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The rally in the bond and mortgage markets is continuing this morning, Europe stock markets weaker and US equity markets set to open lower at 9:30. Dec personal income and spending at 8:30 was in line with estimates; income up 0.5% against estimates of +0.4%. Dec spending unchanged against estimates of +0.1%; more evidence that holiday shopping didn’t meet those early lofty estimates. Spending stalled in December as Americans used a jump in incomes to restore depleted savings, indicating the biggest part of the economy will not be a driver of the expansion.
Last week Greek officials were “confident” that they could make a deal with creditors to fend off another debt default cliff. Nothing happened, not necessarily a surprise as we have been subjected to the continual uncertainty and lack of progress for two+ years now. Greece signaled opposition to economic oversight in exchange for aid, taking Italian interest rates higher this morning and driving equity markets lower. European Union leaders gather in Brussels today for their first summit of 2012 to put the finishing touches on a German-led deficit-control treaty and endorse a 500 billion-euro ($661 billion) rescue fund to be set up this year. Greece and its private creditors said Saturday they expect to complete a deal in coming days after bondholders signaled they would accept a bigger cut in their debt holdings—-it never ends.
The DJIA opened -100; 10 yr note +17/32 1.83% -7 bp and MBS 30 yr prices +6/32 (.18 bp).
This week’s elephant is the Jan employment report on Friday; current estimates are an increase of 160K non-farm jobs and private non-farm jobs +170K, the unemployment rate at 8.5%. The actual unemployment rate is closer to 16% however, that the “official” rate is at 8.5% is evidence that many have simply dropped out of looking for jobs. Until the Fed revised estimates for growth downward for 2012 and 2013 last week and Q4 GDP advance report was weaker than forecasts (+2.8% against +3.1% expected) there was an increasing belief the economy was gaining a little momentum. Now economic bulls are re-thinking that idea.
The bellwether 10 yr note is working on a key resistance level at 1.80% this morning. In early trade it dropped to 1.82% and at 10:00 sitting at 1.83%. The MBSs are pushing into new highs in prices not seen in over a year. The Fed’s decision to leave the FF rate at 0.0% for the next three years and with no inflation now or on the horizon, the long end of the curve is seeing buying as investors seek yield. The safety trade over Europe’s debt crisis has ebbed recently but still plays a role in the decline in rates.
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This Week; is employment week with a lot of key data mixed ion. The interest rate markets should start the week with additional improvement after the Fed extended the time that it will keep rates low clear through 2014. The stock market is likely to continue its sag after the Fed comments last week that the economy is uncomfortably weak. The Fed revising its estimates for growth again last week took some of the wind out of the equity market optimism that was gaining momentum. Last week’s intimal report on Q4 GDP was weaker that was thought, adding to the drag for equities and supporting the bond and mortgage markets.
Nothing out of Europe over the weekend on Greece’s debt crisis. Last week officials were saying a deal would be done by last Friday. Nothing was accomplished. Europe’s stocks will traded weaker adding another anchor for the US markets to drag along.
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This week is extremely busy in terms of economic data scheduled for release and will likely be another active week for mortgage rates. There are seven economic releases scheduled for the week, some of which are known to be extremely influential on the financial and mortgage markets. All seven of these reports are considered to be of moderate or high importance, meaning we should see quite a bit of movement in mortgage rates this week.
The first report of the week is January’s Personal Income and Outlays data tomorrow morning, which gives us an indication of consumer ability to spend and current spending habits. This is important because consumer spending makes up two-thirds of the U.S. economy. Current forecasts call for an increase in income of 0.4% while spending is expected to rise 0.1%. Larger increases would be good news for the stock markets and could hurt bond prices, driving mortgage rates higher tomorrow. Smaller than expected increases would be considered good news for mortgage rates.
Tuesday has two reports scheduled with the first being the 4th Quarter Employment Cost Index (ECI). It measures employer costs for employee wages and benefits, giving us an indication of the threat of wage inflation. If wages are rising, consumers have more money to spend. The report is considered moderately important and usually has more of an effect on the bond market than the stock markets. Current forecasts are showing an increase of 0.4%. A lower than expected reading would be favorable to bonds and mortgage rates Tuesday.
