Reports this weekend were that President Obama’s administration would most likely delay release of its proposal to restructure Fannie Mae and Freddie Mac, as required by the Dodd-Frank law.  The law requires the Treasury to release its recommendations by January 31, but expectations are that it won’t be until mid-February before that occurs, this according to the Wall Street Journal.  With the housing market still fragile, it is most likely that they will try to push this further into the future.

Regarding the FOMC release, we are interested to see how the statement changes, if at all, as a result of the four new voters.  News over the weekend was fairly light with a focus this morning on global inflation concerns.  The rumor is that the Fed will be adopting a more formal inflation target of 2%.  This is a two day meeting starting tomorrow, with the final statement release coming in at 1:15pm CST on Wednesday.  We are expecting very little change to the statement and the FOMC to continue with QE2 purchases.

We will also get our first estimate on GDP for the fourth quarter on Friday.  Looks to be a good quarter for growth given the uptrend in exports and the surge higher in personal consumption.  The consensus is calling for 3.5%.  This is a busy week for economic data, along with the Treasury auctioning 2-year, 5-year, and 7-year notes starting tomorrow.

Treasuries managed to push higher last Friday without making a substantial move to the upside.  The lower trend line that has restricted weakness since December 16^th, now at 119-225, continued to limit any downside into this morning’s trade.  Bears need a break below 119-225(above 3.47% yield) to confirm further downside (higher rates) is likely.  A close above 120-12(below 3.38% yield) would suggest we have further upside potential for better rates and pricing.  Today should be a fairly quiet trading day with the market gearing up for tomorrow’s start to a busy week.

INFO THAT HITS US WHERE WE LIVE Last Wednesday, the Commerce Department reported that Housing Starts dropped 11.7% in October. This drop put Housing Starts at a seasonally adjusted annual rate of 519,000, their lowest level in 18 months. But most of the fall off came from a 43.5% decline in multifamily construction, a volatile part of the market. Single-family building, accounting for more than 80% of all starts, was off just 1.1%, to 436,000 units. And September single-family starts were revised UP to a 2.1% gain. Meanwhile, Building Permits, which reflect builders’ views of the future, were UP 0.5% to 550,000, another hopeful sign.

National average mortgage rates edged up in both Freddie Mac and Mortgage Bankers Association (MBA) weekly reports. The MBA felt rates rose because of “stronger economic data and lingering uncertainty regarding the structure and impact of the Fed’s QE2 program.” This Fed plan to buy $600 billion in bonds in a second round of quantitative easing was supposed to push rates down, stimulating the economy by making borrowing more affordable. But some investors fear QE2 will spark inflation, which pushes mortgage bond prices down and mortgage rates up. People looking to buy or refinance should probably not drag their feet waiting for lower rates that may never happen.

>> Review of Last Week

FLAT… The week on Wall Street saw a big drop in stock prices Tuesday, followed by a big gain on Thursday, but when all was said and done, the week ended virtually flat for all three market indexes. This, however, was a big improvement over the prior week’s big declines for all the indexes.

Negative influences on the proceedings included the drop in Housing Starts covered above, along with the unexpected rise in mortgage rates after the start of the Fed’s bond buying program. But once you got past those items, you had to go overseas to find more downers, which were basically continuations of last week’s concerns. Investors don’t like Chinese inflation threatening a rise in interest rates over there, or the increasing possibility of a bailout for the Irish banks.

But back over here, we did have some goodies going on. Retail sales were UP 1.2% in October, following a September gain that was upwardly revised to 0.7%. Could other positive economic surprises be on the way? Inflation came in tame, with the Consumer Price Index up just 0.2% for October and Core CPI up only 0.6% year-over-year, the smallest inflation increase in the index’s history, dating back to 1957! Initial jobless claims held at under 450,000 for the second week in a row, still too high but showing that the labor market is better than it’s been. The General Motors IPO gave back over $13 billion of the money taxpayers put in to prevent a GM bankruptcy.

For the week, the Dow was up just 0.1%, to 11203.55; the S&P 500 was flat, up only a fraction of a point, to 1199.73; and the Nasdaq was also flat, down a fraction of a point, to 2518.12.

The bond market had an up and down week of it, with prices under pressure on some issues at the end. The FNMA 30-year 4.0% bond we watch ended down 89 basis points for the week, closing at $101.17. This downward action in mortgage bond prices sent national average rates for fixed-rate mortgages up a tad for the week, as mentioned above.

>> This Week’s Forecast

TWO PACKED DAYS… Thanksgiving  shortens the week, so a slew of economic reports get packed into Tuesday and Wednesday. We start with Second Estimate Q3 GDP, expected to edge up from the preliminary reading. Existing Home Sales for October should show a slight drop in the annual rate. Also Tuesday, the Minutes of the FOMC meeting of the Fed on November 3, could give more insight into the economic recovery.

