Earlier today, CPI, inflation at the consumer level, hit the tape plus .3% while the core index was up .1%.  Auto prices and gasoline were all to do about the increase which in the big picture is quite tame.  Actually, our bigger concern is about disinflation as the economy cools.  Retail Sales were also in the mix, up .4% with the ex-autos component up .2%.  Auto sales were behind most of the push here as well, rising 1.6%.  While the numbers look encouraging on the surface, we see the loss of Census workers, loss of emergency unemployment benefits, and the withdrawal of various forms of stimulus starting to drag on the consumer.  Retailers will need a great holiday season to make it a good year.

Business Inventories completed the economic trifecta, rising .3% as sales fell .6%.  We talked about this earlier in the week, commenting about inventory builds with sales faltering.  Not a good prescription for GDP.  Trading, post data has been a light volume affair with the 10 year note up 8/32’s, mortgage backs unchanged to up 2/32’s, and stocks down 22 on the big board.  We expect a quiet day with a neutral bias.

We see a ton of pessimism build into pricing  which could limit further rallies but at the same time, any dips will be a buying opportunity for investors.  Given the auction paper to digest and the soft economic background, we expect the market to trade in a small range with a bullish bias, allowing for Austin mortgage pricing to be slightly better or worse from today’s levels over the next week or so.  We’ll wrap it up 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.

Then along came New Home Sales, expected to be 320K annualized units.  The print was much better than that, up 24% to 330K units.  Stocks got another boost (now up 68 on the big board) as fixed income instruments (such as mortgage backs) dipped a little deeper.  Currently, the 10 year note is off 10/32’s (yield 3.03%) while MBS are off 4/32’s (tighter spreads which is good).  We also had the Chicago Fed National Activity Index out, which dropped .94 to its worst level since October.  Manufacturing output, or the lack thereof, did the trick.

Fast money is selling the long end of the curve, dragging the 10 year note along with it.  Not a lot of downside is expected from here.  The week ahead will feature Case Shiller Home Prices, Consumer Confidence, Durable Goods, Weekly Claims, and GDP on Friday.  Good week for data and market moving volatility.  For the week ahead, we see the market weaving and bobbing with a neutral/bearish type bias as investors will be looking to buy treasuries at yields slightly higher than current.  We still like the market long term as the detours are everywhere.

Short term, Austin mortgage borrowers are encouragerd to stay defensive.

While it is rarely a big market mover, this week’s Consumer Confidence report shocked investors. The index declined to 46.0, far below the consensus forecast of 55.0, and the lowest level in nine months. Consumers are clearly worried about the labor market, and an increase in Jobless Claims in recent weeks has amplified the issue. The decline in confidence has potentially negative consequences for the economy. Consumer spending accounts for about 70% of economic activity, and this data raises concerns about the level of future spending. Also, home sales suffer during periods of low consumer confidence, and the housing data released this week reflected consumer insecurity. Of course, slower economic growth is favorable for Austin mortgage rates, which fell after the report came out.

In contrast to the weakness seen in many of the consumer-driven economic reports, the manufacturing sector has been demonstrating strong performance in recent months. Fourth quarter Gross Domestic Product (GDP), the broadest measure of economic activity, rose at a brisk 5.9% annual rate, largely due to a pickup in manufacturing. The added boost from manufacturing may be temporary, however. During the financial crisis, companies drew down inventories as much as possible to conserve capital. As the economy has shown improvement, companies have been increasing inventories closer to pre-crisis levels. When the inventory rebuilding is complete, manufacturing is expected to return to more normal levels.

Week Ahead

The biggest economic event next week will be the important Employment report on Friday. As usual, this data on the number of jobs, the Unemployment Rate, and wage inflation will be the most highly anticipated economic data of the month. Early estimates are for a decrease of about -20K jobs in February. Before the employment data, Personal Income and the ISM manufacturing index will be released on Monday. ISM Services and the Fed’s Beige Book will be released on Wednesday. Pending Home Sales, a leading indicator for the housing market, will come out on Thursday. Productivity, Construction Spending and Factory Orders will round out the schedule. In addition, the Treasury will announce the size of upcoming auctions on Thursday.

