After yesterday’s FOMC meeting, it became apparent that the Fed would pull out all the stops in an effort to get the economy and employment going again.  “Asset” purchases are all the rage as the government is once again the buyer of choice (treasuries).  Stocks love the idea of free money and a weakening dollars, boosting value in equities across the board.

Gold is up $40.00 as well, pricing in heightened expectations of inflation down the road.  Seems to me that the Chairman and the Prez met by the water cooler and the conversation when something like this.  “Ben, I’m in a tough spot here, my party just got its head handed to it and unemployment is nearly 10%, now I’m not telling you what to do but……… I need a game changer.  What you say we fire up the printing press and go on a buying spree.  Just a thought.”

In the news, Weekly Unemployment Claims jumped 20K to 457K while 3^rd Quarter Productivity rose 1.9%.  No one noticed as traders were too busy trying to buy bonds and stocks.  With the Employment Report for October due out at 7:30 am cst tomorrow, the prudent thing for Austin mortgage borrowers is to lock their Austin mortgage rates now.

Given that we are at the best levels in a month, your timing couldn’t be better in front of such a high profile release.  We’ll preview the Employment Report early this afternoon.

Technically, trading has been a whipsaw affair.  You will notice the downdraft yesterday (post FOMC) and the reversal this morning.  Typically a good indication the market has run its course in the short run, especially in front of the high profile data coming tomorrow.  Just the same, this baby is a bull and will be well supported into year-end given the Fed and their reloaded check book.  Call the market neutral/bullish.  Take advantage as the Employment trade is always volatile.

Election day expectations are huge for the Republicans.  Both the Rothenberg and Cook Political Reports are predicting 50 House seats will be turned over to the Republican party.  39 are needed to take control.  If true, we can expect gridlock in the coming months as the split (House/Senate) will create an environment unable to find common ground on fiscal policy.  This is assuming the Dem’s hold the Senate.

The Fed Open Market Committee (FOMC) started its two day meeting this morning, apparently hashing out what to do to re-inflate the economy and create jobs.  QE2 will most likely be the outcome, with 500 billion expected to be pumped into the system over the next two quarters.  Most expect the Fed to leave the total amount of purchases “open,” allowing for dollar amount changes to be made depending on economic strength.  No doubt the next two days will be high drama and volatile.

We see all of the above “baked into the cake.”  In other words, it’s already priced into the market.  Our bias is for stocks to slip a bit, post election and mortgage backs to hold steady.  Currently, the 10 year is up while mortgage backs are unchanged.  Best bet for Austin mortgage borrowers is to be conservative/cautious with locking your interest rates as the political news will be tomorrow morning’s early trade.

In an effort to boost the economy, the Fed is expected to begin to purchase additional Treasury securities soon. The big question is how large the program will be. Investors expect the Fed to reveal the details of the program at its next FOMC meeting on November 3. Comments from Fed officials during the week indicated that they are still discussing what approach to take. The Fed may decide on a fixed quantity over a set time frame, or they may select a more flexible program in which they decide at each meeting how much to purchase. Austin mortgage rates have already benefitted from investor expectations for the program, and they likely will remain highly sensitive to changes in the outlook for the Fed’s plans.

While foreclosure issues were in the spotlight, this week’s housing sector data generally showed modest improvement. September Housing Starts increased to the highest level since April. The October NAHB Home Builder confidence index rose to 16 from 13 in September, which was the first increase in five months. “Builders are starting to see some flickers of interest among potential buyers,” according to the NAHB.

With both retail and fast money accounts quiet, pricing reflects much of the same.  10 year notes are up 1/32^nd, current coupon mortgage backs up 1/32^nd, and stocks down 20 points on the big board.  The week ahead will feature Import Prices tomorrow, Weekly Unemployment Claims and inflation data (PPI) on Thursday, and CPI (inflation at the consumer level), Retail Sales, Empire State Manufacturing, and Michigan Sentiment Survey on Friday.

Currently, the best bet for Austin mortgage borrowers: don’t take historic low Austin mortgage rates for granted.

For the week of October 4, 2010 – Vol. 8, Issue 40

INFO THAT HITS US WHERE WE LIVE Last week’s housing market data centered on Standard & Poor’s S&P/Case-Shiller Home Price Index. This showed home prices UP in July for the fourth month in a row, but the pace of their gain had slowed from prior months. With the expiration of the government’s home buyer tax incentives, some observers wonder if the S&P/Case-Shiller will keep moving up. The composite 20-city index, a broad measure of U.S. home prices, showed a 3.2% increase year over year, the sixth month in a row it posted an annual gain.

Nonetheless, home price gains did slow in the waning days of the tax credits. In July, only 12 of the 20 cities surveyed showed price gains, compared to 17 cities reporting rising prices in June. Analysts pointed out that these results underscore the fact that the spring/early summer months are the best for home sales. Most experts feel the next few months should give us a better idea of the true strength of the housing market.