January’s Consumer Confidence Index (CCI) will be posted late Tuesday morning. This report is considered to be of moderate to high importance to the bond market and therefore can move mortgage rates. It is an indicator of consumer sentiment, which is important because waning confidence in their own financial situations usually means that consumers are less willing to make large purchases in the near future. Due to the significance of consumer spending, market participants are very attentive to related data. Analysts are expecting to see an increase from December’s reading, indicating a higher level of consumer confidence. A reading much smaller than the expected 67.0 would be ideal for the bond market and mortgage rates.
Wednesday’s big report comes late morning when the Institute of Supply Management (ISM) releases their manufacturing index for January. This index tracks manufacturer sentiment by rating surveyed trade executives’ opinions of business conditions. It is usually the first economic data released each month and is one of this week’s very important reports. Current forecasts are calling for a reading in the neighborhood of 54.7, which would be an increase from December’s reading. The lower the reading, the better the news for the bond market and mortgage rates because weak sentiment indicates a slowing manufacturing sector.
Wednesday also has a couple of private sector employment-related reports due to be released. They normally don’t draw much attention unless they show a significant surprise. I still not too concerned about their results, but the potential does exist that a significant variance in the numbers could lead to changes in mortgage pricing.
Employee Productivity and Costs data for the 4th quarter will be released early Thursday morning. It can cause some movement in the bond market, but should have a minimal impact on mortgage pricing. If it varies greatly from analysts’ forecasts of a 0.6% increase, we may see some movement in mortgage rates. However, the markets will be much more interested in Friday’s data, so a slight difference shouldn’t cause a noticeable move in rates.
Friday’s data is by far the most important of the week. The Labor Department will post January’s Employment data early Friday morning, giving us the U.S. unemployment rate and the number of jobs added or lost during the month among other related statistics. Analysts are expecting to see the unemployment rate remain unchanged at 8.5% and that approximately 170,000 new jobs were added to the economy. An increase in unemployment and a much smaller increase in payrolls would be great news for the bond market. It would probably create a bond rally, leading to lower mortgage rates Friday morning. However, if Friday’s report reveals stronger than expected results, we can expect to see mortgage rates move higher.
Late Friday morning, December’s Factory Orders data will be posted. It is similar to last week’s Durable Goods Orders release in giving us a measurement of manufacturing sector strength, but this data includes new orders for both durable and non-durable goods. It is one of the less important reports of the week, but can influence mortgage pricing if it varies greatly from forecasts. Analysts are expecting a 1.6% increase in new orders, hinting at manufacturing sector strength. However, the Employment report will be the focus of the markets.
Overall, look for Wednesday or Friday to be the biggest day for mortgage rates. Friday’s Employment report is the most important piece of data, but Wednesday’s ISM Index draws a lot of attention also. We could also see movement in rates tomorrow morning following the activity at the end of last week. If we get weaker than expected results from the ISM and Employment reports, we should see rates close the week lower than last Monday’s opening levels. If the data shows stronger than expected results, we may see mortgage rates move higher for the week. With some very important data being posted over the next five days, I strongly recommend keeping fairly constant contact with your mortgage professional if still floating an interest rate.
If I were considering financing/refinancing a home, I would…. Lock if my closing was taking place within 7 days… Lock if my closing was taking place between 8 and 20 days… Float if my closing was taking place between 21 and 60 days… Float if my closing was taking place over 60 days from now… This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of all/any other borrowers.
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The bond and mortgage markets opened better this morning, still reacting to the Fed’s surprise yesterday saying the FF rate would stay at 0.00% to 0.25% clear out to the end of 2014. Prior to yesterday the Fed was saying mid-2013. The motivation from the Fed is that the central bank has lowered its forecasts for US growth this year and next. Bernanke apparently is more concerned about growth that he was six weeks ago. The recovery seen so far he considers anemic with unemployment to remain high for another two years, the housing sector showing little in the way of stabilizing let alone improving much, and he is very likely believing Europe will decline into another recession and that there will be defaults on a lot of the debt piled up.