For the week of February 22, 2010 – Vol. 8, Issue 8

INFO THAT HITS US WHERE WE LIVE Builders are jumping on the recovery bandwagon, as January Housing Starts beat consensus estimates, heading UP 2.8% to an annual rate of 591,000 units. Single-family starts are now 35.6% up from their low a year ago. Total new building permits dropped a tad in January, but single-family permits were up 0.4% for the month and UP 48.2% from a year ago.

The trend indicates more improvement ahead. Permits for single-family homes are 7.4% higher than starts in states requiring building permits, well above the historical norm. Many observers feel home building is in the early stages of a serious rebound. Supporting this, the National Association of Home Builders reported builder confidence higher in February, going from 15 to 17 points, 8 points up from a year ago.

Although the Fed will stop buying Mortgage Backed Securities (MBS) at the end of March, some analysts now feel this may not cause mortgage rates to rise much, if at all. That’s because Fannie Mae and Freddie Mac recently announced their plan to buy up to $200 billion in delinquent loans from their own MBS and pass-through pools. Friday the Mortgage Bankers Association reported the percentage of delinquent home loans shrank in Q4. MBA chief economist Jay Brinkmann feels that fewer new problem mortgages could be signaling the “beginning of the end” of the foreclosure crisis. Let’s hope so. 

>> Review of Last Week

UP UP UP UP… YUP, stocks went UP four days in a row, which constituted all the trading days there were in the holiday-shortened week. Investors seemed to be responding to a cessation of fears coming out of Europe, encouraging economic data, good corporate earnings and the news from the Fed.

The minutes from the Fed’s January FOMC meeting stated economic conditions still warrant low interest rates, although their GDP growth estimate went from 3.0% to 3.2% for the year. Then Thursday, as reported in an Inside Lending Bulletin, the Fed raised its discount rate on emergency loans to banks by 0.25%, to 0.75%. The discount rate is not the Fed funds rate and the central bank said the increase does not “…signal any change in the outlook for the economy or for monetary policy….” Some analysts feel the Fed was just trying to appease inflation “hawks”. The irony was, the CPI inflation reading came in the next morning below consensus expectations, up a scant 0.2%!

Earlier in the week, the PPI reading on wholesale inflation came in a little higher than expected, but this was balanced by the good news on housing starts, plus better-than-expected earnings from John Deere, Merck, Kraft, Hewlett-Packard and Wal-Mart. Equally encouraging, industrial production went UP 0.9% in January, putting it up at an 8.9% annual rate for the last six months. More evidence that manufacturing is at the heart of this recovery.

For the week, the Dow was UP 3.0%, to 10402.35; the S&P 500 was UP 3.1%, to 1109.17; while the Nasdaq climbed UP 2.8%, to 2243.87.

Stocks went up for the week, so can you guess which way bonds headed? Correct. The FNMA 30-year 4.5% bond we watch ended down 69 basis points, closing at $100.22. Mortgage rates, however, still held at their historically low levels.

>> This Week’s Forecast

HOMES, CONSUMERS, Q4 GDP… The week gives us more takes on housing, with New Home Sales on Wednesday and Existing Home Sales Friday. There are two looks at the consumer mindset as well, with Consumer Confidence on Tuesday and the University of Michigan Consumer Sentiment Index on Friday. Also Friday is the second GDP estimate for Q4, showing positive economic growth coming out of the recession. The week ends on another key manufacturing measure –the Chicago PMI.

