Tomorrow will be “the day” as the monster Employment Report for August will be released (7:30 am cst).  Not only is it the highest profile report of the month, but given the mixed economic data and volatile trading of late, everyone will be focused like a laser on this one.  I would not be surprised to see a 250 to 300 point swing on the Dow tomorrow.  Trouble is, which way?  Tactical bias points to soft numbers, something in the neighborhood of minus 100K jobs and the unemployment rate to print 9.7%.

Today’s trade is a continuation of yesterday’s selling, albeit at a slower pace.  10 year note off 11/32’s, mortgage backs off 11/32’s in low note rate conventional, and stocks up a few points on the day.  Expect the day to be one of “squaring up” for traders in both bonds and stocks, with not much movement seen from current levels.  Best bet for Austin mortgage borrowers is to lock in their interest rate.  It just makes cents (and dollars too).

Currently, the 10 year note is down 37/32’s, the 30 year bond is off nearly 3 points, and mortgage backs (lower note rates) are off 22/32’s.  Stocks love the news, up 243 points on the Dow.  One report doesn’t turn the trend but at the same time, we have been warning about topping action and poor risk reward in gambling with this market.  Time for Austin mortgage borrowers to get a little defensive, looking to Friday’s employment report for a little more economic clarity.  Be careful out there.

There will come a day, one when a report comes out of the blue with good economic news.  That will be when the market turns.  That day is not today.  With yields at or approaching historic yields, Austin mortgage borrowers are advised to lock their interest rates with our float down feature.  Doing so has treated Austin mortgage borrowers very well the past few months.

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!

INFO THAT HITS US WHERE WE LIVE Housing starts were UP 1.7% for July to a 546,000 annual pace, but this was below expectations and all the gain came from a big boost in multi-family starts. Single-family starts were off 4.2%, declining for the third straight month. Looking at the market further out, we saw new building permits down 3.1% for July to a 565,000 annual rate.

There is no denying that these reports reflect a softness in the home building market. But some experts see the data as part of a temporary housing market hangover following the expiration of the tax credits. You may remember how the government cash-for-clunkers program pushed a ton of auto sales into July and August last year. This resulted in a dip in sales immediately afterwards. But that was followed by a pretty nice recovery, with auto sales now up 20% from the first half of 2009. Stay tuned for housing.

The Mortgage Bankers Association’s weekly survey showed purchase loan applications down from the week before, but refinance applications soared, equaling their May 2009 level. Austin mortgage rates, of course, continue at historically low levels.

>> Review of Last Week

NOT SO BAD… Really???!!! Listening to the pundits who were fixated on last week’s negative economic news, you might think things were awful. But as usual, the situation actually wasn’t so bad, with the markets closing Friday with mixed results. The Dow and the S&P 500 dropped for the week, but far less than the week before. And the third major index, the Nasdaq, was UP 0.3%, so there are plenty of investors not paying that much attention to fretful pundits.

Make no mistake, the week did have its disappointments. The housing starts and building permits covered above were not cheered on Wall Street. Then, initial weekly jobless claims came in at 500,000, a bit over estimates and higher than they’ve been for a while. On top of that, the Philadelphia Fed index of manufacturing was down for the month, instead of up as expected, indicating a souring of the outlook in that region.

But wait just a minute. Mortgage refinancings took off, helping consumers and lenders. The Empire State index showed manufacturing in the New York region UP to 7.1 in August from 5.1 in July and suggesting more rapid growth to come. July Industrial Production and Capacity Utilization moved up nicely. Corporations continued to deliver strong profits and we even had renewed M&A action, with Intel buying McAfee for a cool $7.7 billion in cash. None of these are bad economic signs.

Yet for the week, the Dow ended down 0.9%, to 10213.62; the S&P 500 was down 0.7%, to 1071.69; but the Nasdaq was UP 0.3%, to 2179.76.

The bond market had a generally decent time of it, with the less encouraging economic data bringing in safe haven investors. Treasuries did well, while the FNMA 30-year 4.0% bond we watch ended down 13 basis points on Friday, closing at $102.15. Freddie Mac’s weekly survey of conforming mortgage rates showed national average rates at historically low levels for yet another week. 

>> This Week’s Forecast

JULY HOME SALES, ANOTHER LOOK AT Q2 GDP…This is the week for July housing. Tuesday’s Existing Home Sales are expected to be down from June, coming off the end of the home buyer tax credits. But Wednesday’s July New Home Sales could be a tick above June. Friday we get the Q2 GDP Second Estimate. This should reflect the economic soft patch we’re going through, as growth is expected to slow to the 1.5% territory.

>> 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 23 – August 27

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months Economists haven’t changed their belief that the Fed meant what it said in its pledge to keep rates “exceptionally low” for an “extended period.” That period is now seen to extend 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:

Overall, we see continued low Austin interest rates on mortgages and historically low yields on treasuries well into the 4^th quarter.  The market is however forming a huge bond bubble that will someday create a massive correction.  That day is not today or tomorrow.

Technically, the rally from yesterday’s lows will add support towards further advancement (better pricing).  Stability at the 8 day moving average is supportive as well.  Oscillators are telling a different story.  One that reflects a lack of conviction to the bullish case.  In other words, the bull is due a nap.

Call the market at value, not expecting much movement either way.   Maybe early 2011 we’ll see the economic winds change direction.  We’ll wrap this up as the ice cubes marinate later today.

Currently, the Dow is off a smooth 200.  The Naz is not much better, off 60 points.  10 year notes are plus 20/32’s and mortgage backs are lagging behind, up 5/32’s.  With the Fed once again the lender and buyer of choice, expectations are that they will purchase 15 to 20 billion a month.  This move will keep Austin mortgage rates low as traders will adopt the old trading slogan, “Don’t fight the Fed”.   In the news, our June Trade Deficit grew 8 billion to a record 49.9 billion.  Imports grew, exports fall, in a simple formula that did the damage.  Once again, this will be a drag on GDP.

We do have an auction today.  24 billion of 10 year notes hit the tape at high noon (cst).  Look for this to be a bullet auction will traders falling all over themselves to buy.  Put up a chart and all you see is a major bull trend.  With the 10 year now at 2.71%, a breakout to lower yields/better mortgage pricing has been confirmed.

In this market, best bet for Austin mortgage borrowers is to take advantage of the historic low levels of Austin mortgage rates.

Tomorrow’s one day FOMC meeting will hold the key as any interest rate changes/policy changes will be released at 1:15 pm cst.  Some feel the Fed will take a baby step towards purchasing more securities (treasuries) to keep interest rates low.  Others talk more spending or tax cuts, infrastructure spending, a payroll tax holiday (like that one), and government backed guaranteed loans to small business.

Technically, it’s hard to find anything standing in the way of this bull.  The chart shows you how Friday’s trade took out the trend line that has capped the market for the past month.  Traders will now be looking a target of at least 2.75% – 2.78%.  The only thing we see that could derail the move is 84 billion in auction paper (3’s, 10’s and 30 year bonds) coming this week.  Keep in mind that the market has priced in a lot of bad news, even the high probability of a double dip.  With that in mind and the fact we’re trading at or near historic low yields, best bet is for Austin borrowers to lock in today’s great Austin mortgage rates and move on down the road.