INFO THAT HITS US WHERE WE LIVE You can’t improve last week’s housing reports, but they don’t necessarily foretell a “double-dip” recession in U.S. real estate. July Existing Homes Sales were off 27.2%, at an annual rate of 3.83 million, well below the anticipated 4.65 million rate. The months’ supply went from 8.9 to 12.5 and there was also a rise in inventories. The truth is, the expectation was a bit high. An annual rate below 4 million for July makes sense, given that the homebuyer tax credit was slated to end in June.Getting an $8,000 check from the government DID encourage lots of people to move up their purchases. For the same reason, experts also predict weak August numbers, but after that, some economists feel existing home sales will start heading back to about 5.5 million units annually. For the year, inventories are down 2.0%, while the median price is UP 0.7%.

July New Home Sales were down 12.4% to a 276,000 annual rate, below the expected 330,000 pace. The months’ supply went to 9.1, but inventories were unchanged at 210,000, their lowest level in decades. Part of the sales drop was because the now expired tax credit required a signed contract by April 30. New homes sales are counted at contract and the April number hit 414,000. In the three months since then, sales are averaging only 291,000 annually. New home buyers may also be going for recently built homes, now at attractive prices. New homes, typically about 15% of sales, are now around 7%!

The Mortgage Bankers Association’s weekly survey showed purchase loan applications UP 1% from the week before, refinance applications UP 6%, and Austin mortgage rates at record low levels.

>> Review of Last Week

THANK YOU, BEN… Ben, of course, is Chairman Bernanke, head of the Federal Reserve. Friday he said the Fed has no triggers set for further easing of monetary policy and he sees continued economic growth. These comments at a central bank summit in Jackson Hole, Wyoming, were all the Wall Street bulls needed to hear to push stocks up Friday after a week of declines. The big rally wasn’t quite big enough, though, as the three major indexes still ended down for the week just a tad.

There were other decent economic signs. The August Richmond Fed index of manufacturing in the mid-Atlantic region was +11, down from July’s +16, but higher than expected and showing that the factory sector still continues its strong growth. Durable Goods orders were UP 0.3% for July, but disappointed because 3.0% was forecast. Nonetheless, Durable Goods are UP 9.3% over a year ago. Initial unemployment claims dropped by 31,000 to 473,000 for the week, a nice sign after last week’s surge. Continuing claims also fell, by 62,000 to 4.46 million.

Friday featured two big news items. First, Q2 GDP was revised lower, from 2.4% to 1.6% growth, but this was measurably better than what many economists had expected and significant parts of the report showed improvement. Personal spending and business Investment were both revised UP, with domestic purchases UP 4.3%. Corporate profits continued their strong growth in Q2, UP at a 20% annual rate and UP 39% over a year ago. Then we had Chairman Bernanke reassuring investors he expects growth to pick up in 2011 and the Fed is ready to use “unconventional measures if it proves necessary.” Again, thank you, Ben!

For the week, the Dow ended down 0.6%, to 10150.65; the S&P 500 was down 0.7%, to 1064.59; and the Nasdaq was down 1.2%, to 2153.63.

Bonds had a bit of a rocky week, ending with investors heading back into stocks on Friday, willing to take on more risk after listening to Bernanke. The FNMA 30-year 4.0% bond we watch still ended UP 5 basis points for the week, closing at $102.20. Freddie Mac’s survey showed national average fixed rates for conforming mortgages at historically low levels for yet another week. 

>> This Week’s Forecast

INCOME, JOBS, INFLATION, JOBS, MANUFACTURING, JOBS, HOME SALES, JOBS…There will be important economic reports to ponder, but rest assured, everyone will have Friday’s August Jobs Report on their minds the whole week. Experts project a smaller loss of payrolls than the prior month, with the jobless rate about the same. Leading up to the biggie, Monday features July Personal Income, forecast up, and July PCE readings, which should show inflation remaining pretty much in check. Tuesday’s Consumer Confidence is projected up a little, but manufacturing is predicted down a tad, as measured by Tuesday’s Chicago PMI and Wednesday’s ISM Index. Tuesday afternoon we’ll have the minutes from the Fed’s August 10 meeting and see if they add any insight to Bernanke’s comments last Friday.

>> The Week’s Economic Indicator Calendar

Weaker than expected economic data tends to send bond prices up and interest rates down, while positive data points to lower bond prices and rising loan rates.

Economic Calendar for the Week of August 30 – September 3

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months With concerns about the economic recovery continuing, virtually all the experts believe the Fed will keep rates low for an “extended period,” well into next year. Note: In the lower chart, a 1% probability of change is a 99% certainty the rate will stay the same.

Current Fed Funds Rate: 0%–0.25%

Probability of change from current policy:

Real money and hedge funds have stepped aside, allowing the market to trade one way.  With that element of support taken away and stocks continuing to shrug off the Intel news (negative on Q4 revenue), we (our Austin mortgage rates/pricing) are caught in a nasty crossfire.  For today, when stocks go tick, bonds go tock.  Dangerous price action so be careful Austin mortgage borrowers!  As we speak, the 10 year note is off 40/32’s and 30 year bond down nearly 3 points.