The reaction to yesterday’s FOMC statement and Bernanke’s press conference was swift; US treasuries that were looking weak rallied taking the 120 yr note to 2.00% -6 bp yesterday on the close, but at 1.92% on the initial reaction. MBS prices spiked initially then backed off but still a very nice close, +16/32 (.50 bp). This morning treasuries are better as are MBS prices; at 9:00 the 10 yr note at 1.98% -2 bp and MBS prices +8/32 (.25 bp). US stock indexes at 9:00, DJIA +65; all major equity markets in Europe rallying on the Fed’s rate surprise. At 9:30 the DJIA opened +44, the 10 yr +12/32 to 1.96% -4 bp and MBSs +10/32 (.31 bp).
At 8:30 weekly jobless claims were in line with forecasts, +21K to 377K; continuing claims +88K to 3.554 mil. Dec durable goods orders were much stronger than estimates, expectations were for an increase of 2.2%, as reported up 3.0%. The more significant ex transportation orders were expected up 0.7%, as reported up 2.1%. Nov orders were revised higher, frm 3.8% to +4.3%, ex transportation frm 0.3% to +05%. The two reports added a little more strength to the stock indexes in the futures markets.
More data at 10:00; Dec new home sales were expected to increase 1.5% to 320K annualized units, as released sales declined 2.2% to 307K; based on sales there is a 6.1 month supply, for all of 2011 sales were down 6.2%. Dec leading economic indicators were expected to be up 0.7%, as reported +0.4%, Nov revised to +0.2% frm +0.5%. No immediate reaction to the data.
This afternoon at 1:00 Treasury will complete its auctions with $29B of 7 yr notes; yesterday’ 5 yr auction met with solid demand.
The slightly bearish bias in the bond and MBS markets turned quickly yesterday on the Fed’s announcement. Prior to the Fed we were thinking the 10 yr would climb to 2.15% but go no further, the highest it got was 2.09% on Tuesday. Now the obvious question we are tackling is, how low will the 10 yr yield go based primarily on the Fed holding the FF rate at current lows until the end of 2014; and how low will mortgage rates go now? It is unlikely US interest rates will decline to new lows, at this point we expect the wider trading range will continue with the possible low on the 10 at 1.80% and mortgage rates tied to a 25 basis point range in rates. The Fed is worried about the US recovery and that Europe will continue to decline with eventual debt defaults in Greece and other EU countries. Until there is another Europe shock it is unlikely that US rates will push to new low rates. It will take a few days for traders and investors to assess the message sent yesterday from the Fed when the Committee made such an unusual move.
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Generally quiet early this morning with treasuries and mortgage markets flat and stock indexes mixed at 9:00. US financial markets will not see much change this morning ahead of the 2:00 FOMC policy statement and Bernanke’s press conference. The NASDAQ is the only index trading higher this morning, driven by the rally in Apple.
No changes or improvements over Europe’s debt mess. Greece is on the front burner now; on Monday there was widespread belief the Greece and its creditors would make a deal and avoid defaults. Yesterday the optimism waned as private investors (banks) refused to take the losses necessary to save the country. Today the ECB said it would not participate in any writedowns on the Greek bonds it holds, saying the central bank isn’t an investor, it bought the debt to aid Greece in an attempt to avoid default. Summing; nothing is being accomplished with Greece. International Monetary Fund Managing Director Christine Lagarde said today that European governments and other public holders of Greek debt may have to increase support if private creditors don’t go far enough. Investors and European finance ministers remain at odds over how much private investors should shoulder in the Greek bailout.
The US bond and equity markets have largely become desensitized about momentary events and comments out of Europe. There is a slowly increasing belief in US markets that eventually Europe will save itself and its currency; likely driven by the view that anything short of some acceptable plan would be a catastrophe to Europe and rest of the global economies. Safety moves into US treasuries have ebbed, at the moment there is little motivation to move into treasuries, yet so far there is not much reason the dump fixed rate treasuries. The 10 yr note yield has increased from 1.85% on 1/13 to 2.06% yesterday, mostly traders reducing exposure; MBSs also have increased in rate. Although rates have increased some as we noted they would, at the same time we do not expect interest rates to move much higher; our target for the bellwether 10 yr note is 2.15% and no higher, worse case for mortgage rates, another 10 basis points in rates on 30s.
