Stocks are not the reason as we are off 139 points on the big board.  PPI, inflation at the wholesale level, is not the culprit either as the print was up .4% headline and down .6% ex-autos, giving some cover for the Fed’s pressing QE2.  October Industrial production hung an egg (unchanged) and the National Association of Home Builders Index was up slightly yet not very impressive.  Even the Fed buying 5.4 billion in paper can’t plug the dam.

What you have here is a mentality surrounding QE2 that is worried about inflation, economic growth, Federal balance sheets, and was priced in “before” the operation took place.  Now we have fast money accounts (trading accounts, hedge funds, money managers, etc.) pressing the trade, blowing through technical support levels like a tsunami.  Studies are bearish on every time frame.

Given the economic backdrop (high unemployment, etc.) we feel this move is close to a bottom.  Trouble is, picking bottoms are like catching falling knifes, hard to do without some pain.  Best bet for Austin mortgage borrowers is to use the float down option (“option to lower your interest rate one time”) to guard against a reversal (rally).

Markets like this are dangerous and sometime do not follow logic.  If it looks like a bear and walks like a bear, it probably is a bear.

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.

For the week of November 1, 2010 – Vol. 8, Issue 44

INFO THAT HITS US WHERE WE LIVE Last week’s big rush of housing news began on Monday with Existing Home Sales for September UP 10% from the month before. The annual rate hit 4.53 million. This was the second straight monthly gain after July’s record low following the expiration of the tax credits. The national median price for existing homes is now at $171,700, down 2.4% from a year ago. Unsold inventory dropped 1.9% from the prior month to a 10.7 months’ supply.

Tuesday, the S&P Case-Shiller home price indexes came in weaker for August, also seen as a result of the expiration of the tax credits. The 10-city index was down 0.1% for the month and the 20-city index off 0.2%. The Federal Housing Finance Agency’s monthly house price index showed U.S. home prices falling 2.4% from August a year ago and 13.7% off their April 2007 peak. This index only tracks the prices of homes purchased with mortgages sold to or guaranteed by Fannie Mae or Freddie Mac.

Wednesday, New Home Sales for September were UP 6.6%, coming off record lows in July and August. The seasonally adjusted annual rate was 307,000, which is down 21.5% from a year ago. Good news came with the median new home price rising 3.3% from the year before, now at $223,800. The supply also came in at 8 months, with the actual number of unsold new homes the lowest it’s been since 1968.

>> Review of Last Week

FLAT WEEK, UP MONTH… Investors on Wall Street kept things in check last week, leaving the Dow down by a whisker, the S&P 500 dead flat, and the tech-heavy Nasdaq up a modest 1.1%. Observers felt traders were awaiting this week’s midterm elections and then Wednesday’s Fed meeting statement regarding its next round of quantitative easing to spur growth. For the month, stocks did quite nicely with the S&P 500 up 3.7%; the Dow up 3%, its best October since 2006; and the Nasdaq up 5.9%, its best October in seven years.

In the week’s economic news, a plus always seemed to come with a minus. For example, Consumer Confidence was up in October, but it still remains at historically low levels. This is occurring over a year since the economy transitioned from recession to recovery, at least as measured by overall growth. Durable Goods Orders were up 3.3% in September, but it all came from aircraft and parts. Exclude those, and orders were down 0.8% for the month.

It was somewhat encouraging to see weekly jobless claims dropping for the third straight week. This put them at their lowest level since July, but still in troublesome territory above 400,000. Finally, the advanced estimate of Q3 GDP came in at 2.0% annual growth. This was in line with expectations and shows the economy is in fact growing. But 2% is well below the growth rate economists say we need to make a significant dent in the unemployment rate.

For the week, the Dow was down 0.1%, to 11118.49; the S&P 500 ended flat, at 1183.26; but the Nasdaq was UP 1.1%, to 2507.41.