Then came Ben, giving a speech at the Kansas Fed meeting in Jackson Hole Wyoming.  Stock traders were looking for a policy statement change.  Don’t know why as it wasn’t the right place or time.  What they got was a 17 page speech of old news.  Statements about battling deflation, low mortgage interest rates for and extended period of time, and using every tool if the economy deteriorates further is all they got.  Consequence, stocks tank and bonds rally.

Trouble with that market move is that it didn’t last long.  Once again, value buyers emerged in stocks, taking the Dow up over 100 points as we speak.  Treasuries and mortgage backs have taken a turn for the nurse, down 31/32’s on the 10 year note while current coupon MBS are off 12 to 16/32’s.  Whether this is mortgage bankers unloading August originations or just fixed income traders taking profits, no one knows.  We do know that and end of day close at higher yields (current pricing) will neutralize all bullish trend intensity signals on all time frames (60 minutes through Weekly).

We see this as an early warning sign that risk reward is not in your favor, Austin mortgage borrowers.  Overall sentiment and economic fundamentals will continue to support a low interest rate environment but not without corrections and volatile conditions.  Technically, the price action looks like a topping formation so be very careful out there.  Use the live dog instead of the dead lion school of deciding when to lock in your Austin mortgage rate.  It makes for a better night’s sleep!

Other reasons for this psycho trading environment is that supply in the form of 2’s, 5’s, and 7 year notes (109 billion) will hit the street Tuesday/Thursday, last of the big vacation weeks is next week with many trading desks occupied by junior traders, and with such a nice run in treasuries, many are hitting the cash register (selling) to book profits.  Technically, the chart looks like a dog. Nothing huge, maybe something on the order of a Chihuahua.

The day started off at better levels than yesterday only to close at level exceeding the worst levels printed yesterday.  Typically, these are warning signals of bearish behavior starting to gain confidence.  Another warning sign is that we closed below the eight day moving average and at the lowest closing level in 6 sessions.  Trend Intensity will keep its bullish signal but is in danger of failing if buying does not happen quickly next week.  Not doom and gloom as we head for the saloon, just a heads up to be careful.

Big picture still suggests low Austin mortgage rates will be with us for some time to come.  Just get used to the volatility.  Have a great weekend.

Some blame this on a large hedge fund liquidation (2 billion) that swapped MBS for treasuries.  Others comment on 3 billion of new origination paper that hit the street today.  Part of the whip lash seems to be coming from traders reading the tea leaves of the Housing Summit.  Comments by Bill Gross that Pimco wouldn’t buy a mortgage security unless the government backed it or if they did, they would require a minimum of 30% down payment.  Other comments range from having FNMA/FHLMC reduce all current mortgages to 4.0% as a stimulus measure for the economy.  How would you like to be invested in a few billion of 4.50% or 5.0% paper and take a hair cut to 4.0%?  Talk is also cheap about what to do with FNMA and FHLMC.

Moving towards a private structure has been estimated to increase rates by 300 bps.  Once again, what would you do if you had a few billion of MBS paper?  At the market one day, 300 bps in the hole the next.  Obviously, most of this is lunacy but just the same, its scaring the H E double hockey sticks out of the investment community. Markets hate uncertainty.  That’s why they run for cover.  Best to grab a flack jacket until some sort of sanity returns.

Case in point is the continuing spread widening between mortgage backs and treasuries.  Currently, the 10 year note is plus 10/32’s yet MBS are DOWN 9/32’s.  To be honest, this is very strange and must have a fundamental money flow issue behind it.  Trouble is, we just don’t know what that is.  Be very careful out there.  More as we get our arms around this.

Both bonds and stocks finished on the plus side today.  Not bad considering another batch of soft economic data and it being Friday the 13^th.  Speaking of data and events, the entire week was glooming starting with the Fed admitting (in so many words) that a second round of treasury buying is needed, Productivity slipping, Weekly Unemployment Claims rising, Retail Sales up but below forecast, CPI a non-event, Michigan Sentiment better but still below 70, and the Philly Fed downgrading their outlook for that region.  No wonder stocks took it on the chip and bonds, notes, and mortgage backs look like the Eveready bunny.

After yesterday’s selling, the 10 year note rebounded nicely, up 15/32’s on the day.  The week is ending with all time frames, daily, weekly, and monthly looking like 3 bulls in a china shop.  All ready for continued action.  Conditions favor continued bullish price action (Austin mortgage price improvement) but probably at a slower pace.  Reason being is that we’re in the 10^th consecutive week of positive price action on the weekly chart.  Something that is rare to see (8 weeks or more).

With so much doom and gloom built in, the sledding towards lower yield will become more difficult.  Just the same, the trend will be persistent and keep the market neutral worst case into next week.  Only a reversal in stock or economic sentiment will get in front of this bull.