better Retail Sales, higher unemployment, or the fraudster Bernie Madoff finally going from the penthouse to the big house, stock and bond/MBS traders are all bulled up. Stocks have been steady to higher all day, currently up 145 points on the big board. The 10 year note is currently up 19/32’s to yield 2.84%. Mortgage backs have gone along for the ride on both the news and the government being very aggressive all week long, buying MBS to prop up the market and better our pricing. MBS, lower coupon and note rates are up 9/32’s. Higher rates are plus 5/32’s. Technically, the buying today has formed a bullish buy signal on the hourly charts however, the market continues to struggle with the 40 day moving average. On one hand, sellers have not been able to push the market through the 3.0% yield mark. On the other hand, buyers have not been able to buy their way below 2.81% at the other side of the range. This is a great example of a market that’s not to cold, not to hot, but feeling just about right with the range trade we’ve been in for some time continuing to hold.

In situations like this, Goldilocks would tell you to take advantage of pricing as we trade at or near the top of the range (2.81%) as the odds are likely we’ll slip a bit in the days to come, testing the bottom of that range at 3.0%.

Good time to use the biggest no brainer in mortgage banking history.

-Courtesy PrimeLending Capital Markets Group

Fed Chief Ben Bernanke, speaking on Financial Reforms to Address Systemic Risk, finally gave the market a dose of clear communication in both his speech and the Q and A period.  I thought his delivery was straight forward, definitive, and at times funny.  He repeated the statement that the Fed, Treasury, and other regulators will "take any necessary and appropriate steps to ensure that our banking institutions have the capital and liquidity necessary to function well in even a severe economic downturn.  He advised strengthening the financial infrastructure-"the systems, rules, and conventions that govern trading, payment, clearing, and settlement in the financial market". 

Citi CEO, Victor Pandit, also had a hand in today's stock market rally, citing the fact that Citi is having its first profitable quarter since 2007 and believes his institution has "turned the corner".  You may remember that Well Fargo reiterated positive guidance last week and with Citi following today, may start the healing process for a severly battered sector. 

Wholesale Inventories hit the tape this morning, down .7% due in large to a 4.8% reduction in auto inventories.  This is a net positive for the economy as a draw down in inventories means better sales which in turn improves GDP, eventually leading to more workers replenishing the inventory. 

Stocks love all of the above and given the high powered oversold condition, look to be well on their way towards a plus 300 point day (Dow).  Next question, is this a bear market rally or the beginning of the end.  Time will tell. 

Treasuries has taken it on the chin as auction paper and flight to safety selling are to blame.  Currently, the 10 year note is off 24/32's trading at a yield of 2.98%.  The 30 year bond is off 1 and 5/8^th points to yield 3.70%.  Mortgage backs have been a star performer, off only 4/32's as spreads have tightened to treasuries while the Fed continues to buy MBS, supporting our pricing.  Technically, the weakness today has created sell signals on daily charts as well as a number of other oscillators.  2.98% to 3.0% needs to hold for the bulls to have a chance but realistically, our chart work looks like a roller coaster at Six Flags, giving us little to hang our hat on. 

Call the market neutral with a slight edge toward the bears.  Mortgage pricing should however, hang it there a current levels.

-Courtesy PrimeLending Capital Markets Group

Overseas markets got our week started on the bearish side, singing new lyrics to Bob Seger’s “Night Moves”. The Nikkei fell to its lowest level since 1982 as a trio of British banks (HSBC, Lloyds, and Barclays) fell to double digit losses. Concerns of toxic asset holdings and how far the government will go to bail them out did the damage.

Treasury auction supply and a steepening yield curve have done the damage to our mortgage pricing. Currently, stocks are making a rebound from earlier losses, now down 27 on the Dow. The 10 year note is pressing 2.92%, down 24/32’s on the day. Mortgage backed securities have followed suit, although performing better than expected as the Fed is in buying MBS to prop up the market. Currently, lower rates (4.75%/4.875%) are off 12/32’s while the higher rates are off 8/32’s. No news today and really very little as the week rolls on. 

For the most part, volume is low and spreads are tightening, giving the feel of more range trading to come instead of a new directional trend developing. The pullback today has taken the market back to the 38% fibo level, represented by a yield mark on the 10 year note of 2.92%. Good support lies between that level and 2.97% (bottom of the recent range).

For the bulls to get going and give us better pricing, the yield will need to breech 2.83%, which would improve the near term outlook considerably. For now, expect the market to rattle around between the two extremes just mentioned. The ace in the hole will be stocks. If they rally, we will see worsening mortgage pricing. If they falter, expect the best levels we’re seen in pricing to return.

Call it neutral/bearish as the “Week Moves”.

-Courtesy PrimeLending Capital Markets Group

Pending Home Sales, an index that measures purchase agreements signed but not closed, hit the ditch down 7.7%, the lowest level since scribes began keeping records on cave walls. Three of the four regions in the country took it on the chin with the Northeast off 13% and the West the only positive, up 2.4%. Given that housing affordability is at an all time high, mortgage interest rates at very attractive levels, and the recent Housing Stimulus package, stabilization and recovery could kick in by year end. Your heard it here first.

Additional details were made available today by the Fed concerning TALF (Term Asset Backed Lending Facility). The program is aimed at generating up to 1 trillion dollars in consumer, student, and small business loans. Private securities were also included in the details. That is the classification “Jumbo” loans fall under. Maybe there is hope.

Stocks have been trading both sides of unchanged, currently up 18 points on the big board. Testimony today has moved the market, given the statement of the moment, as both Gentle Ben and Turbo Tax poster child Geithner update us on the economic mess we’re in.

Bonds, Notes, and Mortgage Backs have traded in the opposite direction of stocks, currently unchanged on the 10 year note (yield 2.93%) while MBS are up 6/32’s. As we talked about yesterday, we see the market continuing to hold steady with a slight bullish bias, not able to mount a substantial rally due to the supply concerns (treasury auctions) but not selling off either as the stock market hovers at 12 year lows, looking like James Caan after Kathy Bates get’s done with him in “Misery”.

Enjoy the price improvements as we tread water in the Employment Report on Friday.

-Courtesy PrimeLending Capital Markets Group