Mortgage backs have slipped into the red. As I mentioned last week, the next few days could be high volatility, market moving affairs with the mid-term elections, FOMC meeting, and a boat load economic data culminating with the Employment Report on Friday.

Retail Sales and strong manufacturing results out of the Empire State didn’t help either.  Mortgage backs performed better than treasuries as spreads tightened.  Technically, it is time to pay attention.  Weak day structure on the 10 year note chart is reinforced by a second consecutive day close below the 8 day moving average.  That’s the bad news.  Good news is that intraday studies are very oversold and the market has good support close by.  So to speak, we are at that line in the sand.

Next week will be the true test, one that we would expect will see the market trade sideways to a little better (slightly improving mortgage pricing). Overall, we think this is the low probability trade as QE2, even though it is fully priced in, is a force to be reckoned with.  When the Government is the buyer of choice, most follow the ant age, “Don’t fight the Fed.”

Call it neutral/bearish and not a market to throw caution to the wind.  Next week’s data is light with Housing numbers, Leading Economic Indicators, Philly Fed Survey, and the Fed’s Beige Book.  Have a great weekend.

The New York Fed (Empire State) Manufacturing report was also released, jumping 12 points to 15.7.  Both new shipments and orders improved at the fastest pace since June.  Overall, the factory sector in NY seems to be on the mend.

Last but not least, we got a look at the University of Michigan Sentiment Survey which declined from 68.2 to 67.9.  Current conditions did the damage, falling 5.4 points.  Future expectations did a little better, up 4 points for the month.  Big Ben, printing press supervisor for the Federal Reserve was speaking in bean town this morning.  He all but assured the market of QE2 coming with details most likely presented at their November 2^nd/3^rd meeting.

The 10 year note, 30 year bond, and mortgage backs have been taking a beating.  The note is currently of 18/32’s.  Mortgage backs continue to slide, now off 7/32’s.  Stocks are a mixed bag and no help to bonds.  Dow off 46 points, Naz up 21 points on Google’s earnings.  That stock is up 58 bucks!

From our perspective, the market has fully priced in QE2 and has shifted the focus to a weak dollar and indigestion from 66 billion of auction paper that is now underwater.  Call the market neutral/bearish with good support nearby.  As we have preached all week, defense is your friend, Austin mortgage borrowers, and the exclusive float down option from Max Leaman is a no brainer.  We’ll try to wrap it up later today.

In other news, the Mortgage Bankers Association reported a rise in purchase activity led by FHA lending (up 9.3%).  Refinances’s decreased 2.5% in the same period.  Bank of America also made headlines, announcing the shutdown of their wholesale lending unit, apparently to focus on consumer direct business.

Going to be tough sledding out there for the brokers.  Stocks have not done much following yesterday’s 200 point gain.  Currently, the Dow is close to unchanged.  Bonds and notes on the other hand have been on fire with the 10 year note up 1 point.  Trouble with this picture is that treasuries are the only thing in stealth rally mode due only to quantitative easing in the air.  Mortgage backs are not doing bad, just not up in lock step with treasuries.

Given the “juice” provided by QE2 (rumor or real), we may be set up for a blow off top and hard reversal.

Japan chimed in, announced an interest rate move from .1% to 0.  They also have announced a plan to purchase government fixed income assets, hopefully allowing the Yen to fall and improve their export business.  Seems as though QE is going global.

Earlier today, the ISM Manufacturing Index rose nearly two points to 53.2.  The index unfortunately is still below the first half of the year and reflects GDP growth of 1.8% to 2.0%.  Stocks have had a nice day, starting with gains in Europe.  Currently, the Dow is up 187 points while the Naz has tacked on 54 points.

Under “normal” circumstances, one would expect Austin mortgage pricing to be getting its head handed to it.  Not so fast my quantitative fans.  10 year notes are up and mortgage backs are unchanged.  Don’t expect much of a down draft in pricing unless the Employment Report, due out Friday at 7:30 am cst is plus 200K or higher.  More on that Thursday.

We’re suffering from whiplash after bonds reacted to better than expected set of economic numbers this morning but then came right back.  Q2 GDP came in +1.7%, better than the expected 1.6% causing a knee jerk reaction.  Jobless claims were also better than expected at 453K, and Chicago PMI (a gauge of manufacturing activity in Chicago) showed unexpected improvement in September.

Now that the dust has settled, The 10 Year is at 2.53, and mortgage backs recovered from ugly levels to off 3/32s.  Equities have been volatile too, with the DOW going from +100pts to down 65 this morning.

Auction supply, to the tune of 100 billion kicks off today with 36 billion of 2 year notes.  Tuesday/Wednesday’s plate will be filled with 64 billion of 5 and 7 year notes.  Late last week I talked about the upcoming economic calendar which heats up tomorrow, Thursday, and Friday.  Market players will pay close attention to the manufacturing and industrial data, looking to confirm or reject the recent uptick in activity.