Working against the bond market, less concern over Europe and improved US economic outlook. Most all key economic reports in the past three months have beaten estimates. On Friday Commerce will release the advance Q4 GDP, consensus is+3.1%, up frm +1.8% in Q3. While the fed will continue to keep short rates low as it has said repeatedly, the long end of the curve (10 yr) has seen its lows. There is an idea out there that the Fed may decide to increase its purchases on MBSs in an attempt to keep mortgage rates low, but if treasuries increase about all that can be expected is the yield spread between MBSs and treasuries will narrow. It is not likely that treasury rates would increase while mortgage rates fall.
At 10:00a few minutes ago; Dec pending home sales (contracts signed but not closed) was expected down 1.0%, sales fell 3.5% with about a third of sales are not going to the closing table; yr/yr pending sales up 5.6%. Nov FHFA housing price index expected -0.1%, jumped 1.0%; yr/yr -1.8%. There was no market reaction to the two housing reports.
US rate markets will likely stay quiet through the morning and early afternoon ahead of the FOMC statement and Bernanke’s press conference this afternoon. At 9:30 the DJIA opened -45, the 10 yr unch and mortgage prices also unchanged to slightly lower.
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It wasn’t a good week last week in the bond and mortgage markets; interest rates increased on increasing optimism the US economy can improve even in the face of Europe’s slide, and reduced need for safety in US treasuries. The 10 yr note yield increased 15 bps last week, mortgage rates up 8 basis points; this morning early prices continue to fall as early activity pointed to a better open in the equity market. At 8:30 the 10 at 2.06%, up 3 bp frm Friday’s close, MBS prices at 8:30 -5/32 (.15 bp). At 9:30 the DJIA was expected to pen a little better, it opened down a fraction (-8), the 10 yr note traded at 2.07% +4 bp -14/32; mortgage prices at 9:30 -8/32 (.25 bp).
There are no economic releases this week until Wednesday. The week is focused on the FOMC meeting that starts tomorrow and ends Wednesday with the policy statement. Treasury will auction its monthly ration of $99B in 2 yr, 5 yr and 7 yr notes. The Eurozone of course is always in play these days, any significant comments from leaders of the EU, ECB and IMF will get traders’ attention. Technically, the bond and mortgage markets, after last week’s selling, are now slightly bearish. We talked about how the rate markets were losing momentum for the past two weeks, the break came last week.
How high will interest rates climb is the question now facing investors and traders. We don’t believe rates will increase much, at worst the 10 yr could increase to 2.15% but should hold. On the opposite side, it is very likely that the lows in rates have been put in place. As long as the US economic outlook is imp[roving, and there are no actual defaults in any Euro debt there is little reason to justify the 10 yr under 2.00% and mortgage rates at their lows of a few weeks ago.
Europe’s finance ministers are meeting today in Brussels, trying to advance plans to craft a long-term plan to tackle the region’s debt crisis, as banking and government negotiators continue trying to reach an agreement that will lighten Greece’s debt burden. There has been progress over the past couple of weeks, Greece and private bondholders said they had made progress in talks over the weekend in Athens. Finance Minister Evangelos Venizelos said before today’s meeting that Greece is prepared to wrap up the private-sector debt swap on schedule. “We have a very constructive cooperation with the private sector,” Venizelos told reporters in Brussels. “We are ready to finalize the procedure on time.”
This Week’s Economic calendar:
Tuesday;
1:00 pm $35b 2 yr note auction
Wednesday;
7:00 am MBA mortgage applications
10:00 am Dec pending home sales (-1.0%)
Nov FHFA housing price index (-0.1%)
1:00 pm $35B 5 yr note auction
2:15 pm FOMC policy statement
Thursday;
8:30 am weekly jobless claims (+23K back to 375K)
Dec durable goods orders (+2.2%, ex auto sales +0.7%)
10:00 am Dec new home sales (+1.5% to 320K units (annualized)
Dec leading economic indicators (+0.7%)
1:00 pm $29B 7 yr not auction
Friday;
8:30 am Q4 advance GDP (+3.1%)
9:55 am U. of Michigan consumer sentiment index (74.2 frm 74.0)
The bond and mortgage markets have been losing strength for two weeks as we have indicated in past commentaries. The 10 yr note won’t find much support until it hits 2.15%, now at 2.09%; not much momentary concerns to hold treasuries against Europe. US economic outlook is improving, removing another support for rates. There is some talk that the Fed may announce it will increase purchases of MBSs to keep mortgage rates low, but as long as treasury rates increase the best we can expect is mortgage rates won’t increase as much but will increase. All that said, while we do not expect rates will fall again to the recent lows we are equally not expecting rates to move radically higher.