>> 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 February 22 – February 26

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months The Fed discount rate went up last week, but experts say that doesn’t mean the Fed funds rate is moving any time soon. Please also note that discount rate moves are made by the district banks, not the Fed. With jobs still lagging in the recovery, economists feel the Fed funds rate will stay where it is through June. 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:

Speaking of the movie, do you remember this volley:

Censor #1: You know the rules, airman. If this is a legitimate news story, it must go through proper channels.
Adrian: Look tweedledee, it’s an actual event. (referring to blood on his short). What do you think this came from, shaving? It’s the truth. I just want to report the truth. It’ll be a nice change of pace.
Major Dickenson: What is going on here?
Adrian: Sir, will you listen to me?
Major Dickenson: (reads the story). This is not official news, airman. As far as I’m concerned, it didn’t happen.
Adrian: It did happen.
Major Dickenson: You shut your mouth!
Adrian: What are you afraid of Dickenson? People might find out there’s a war going on?

The truth is we have a battle going on between stocks and bonds, recovery or no recovery, inflation or no inflation. JPMorgan Chase blew the doors off, beating the street’s estimate by .30 cents a share. Intel reported yesterday (after the close), posting a great quarter as well. Equity traders are falling all over themselves, taking the Dow within a few points of 10,000, a level not seen since October 3rd, 2008. Retail Sales also hit the tape, down 1.5% while the ex-auto’s component was plus .5%. The better than expected numbers portray a consumer that seems to be increasing spending, albeit at a slow, value based level.

August Business Inventories were also released, down 1.5% while sales were up 1.0%. Business inventories are now more in line with sales, almost back to normal levels. We will want to watch for inventory rebuilding in the near future for further signs of employment growth and GDP improvement. Bonds, notes, and MBS took it on the chin this morning as the early trade (7:30 am cst) had the 10 year note down 1 point. Mortgage backs are off their worst levels of the day but still down 10/32’s on the FNMA 4.50% coupon.

The failure of the market to hold yesterday’s gains suggest we are building on a bearish continuation pattern. English translation is one of caution, telling us it’s time to be defensive. We expect the new range on the 10 year to be 3.34% to 3.48%. Expectations for worsening Austin mortgage pricing is quite high so take cover. With the expectation of strong earning out of Goldman, B of A, and Wells Fargo, stocks should continue their momentum rally, adding pressure to our fixed income market. Sorry to put you back on defense but just like Adrian, “it’s the truth”.

For the week of October 5, 2009 – Vol. 7, Issue 40

INFO THAT HITS US WHERE WE LIVE Another good week for the housing market. The S&P/Case Shiller home price index was up for the third month in a row and the rate of annual decline fell for the sixth month in a row! Price increases were reported in 18 of 20 metro areas measured. Many now feel this data indicates the worst of the price declines are behind us. David M. Blitzer, chairman of the index committee at Standard & Poor’s, said: “These figures continue to support an indication of stabilization in national real estate values.”

Later in the week, Pending Home Sales came in UP 6.4% for August, their seventh straight monthly gain, UP 12.4% from a year ago and at their highest level since March 2007. Many see this boost in sales coming from first-time homebuyers rushing to make the deadline for their $8,000 tax credit which expires at the end of next month!

On the mortgage front, Freddie Mac’s weekly survey showed the 30-year fixed-rate mortgage below 5% for the first time since May. The average rate was 4.94% with an average 0.7 point (including the origination fee) for 80% loan-to-value ratio loans to borrowers with good credit. Finally, residential construction spending also rose in August, UP 4.7%!

>> Review of Last Week

CORRECTION?… Friday ended with the stock markets down for the second week in a row, so pundits wondered if the bull market is over, or just correcting itself as it does after the kind of big run-up it’s had. Or maybe investors were fearing the recovery’s in jeopardy, given a few disappointing economic indicators, capped by a still problematic employment report for September.

Yes, we did get lower than expected numbers for Consumer Confidence and ISM Manufacturing. But that manufacturing number is now above 50 two months in a row, showing expansion. The business media jumped all over a rise in initial claims for unemployment, but ignored the fact that the four-week moving average dropped to 548,000, its lowest level since January, and continuing claims dropped another 70,000, to 6.09 million, the lowest level since April. The major placement firm of Challenger, Gray, & Christmas reported that layoffs announced in September were down 30.2%, compared to last year. Some economists see unemployment falling by the end of the year.

