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:

Stocks are getting pounded, down 200 on the Dow, the 10 year note is up 12/32’s, and mortgage backs are plus 4 to 6/32’s depending on the coupon. Why you ask.  First up, CPI, inflation at the consumer level fell .1% while the “core index” (ex-food and energy”, rose .1%.  Tame by any means with a whiff of deflation in the cards (slim chance in our opinion).  Michigan Sentiment Survey was the one that raised an eyebrow, falling nearly 10 points to 66.5.  Economists noted that consumers have gone into a cocoon, chaining their wallets to themselves only to be opened for necessitates.  Expect Retail Sales to soften in the future.

BP finally put a cork in their crude oil jug, a welcome site indeed. Technically, the late rally (yesterday) provided the perfect set up for a continuation pattern (further rally).  Stocks are really the major influence here.  We see this a just a move to the top of the range (2.90% 10 year note).  Any where here, current mortgage pricing or a little better is a good place for borrowers to lock in their Austin mortgage interest rates.  Any reversal in stocks will simple reverse our direction and take the market to the lower part of the range.  Enjoy the historic low Austin mortgage rates.

After going negative, the market has started to boot strap itself back up. From the technical side, trading above the range highs is encouraging but is viewed as “cautiously optimistic”. With Ben Bernanke due on the hill tomorrow and most of the low volume trade directed by fast money types and day traders, the market may need time to prove itself. Stocks are up a hand full, mortgage backs up 2/32’s, and the 10 year note is trading at 3.81%, all positive elements. At least for today. We’ll call the market neutral/bullish yet still feeling the need to keep both hands on the wheel.

The week has gotten off to a slow start with the 10 year note off slightly and mortgage backs following suit.  The stability can be linked to month/quarter end adjustments by money managers and hedge funds to bring their bogey in line with the Barclays Index.  That buying should continue through tomorrow as the index needs are .16 years (duration add).  Earlier today, Personal Income/Spending hit the tape unchanged and up .3%.  Economists were looking for Income to be up .1% and Spending to be up .3%.  No great shakes here.

The balance of the week could get a little dicey however with Housing and Consumer Confidence tomorrow, ADP Employment “guess” on Wednesday, Construction Spending, ISM Index, and Weekly Claims on Thursday, and Big Daddy, the Employment Report for March front and center on Friday (7:30 am cst).

For now, the tactical bias is neutral/defensive into what the market feels is going to be a positive jobs number (plus 200K).  The weakness of the past few trading days has changed the trend to bearish.  The little bit of stability we’re seeing is only due to month end.  That can only mean one thing as seller are waiting in the wings.  We would advise borrowers to lock their Austin mortgage interest rates, expecting that we will see 4.0% on the 10 year note before we see 3.75%.  The interest rate landscape (lower Austin mortgage rates) is not over, just on hold.

Given the Fed’s exit from MBS purchases, their steering of quantitative easing ala Austin mortgage rates hike sooner than later, and a fragile housing market that must be content will mean more inventory and less stimulus, a case for the double dip can certainly be made.  That scenario has a high probability (in our opinion) and brings with it lower Austin mortgage rates.

Hang in there.

In early 2009, the Fed embarked on a $1.25 trillion mortgage-backed securities (MBS) purchase program to help keep mortgage rates low and stimulate the economy. The amount purchased varied from week to week, reaching a peak of $33.2 billion in the week of March 25, 2009. The Fed has been gradually reducing the size of its purchases at a pace consistent with a March 31 conclusion of the program, and the most recent weekly purchases have been down to around $10 billion.

As the date nears, the big question is what will happen when the MBS purchase program ends. This program is unprecedented, making the outcome difficult to predict, and forecasts vary widely. Estimates for the impact on mortgage rates from the conclusion of the program vary from an increase of one percent to no change. Those who predict higher mortgage rates point to a basic change in the fundamental supply and demand. The added demand from the Fed was widely credited with moving rates lower, and a decrease in demand would typically push rates higher. However, other economists argue that investors respond only to unexpected news. In this view, since the Fed has telegraphed the end of the program for months, there should be little reaction around March 31. The Fed itself has indicated that they expect a modest increase in Austin mortgage rates due to the end of the program.