Overall, we see the stock market as moving away from any notion of a double dip, instead feeling a little giddy about taking on more risk.  Reason being is that traders view one of two scenarios playing out, both good for stock prices.  The first is that a bonified recovery is taking place, albeit at a slow pace but recovery none the less.  Conclusion, stocks go up.  Second scenario is that the recovery falters and Sir Ben fires up the helicopter, spreading money all over the country as Quantitative Easing 2 goes full bore.  Asset purchases by the Fed (Treasuries and MBS) will drive the stock market higher.  Scenario number 2 will keep Austin mortgage pricing low while what’s behind door number 1 will lead to a gradual escalation in mortgage pricing.

Short term focus for Austin mortgage borrowers is tactically defensive, only due to auction supply paper.  We see traders trying to back the market up (selling), only to buy once again at the conclusion of the auctions for month end/quarter end.  Good case can be made for a volatile week ending up right where we started.

For the week of September 27, 2010 – Vol. 8, Issue 39

INFO THAT HITS US WHERE WE LIVE As promised, last week’s reports gave us a complete picture of the housing market in August. Housing Starts rose 10.5% month-over-month to a 598,000 annual rate, well ahead of the expected 550,000 number. Building Permits, which reflect builder sentiment further out, grew a more modest 1.8% month-over-month to a slightly smaller 569,000 annual rate. Thursday, Existing Home Sales came in UP 7.6% over July, at a 4.13 million annual rate. But let’s remember, July was a record low, so this gain still left sales down 19% from August a year ago. The median price for Existing Homes, however, ticked up 0.8% year-over-year, as reported by the National Association of Realtors.

Friday saw New Home Sales for August come in unchanged from the previous month, meeting expectations at a 288,000 annual rate. The increases in Existing Home Sales and Housing Starts are welcome, as is the lack of a drop in New Home Sales. But sales are still at fairly weak levels. Observers feel that with the government tax credit, we had an artificial boost in home sales, so what followed was obviously an artificial low and we’re now slowly climbing back toward normalcy.

>> Review of Last Week

FOUR IN A ROW… The stock market opened the week strongly, but then lost ground for three days before the bulls were back in control igniting a big rally on Friday, just shy of a 200 point gain for the day. This put stocks UP for the fourth straight week, with the Dow again nearing 11,000 and the broad-based S&P 500 hitting a four-month high.

It was a mixed bag of economic data once again. Housing numbers, covered above, were showing some signs of recovery, but then initial jobless claims grew to 465,000, higher than anticipated and indicating the labor market is still soft. The week ended with Durable Goods Orders down for August.

But the big event was the Federal Reserve meeting Tuesday. They left the fed funds rate unchanged as expected. They also kept policy statement language that says economic conditions are likely to keep the rate at exceptionally low levels for “an extended period.” But they have now added that the Fed is prepared to provide additional accommodation if needed. Some think this is what sent stocks up, as investors felt they couldn’t lose. If the economy improves, stocks will go up. If the economy stalls, the Fed will step in, so stocks will still go up! We’ll see.

For the week, the Dow ended UP 2.4%, to 10860.26; the S&P 500 was UP 2.1%, to 1148.67; and the Nasdaq was UP 2.8%, to 2381.22.

Bonds were on the move up and down all week, and Friday was a down day as investors flocked to those rallying stocks. Yet for the week, the FNMA 30-year 4.0% bond we watch ended UP 8 basis points, closing at $102.17. Freddie Mac’s weekly survey of national average mortgage rates reported fixed-rate mortgages not budging from their historically low levels. 

>> This Week’s Forecast

CONSUMERS, Q2 GDP, INFLATION… Economic reports on the consumer’s September mindset bookend the week, with Consumer Confidence expected off a tad on Tuesday but Michigan Consumer Sentiment up a fraction come Friday.

Thursday features the third estimate of Q2 GDP numbers, but no change is expected from the prior reading, which showed a slower 1.6% growth rate. Friday’s Personal Spending and Core PCE Prices for August should reveal inflation still well under control.

>> 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 September 27 – October 1

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months The policy statement from last week’s FOMC meeting preserved the language that the Fed would probably keep rates low for “an extended period.” The statement also added that the central bank was ready to provide more accommodation if needed, so economists do not expect to see any change in the Fed funds rate 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:

Treasury traders hit the cash register today as the 10 year note couldn’t push below 2.50%.  Stocks on fire didn’t help the fixed income players either. Other factors in the mix were a rally in commodities (oil up $1.31) and dollar bashing while the Euro rallied.

Talking stocks, the Dow closed up nearly 200 points on the day and is having a stellar September.  Funny thing is that September is historically the worse month for stocks.  Just another reason why the financial markets are a “one day at a time” mind set.  You just don’t know what tomorrow brings.  Next week’s data will be quiet on Monday, heat up a little on Tuesday with Consumer Confidence and Case Shiller Home Prices, take the day off on Wednesday, release GDP (Q2), Weekly Claims, Chicago Purchasing Mgr’s, and the Kansas City Fed Survey on Thursday, and finish the week with Personal Income, Construction Spending, and the Michigan Sentiment Survey.

Overall, we see the fixed income market as “soft” but not in a hurry to head towards higher Austin mortgage rates.  Just like I mentioned earlier today, the trade is one of consolidation and near good support.