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This Week; after last week’s increase in rates this week has a lot of potential impact on rates. Treasury will auction $99B of notes ($35B 2 yrs on Tuesday, $35B of 5 yrs on Wednesday, and $29B of 7 yr notes on Thursday). Tuesday night the State of the Union address to Congress. Wednesday the conclusion of the FOMC meeting. Friday the first look at Q4 GDP. Mixed in all of it, a few key economic reports. Technically, the 10yr treasury has broken its key averages at 2.02%, the MBS market also has moved below its 20 day average on the price, but still is holding its longer term 40 day average.
The FOMC meeting won’t likely have any new policy implications; the Fed will continue to keep the FF rate at 0.0% to 0.25% as Bernanke indicated months ago. We are not looking for another QE from the Fed; Europe for the moment has stabilized somewhat and the US economy is likely to have grown 3.1% in Q4. Europe’s impact on US markets has lessened recently with Italy and Spain able to auction debt at better rates than two months ago. The debt problems however, are far from being over, it will continue to be a factor throughout this year and at times roil US markets. We are looking for flat markets early this week.
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Thursday’s bond market has opened in negative territory as mixed economic news has stocks in positive ground. The stock markets are showing minor gains at the with the Dow up 11 points and the Nasdaq up 13 points, but pre-market trading hinted at a stronger open for stocks. The bond market is currently down 7/32, which will likely push this morning’s mortgage rates higher by approximately .125 – .250 of a discount point.
There were two monthly reports posted this morning in addition to the weekly employment sector update. The most important of them was December’s Consumer Price Index (CPI) from the Labor Department. They announced that the overall reading was unchanged from November and that the more important core data that excludes volatile food and energy prices rose 0.1%. Both were expected to rise 0.1%. This means that inflationary pressures at the consumer level of the economy remained subdued last month, making the news neutral-to-slightly favorable for bonds and mortgage rates.
December’s Housing Starts was the second monthly report released this morning. The Commerce Department reported that new construction starts of housing fell 4.1% last month, falling well short of forecasts. Analysts were expecting to see a decline, but by more than half of what we saw in the report. This data hints at a weaker housing sector than many had thought. However, this particular report is not considered to be of high importance to the bond market or mortgage rates. Therefore, the impact it has had on today’s pricing unfortunately has been minimal.
The third piece of news was last week’s unemployment figures. The Labor Department said that only 352,000 new claims for unemployment benefits were filed last week. This was sizable decline from the previous week’s revised total of 402,000 and on the surface appears to point towards a strengthening employment sector. On the other hand, the significant volatility we have seen in this data the past couple weeks questions its reliability as an indicator of employment sector strength or weakness. Accordingly, it also has not had too much influence on this morning’s bond trading and mortgage rates.
Overall, today’s data was mixed at best. A more accurate description could be neutral towards bonds and mortgage rates. In fact, half of this morning’s increase in mortgage pricing comes from weakness late yesterday and not today’s news. But since stocks are in positive territory, bonds are showing losses during early trading. However, I would not be completely surprised to see stocks to give up the rest of this morning’s early gains or for bonds to erase their current losses later today. This may lead to an intra-day improvement to mortgage rates this afternoon.
The National Association of Realtors will give us December’s Existing Home Sales report late tomorrow morning. This housing sector report tracks home resales in the U.S. It is expected to show an increase in home sales last month, meaning that the housing sector strengthened. Ideally, the bond market would prefer to see a decline in sales, but a small increase should not negatively affect mortgage rates tomorrow.