Week Ahead

The big story next week will be Tuesday’s Fed meeting. No change in the fed funds rate is expected, but any surprises in the Fed’s statement could produce a large reaction. The most significant economic data next week will be the monthly inflation reports. The Producer Price Index (PPI) focuses on the increase in prices of “intermediate” goods used by companies to produce finished products and will come out on Wednesday. The Consumer Price Index (CPI), the most closely watched monthly inflation report, will come out on Thursday. CPI looks at the price change for those finished goods which are sold to consumers. In addition, Industrial Production, an important indicator of economic activity, will be released on Monday. Housing Starts are scheduled for Tuesday. Import Prices, Leading Indicators, and Philly Fed will round out a busy week.

Weekly Unemployment Claims fell 27K to 469K as seasonal factors and the weather related snafu has everyone guessing is this real or Memorex.  The big picture points to the percentage of eligible people receiving unemployment benefits being 3.5%, well above the reading that creates jobs.  Seems to us that unemployment is stabilizing albeit at higher levels.  Not the makings of a vibrant economy.

Pending Home Sales looked like a Rottweiler as well, falling 7.6% in January.  Economists were looking for a plus 1.0% print.  Once again, the NAR Chief Lawrence Yun blames the weather for affecting home shopping.  Maybe we’ll get a clear read in July.  For the record, all regions were in the red with the West falling 13.2%.  Did it snow in California?

Factory Orders were up 1.7% with the ex-transportation up .1%.  A 15% gain in transportation orders did this trick for this number.  Maybe new accelerator parts for Toyota.  Productivity gains were off the chart, rising 6.9%.  The flip side was a drop in labor costs of 5.9%.  We are putting computers to work, not Joe the Plumber.  All of the above has flattened the yield curve with the 10 year note up 4/32’s and the bond plus 13/32’s.

One positive here is that until we work through this massive off sides market position in MBS, mortgage pricing will be supported, helping to keep pricing stable.  I’m going to give you our best guess on tomorrow’s jobs data.

Expectations for the February Employment Report are as follows;

1)      Non-Farm Payrolls – Minus 50K

2)      Unemployment – Rate 9.8%

3)      Hourly Earning – Plus .2 month on month

4)      Average Work Week – Minus .2

As we have been talking about, the weather is going to make a mess of the numbers.  We expect continued job losses in manufacturing, construction, and private services payrolls.  Construction should be hit the hardest, probably losing another 50K.  Consensus workers are a wild card as the government is expected to ramp up hiring, adding 1.2 million short term workers over time.

Using one standard deviation and a dart board, our bias is for 100k in job losses and a 9.9% unemployment rate.  JPMorgan has the call at minus 90K and 9.9%, Barclays at Minus 75K and 9.8%, Wells Fargo at minus 80k and 9.7%, and Credit Suisse the outlier at minus 125K and 9.9%.  If there is a miss, it will be towards more job losses than less.  You may recall that I wrote about John Ryding call that job losses would be minus 250K.  Don’t know if he is right but I do know he’s a pretty sharp dude.  What will the market do?  Most likely blow the numbers off due to distortions in the weather but trade nonetheless in a volatile fashion.  Once the dust settles, we would expect that pricing will be close to today’s levels “unless” the number is below expectations.

Let’s say we see a -25K or unchanged print.  We feel the market would interpret that to be much better than expected once you factor in the weather distortion.  Really, this one is a crap shoot.  Technically, we’re not getting much help as the 10 year note chart has formed a triangle pattern on the daily time frame.  We would need to close below 3.45% to turn this into a raging  bull (currently 3.61%) so not much help there.  Triangle patterns typically wind themselves up, tighter and tighter before a break out occurs.  Given the distance in basis points for a bullish outcome, we would side with a break out to higher yields/ worsening mortgage pricing to coincide with the ending of the short squeeze in the MBS market.  To put this in English and cut to the chase, be careful out in the days ahead.

Earlier today, Personal Income/Spending hit the tape plus .4% and plus .2%, slightly better than economists had predicted yet not anything to write home about.  Construction Spending was another story, falling 1.2% versus the minus .5% many were looking for.  Cold weather and competition from a heavy inventory of distressed/foreclosure sales has done the trick once again.