>> Review of Last Week

A BIT OF A BREATHER… Investors on Wall Street took a rest last week from bidding stock prices up the way they had earlier in the month. Performance of the major market indexes was uninspiring, though slippages were all less than a half a percent. But performance for the month was impressive. The broad-based S&P 500 index, favored by professional investors, shot up 8.8% for September, its best monthly gain since April 2009 and its best September reading in over 70 years.

Perhaps investors took the week off because they remain cautious about the near-term economic recovery. Consumers seem to agree, as the week began with a surprise drop in September’s Consumer Confidence Index, which hit a seven-month low, falling far short of consensus expectations. The ISM Manufacturing Index also slid a bit from August to September, missing estimates, but remaining in expansion territory.

Upside economic data included better than forecast weekly initial jobless claims, although 453,000 is still not a good number. Continuing claims dropped by 83,000 for the week, but that number remains well above 4 million. Personal income and spending (PCE) for August were up better than expected and Core PCE was up just 0.1%, so inflation is still in check.

For the week, the Dow ended down 0.3%, to 10829.68; the S&P 500 was down 0.2%, to 1146.24; and the Nasdaq was off 0.4%, to 2370.75.

The bond market ended the week with investor interest helping prices in some areas. One was the FNMA 30-year 4.0% bond we watch, which ended UP 10 basis points for the week, closing at $102.27. According to Freddie Mac’s weekly survey, national average mortgage rates for fixed-rate mortgages dropped a tad, remaining at historically low levels. 

>> This Week’s Forecast

WHERE WE’RE GOING WITH HOMES AND JOBS… The week begins with August Pending Home Sales, which count signed contracts and therefore tell us what will be happening with closings a few months out. Unfortunately, the consensus expects the August reading to be down a bit from July. But September ISM Services is expected to show the non-manufacturing sector still indicating expansion, with a reading just over 50.

The week ends with the September Employment Report and the forecast is for no increase in payrolls overall, although 70,000 jobs are expected to be added to the private sector. However, population growth outpaces this rate of job creation, so unemployment is predicted to tick up to 9.7%.

>> 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 October 4 – October 8

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months There’s been a lot of talk about the Fed’s readiness to provide a second round of quantitative easing (QE-2) if needed. This has led economists to believe that the Fed Funds Rate will remain at its rock bottom levels for quite some time. 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:

Austin mortgage rates were better this morning and the 10 year is up 10/32s for the day.  FOMC statement will be released at 1:15PM Central, and we will follow up with more news afterward.

Wholesale Trade was the last of today’s data points, up .1% with Sales down .7%.  The .1% print was below expectations of plus .4%.  Sales falling .7% is the evil twin in this report.  It’s the second decline in a row following 13 months of gains.  Bottom line is more inventory, less sales, and a drag on GDP.  Post data, market reaction has not been what one would expect.  Stocks are off 84 on the big board, 10 year note off 3/32’s, and mortgage backs off 5/32’s.  Stocks make sense as the data stunk.  Notes and MBS are lower in sympathy with hedging for the 84 billion in auction paper due over the next three days.

Today’s FOMC will be the story of the day.  Many are looking for the Fed to take a baby step towards a second round of stimulus, etc.  We see this as being premature.  Prior to today’s policy statement, the Fed has done nothing to set up the market for this kind of a change.  In fact, Ben Bernanke has been cheerleading the market about slower growth with a stabilizing economy.  Why would he/they do a 180 and now talk about doom and gloom?  This would panic the market.  We see the policy stating that growth and the consumer are soft but not dead.  They could slip in an announcement about using proceeds of their MBS purchases to reinvest in additional purchases.  We shall see.

What we do know is that the bond market is anticipating additional accommodation via treasury/MBS purchases or others forms of stimulus.  We may, in fact, have gotten a little ahead of ourselves (Austin interest rates too good) so be careful.  Details will be out at 1:15 pm cst.

With the 10 year note now trading at 3.09%, a level not seen since last April, many are talking about our market being “bubble-ishous”.  The other contingent thinks bond prices are just “insane”.  With the 10 year yield at levels not seen since 2008 and 1962, one would think that a correct is imminent.  Quite possible but not a given.  Technically, our chart work makes a case for 2.92% to 2.78% on the 10 year note.  All depends on stocks and the economy.  Even the FOMC “downgraded” the economy to underperform.

Early buying today has started to show signs of a new bullish trend, endorsed by almost every oscillator.  The key to a new trend will be a close below 3.09% on the 10 year note.  This will activate a break of the major double top which has been in place for over a year.  “If” this happens, the next target will be 2.88%.  Not to throw cold water on the bulls but we think this market is a little long in the tooth, pricing in as much bad news as one could imagine.

Not to say we will not see lower Austin mortgage rates and better pricing but for that to come to fruition, we’ll need a major catalyst.  Something like a stock market rout or collapse of Greece.  In English, the smart money will bet against this, at least for a corrective trade that could take the 10 year note back to 3.25%.  Pricing was struck with MBS unchanged, now down 5/32’s. Trigger fingers are getting twitchy.

With Austin mortgage rates at or near historic lows, best bet is to take a little off the table before the market “potentially” picks your pocket. Careful out there.