©Mortgage Commentary 2012
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This Week; of course it is still most about Europe, the saga that won’t go away, and likely not for years. Treasury rates ended last week at 1.87%. Mortgage rates continue to decline in the MBS market but lenders that buy the loans have not been pricing to the MBS market, holding prices lower than the market itself. The increased fees to finance the 2.0% social security tax cut financed by home buyers and re-financers is causing disruptions in pricing. Some lenders have used the fee increase to increase gains from originators by setting prices much lower than MBS markets trade—over and above making the price adjustments for the fee increases. Watch your lenders and compare MBS prices we report to how your lender is treating you.
This week a few key economic reports that will get traders’ attention; PPI, CPI, Philly Fed business index, Housing starts and permits as well as Dec existing home sales and weekly jobless claims all on tap (see economic calendar). US interest rate markets continue to hold well, at the same time the long end including mortgages is struggling to keep a positive bias. Europe’s travails and this week’s economic data should define whether rates will move lower. That said, with rate increases due to Congress using Fannie, Freddie and FHA to finance the social security tax cut, mortgage rates are not likely to fall much more even if US treasury markets improve somewhat. We remain skeptical on the longer term outlook for rates, rates are likely to increase a little this year with the economy improving. The wild card now is the Fed (Europe is always a wild card on a day-to-day basis); last week there were some that were floating the idea of another easing move from the Fed, still a minority view however. On the 24th and 25th the FOMC meets, likely there will be discussions on the subject.
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Treasuries started better this morning, then got a little additional boost at 8:30 on the release of Dec import and export prices. Import prices declined 0.1% and export prices -0.5%; the declines will have a slight negative impact on Q4 GDP. Yr/yr import prices +8.5%, yr/yr export prices +3.6%. Also at 8:30 Nov US international trade deficit was expected -$44.3B, as reported -$47.8B.Stok indexes were trading lower prior to 8:30 then fell a little more on the data.
The U.S. import bill was driven by demand for higher-priced crude oil at the same time American companies tempered orders for consumer goods on concern household spending will cool early this year. Exports from the U.S. declined to a four-month low, depressed by a drop in shipments to Europe. The U.S. trade deficit widened more than forecast in November as American exports declined and companies stepped up imports of crude oil and automobiles. The gap expanded 10.4 percent to $47.8 billion, the widest since June, from a $43.3 billion shortfall in October, Commerce Department figures showed today in Washington. The deficit was larger than any of the estimates.
At 9:00 30 yr MBSs were +6/32 (.18 bp), stock indexes pointing to a weaker open. At 9:30 the DJIA opened -100, the 10 yr note +17/32 at 1.86% and mortgage prices +7/32 (.22 bp) on 30s and +4/32 (.12 bp) on 15s.
About 9:00 this morning some of the wires were reporting S&P is about to lower the credit rating for countries in Europe. While not unexpected, if the reports are true the downgrades are coming sooner than what many were expecting. The news added additional pressure to stock indexes already weaker.
At 9:55 the U. of Michigan consumer sentiment index was expected at 71.5 frm 69.9 at the end of Dec; the index jumped to 74.0; current conditions increased to 82.6 frm 79.6, expectations increased to 68.4 frm 63.6, and the 12 month out index increased to 79.0 frm 70.0. It is the mid-month survey and although stronger than expected there has been no reaction to the report.
Trade today will likely be more defensive with markets closed on Monday for MLK. Generally a three day weekend with other global economies open increases safety, likely the bond and mortgage markets will hold strong with investors and traders increasing long positions. US equity markets will be under pressure, also due to the long weekend.
The improvement in the 10 yr note this morning, breaking below 1.90% increases the bullish technical bias somewhat. Until this morning the bond market, while bullish was losing momentum, that it pushed below 1.90% projects a possible test of the recent low at 1.80% achieved on Dec 19th. There is always a caveat however, the strength today may be somewhat exaggerated due to the long weekend. In the mortgage world, be careful with your lenders as they begin to add in the increases in rates that Congress dictated to the agencies to finance the 2.0% social security cut extension. Many lenders have put on time tables, others it’s a crap shoot as to what day the hammer will fall. Even with treasuries doing well, mortgage interest rates will increase with the increased G fees mandated.