The ISM Index (Manufacturing) surprised to the upside, putting it its best number since August 2004 (plus 3.5 points to 58.4).  Digging deeper into the numbers, most of the gains came from new orders as inventories need to be rebuilt.  The question now becomes, will buyers step up to take the newly produced goods off the shelf?  Time will tell.

President Obama’s projected budget sets a new record deficit (1.516 trillion in 2010) as the new budget looks to be 3.8 trillion.  Bailout costs for FNMA and FHLMC alone will be 153 billion.  Wow.

Technically, note, bond, and MBS structure are in neutral as follow through to the upside (rally) is not in the cards.  Bulls need the 8 day moving average (currently we’re sitting on it) at 3.65% to hold.  We expect that area to hang in there into tomorrow.  Traders will then make a move, one way or the other, on Wednesday and Thursday to hedge positions up for Friday’s Employment Report.  Tough one to handicap as predictions on Nonfarm Payrolls and the Unemployment Rate are all over the map.  Cautiously optimistic is the best we can come up with.

Bonds, notes, and mortgage backed securities are doing quite well given the plus 100 point gain on the big board.  10 year notes off 7/32’s (yield 3.70%) and MBS off 3/32’s tell the tale of the tape.  Technically, a series of higher highs and higher lows are developing on the chart.  This is typical of bullish price action and will help to limit the downside (selling).  Bulls need a close below 3.68% to prove that further upside (rally) is in the cards.  Given the limited data until PPI (inflation index) on Wednesday and Weekly Claims/Leading Economic Indicators on Thursday, odds are good that we will continue to hang around current levels.

In December, the economy lost -85K jobs, which was lower than the consensus forecast of -5K, and the Unemployment Rate remained at 10.0%. A small revision to the November data created a gain of 4K jobs, the first monthly increase since December 2007. The report indicated that 661K people dropped out of the labor force in December. The details suggest that small businesses may be creating jobs more slowly than larger companies. The manufacturing and constructions sectors continued to perform poorly. Average hourly earnings, an indicator of wage growth, showed a small increase. Overall, the data was weaker than expected, and mortgage rates moved lower after the news.

In the housing sector, November Pending Home Sales fell 16% from October, but the decline followed nine straight months of increases and November Pending Home Sales were 15% higher than one year ago. Pending home sales are a leading indicator of future housing market activity. Recent data has been heavily influenced by the timing of the homebuyer tax credit, which was originally set to expire at the end of November. A surge of buyers attempting to purchase before the original deadline pulled demand forward. When the homebuyer tax credit was expanded and extended through the first half of 2010, the time pressure was removed. According to the National Association of Realtors (NAR), we should see another “notable” gain in sales activity in coming months.

Week Ahead

The Economic Calendar will be packed on Thursday and Friday next week. Earlier in the week, the Trade Balance will come out on Tuesday, and the Fed’s Beige Book will be released on Wednesday. Retail Sales, which account for about 70% of economic activity, will come out on Thursday, along with Import Prices and Jobless Claims. The Consumer Price Index (CPI), the most closely watched monthly inflation report, will come out on Friday. CPI looks at the price change for those finished goods which are sold to consumers. In addition, Industrial Production, Consumer Sentiment, and the Empire State index will be released on Friday. There will be Treasury auctions on Tuesday, Wednesday, and Thursday.

Stocks are riding a Santa Claus rally, up another 50 something on the Dow and setting new 2009 highs on the Naz.  Bonds, notes, and mortgage backs have continued down their bearish path, starting in Australia and continuing through Asia and Europe.  State side traders picked up the ball and battered the market, driving mortgage backs down 20/32’s at the time we priced.  We have begun to stabilize but are just off the lows (yield 3.74%) as we speak.  Low volume trade or not, the chart shows a stunning break since last Thursday with no signs of letting up.  3.75% on the 10 year note is minor support and psychologically important but nothing to hang your hat on.  Bigger picture charts (weekly/monthly) warn of the next level of real support not coming in until we see 3.88% to 3.90%.  Market profile and trend intensity also tell us that the bears are in control.  Markets like this are dangerous, hoof prints on your back can be painful.