Wednesday kicks off with Core PCE Prices, expected to inch up a tad, but still within the Fed’s comfort zone for inflation. No need for them to curtail their QE2 bond-buying! Durable Goods Orders are forecast down a little for October, while Initial Unemployment Claims for the week should remain at their currently lower levels. Happily, New Home Sales for October are projected up a tad and let’s hope the experts have that right…. Happy Thanksgiving!

>> 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 November 22 – November 26

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months With last week’s CPI readings showing inflation very mild indeed, economists expect the Fed Funds Rate to stay low as the Fed continues its $600 billion bond buying program through the first half of 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:

A speech by Fed Chief Bernanke on Friday confirmed the expectation that the Fed will soon provide additional monetary stimulus by purchasing Treasury securities. The Fed’s plan is to boost the economy and to bring the inflation level up to the Fed’s preferred rate. According to Bernanke, “There would appear – all else being equal – to be a case for further action.” Investors hoping for more information about the size of the purchase program were disappointed, as Bernanke stated that it is still being discussed by Fed officials. Investors expect the Fed to reveal the details of the program at the next FOMC meeting on November 3, if not sooner.

The data released during the week showed that core inflation remains below the Fed’s desired range of 1.5% to 2.0% per year. The September Core Consumer Price Index (CPI), which excludes the volatile food and energy components, increased just 0.8% from one year ago, which was the lowest annual rate in more than 49 years. Central bankers around the world generally agree that a stable, positive inflation rate is optimal for long-term economic growth.

Following Friday morning’s better than expected Employment report, Austin mortgage rates moved higher. Against a consensus forecast for a decline of 110K jobs, the economy lost 54K jobs in August. Temporary census workers accounted for a loss of 114K jobs, and the private sector added 67K jobs. The June and July figures saw significant upward revisions as well. The Unemployment Rate rose to 9.6% from 9.5%, matching expectations, as the labor force grew by about 550K workers.

After several months of housing data which has failed to meet expectations, this week’s data contained relatively good news. Investors were expecting July Pending Home Sales to remain at June’s record low levels, but instead they rose 5% from June. Pending sales are a leading indicator for the housing market, so home sales may pick up a little in coming months. The chief economist of the National Association of Realtors (NAR) expects “improved affordability conditions” to boost home sales, but warned that a housing market recovery will be a “long process.”

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).

The impact of the homebuyer tax credit was seen in the weak housing market data released this week. July Existing Home Sales dropped 27% from June to an annual rate of 3.83 million units, the lowest level since May 1995. July New Home Sales showed a decline of 12% from June to the lowest level ever recorded. These figures sound terrible, but they really just demonstrate the effect of the homebuyer tax credit on the timing of purchases. The National Association of Realtors (NAR) still expects total existing home sales this year to be roughly the same level as last year.

Since the financial crisis, the Federal Housing Association (FHA) has grown rapidly and is now backing nearly half of all new home-purchase loans. To boost reserves and reduce risk to taxpayers, the FHA will raise the annual fee it charges to new borrowers. In particular, for case numbers ordered October 4 or later, it will raise annual insurance premiums (MIP) to 0.85% or 0.90%, based on LTV, up from 0.55%.

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.

Congress passed the comprehensive Financial Regulations bill and President Obama will sign it into law soon. The bill provides a framework for oversight of the financial services industry, and certain aspects of the bill will affect mortgage lending and the home buying process. The bill calls for various regulatory agencies, some of which will be newly created, to determine the details. Implementation of most of the new mortgage-related rules is expected to take 18 to 24 months to complete.

Heading into a Fed meeting next week, the low inflation data released this week means there is little pressure on the Fed to begin raising the fed funds rate. May Core Consumer Price Index (CPI) inflation rose at a 0.9% annual rate, the lowest level in four decades. Usually the major task of Fed officials is to prevent inflation from moving too high, but they are now concerned about the risk that inflation will drop too low. Fed officials are most comfortable when inflation remains in the 1.5% to 2.0% range. This also means that there is little inflationary pressure to push Austin mortgage rates higher. Of course, with expectations set so low, if inflation were to surprisingly increase in coming months, it could cause a large reaction in the Austin mortgage market.

Will the “close by” deadline to receive the Home Buyer Tax Credit be extended? The answer to this question is not known as of this Friday morning. The Senate has approved an amendment to a larger bill to do so, but the larger bill is still being debated and its passage is not certain. Extending the “close by” deadline will benefit qualifying home buyers who are not able to close by June 30, the original deadline. Extending the deadline sooner rather than later would help relieve some anxiety. Right now, people in all phases of the home buying process are working very long hours to close an unusually large number of purchases before the end of the month.