But for the moment employment lags the rest of the recovery. Non-farm payrolls fell more than expected in September and unemployment inched up 0.1% from the month before. Yet we are clearly in recovery. Personal income increased 0.2% in August and small business earnings were up 0.7%, hitting a 7.6% annual rate for the past three months. Final Q2 GDP was revised upward to –0.7% and virtually all economists expect Q3 to show positive growth.

Nevertheless, for the week, the Dow ended down 1.8%, to 9487.67; the S&P 500 was off 1.8%, to 1025.21; while the Nasdaq fell 2.0%, to 2048.11.

Once again, as stock prices sank, bonds soared. The FNMA 30-year 4.5% bond we watch finished up decisively from the previous week’s $101.12 close, moving to $101.66. As detailed above, mortgage rates slid down a bit more, back to the super low territory they were in last May. Fence-sitters should take note.

>> This Week’s Forecast

PRETTY QUIET… Not much going on this week on the economic front. We’ll get the ISM reading on how the services sector is recovering, plus our weekly look at the jobs story. The week ends with the Trade Balance figure showing the state of our export-import situation.

>> 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 5 – October 9

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months. Last week’s Personal Consumption Expenditures (PCE) numbers showed inflation under control, with prices down 0.3% from last year. But over the last three months, prices are up. If inflation picks up, the Fed could raise rates. Note: In the lower chart, a 2% probability of change is a 98% certainty the rate will stay the same.

Current Fed Funds Rate: 0%–0.25%

Probability of change from current policy:

Nonfarm payrolls fell 216K, Unemployment rate jumps to 9.7%, and both June and July job losses were revised higher.  At best, the report is “mixed” with optimists looking at the downward slope of job losses over the past 8 months and “realists” looking at the 9.7% unemployment rate and negative job growth as a continued drag on the consumer and GDP.  Jobs were lost in all sectors except education and health care services, which added 52K.  We missed our boggy due to less job losses in service sector employment (expected 100K/actual 80K) and construction (expected 75K/actual 65K).  Hey, at least we were closer than Normura.

Reaction to the data was fast and furious post release, with wild swings in both bonds and stocks.  Since the dust settled, the 10 year note is off 10/32’s (yield 3.37&), mortgage backs off 1/32^nd, and stocks up a nickel.  Pretty quiet on the western front.  With the long weekend approaching, traders will have one foot out the door by noon.  High probability that your capital markets group will too, thinking more about marinating the ice cubes than what’s on the screen.  We expect, or are hoping for, a quiet, steady trading day as well.  Next week the action will pick up as kids across the country head to school and first flight traders go back to work.  For now, let’s call the market neutral with a slightly bullish bias for Austin mortgage pricing.

The New York Manufacturing index posted a 13 point rise to 12.1, the highest level since November 2007.  Although it is a positive growth number, we see it as a rebuilt of inventories.  Restocking the shelves will put a kick in our GDP but, with today’s consumer be willing to take it home?  We shall see.  I have been asked the question, why are we not getting  much bang for the buck out of MBS when the 10 year treasury rallies.  This is all about spreads which have widened on consumer concerns, escalating foreclosures, and investor appetite for anything related to credit (tied to the consumer).

Case in point is today’s move; 10 year note plus 17/32’s (yield 3.49%), MBs plus 6/32’s.  Good news is that we are 6/32’s better than Friday’s close and if you haven’t looked lately, Austin mortgage pricing looks pretty good.  Time to wake up those Austin refinance people who missed the last bus.

The week ahead will feature PPI, inflation at the wholesale level and New Residential Construction tomorrow, zippo on Wednesday, Weekly Claims and Leading Indicators on Thursday, and Existing Home Sales on Friday to close out the week.  Plenty to give us volatility.  Stocks will be the main driver as we need to see if this is just minor consolidation or something bigger in the making.  Say a 10% to 15% correction.