Bond prices dipped for a good part of the week, then rebounded, but not quite enough. The FNMA 30-year 4.0% bond we watch ended down 10 basis points for the week, closing at $103.02. National average mortgage rates for most mortgages remain at historically low levels. A cautionary note: the Mortgage Bankers Association predicts rates of 30-year fixed-rated mortgages will begin rising next year.

>> This Week’s Forecast

HEARING FROM THE FEDS, WAITING FOR THE JOBS… There are plenty of economic reports to ponder this week, but two items stand out. The Fed will be meeting on Wednesday and while no one expects the Fed Funds rate to go up, everyone will be looking for indications of when the Fed will start its second round of quantitative easing (QE-2) and how much money will get thrown into the system. The other point of interest will be the October jobs report on Friday. The forecast is for payrolls to be up by 45,000 jobs, which isn’t very many, but at least it’s a positive number, though the unemployment rate is predicted to hold at 9.6%.

Highlights of the remaining economic news include the PCE inflation reading expected to stay at 0.4%, and ISM predicted down a little, though still showing manufacturing expanding. The week ends with Friday’s Pending Home Sales for September, forecast to be up 0.5%, a good thing but not quite as good as August’s hike of over 4%.

>> 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 1 – November 5

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months Economists agree that the Fed Funds Rate will stay at its rock bottom level for quite some time. Inflation could change that, of course, but experts feel that’s quite a way down the road. 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:

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.

For the week of September 20, 2010 – Vol. 8, Issue 38

INFO THAT HITS US WHERE WE LIVE Fannie Mae released a housing survey showing 70% of those polled in June and July feel now is a good time to buy a home. This is up from a 64% reading in January. At the same time, 83% of those people surveyed think it’s a bad time to sell, which isn’t such a terrible thing, since there’s still plenty of inventory for buyers to choose from.

Another group of industry observers concluded that sales of existing homes hit bottom in July and will rebound in the fall. They based this on recent reports for purchase mortgage applications and pending home sales, which track signed purchase contracts for existing homes.

The fact remains, homes are now more affordable for more people than they’ve been in years. And today’s historically low Austin mortgage rates make monthly payments much easier to work into the family budget. Prices may have bottomed out indeed. The S&P/Case-Shiller Home Price Indexes show that nationally, home prices are 3.6% above levels a year ago. For buyers who expect to live in their home a while, many observers feel this is clearly a very smart time to purchase.

>> Review of Last Week

UP YET AGAIN… For investors on Wall Street, positive feelings continue to prevail over negative vibes and uncertainties, as stocks closed higher for the third week in a row. All the major market indexes were up, with the extra strength of the tech sector pushing the Nasdaq up well over 3%. In addition, all three indexes are now UP for the year.

Worrying investors, and everyone, were things like Thursday’s report that the U.S. poverty rate was at a 16-year high. Other data showed that real median household income last year was essentially unchanged over 2008. No surprise then that Friday’s University of Michigan Consumer Sentiment Index came in at its lowest level since August a year ago. The day before, the Producer Price Index reported wholesale inflation a bit higher than anticipated, which got some analysts concerned that consumers might see price hikes next.

Those fears were quelled Friday with Consumer Price Index (CPI) readings that had inflation well under control at the retail level. And the 1.1% year-over-year gain in the CPI showed that those who feared deflation have nothing to worry about for now. Other encouraging signs included a rise in Industrial Production for August that met expectations and August Retail Sales that beat forecasts, evidence that consumers may be worried, but they’re still spending!

For the week, the Dow ended UP 1.4%, to 10607.85; the S&P 500 was UP 1.4%, to 1125.59; and the Nasdaq was UP 3.3%, to 2315.61.

It was another mixed week in the bond market, but prices held up enough. The FNMA 30-year 4.0% bond we watch ended a mere 5 basis points ahead for the week, closing at $102.09. National average mortgage rates continue at historically low levels, though some observers do expect them to move up a little by the end of the year. 

>> This Week’s Forecast

WOO-HOO, HOUSING AND THE FED!… This week features our two favorite topics. The Fed’s an easy forecast, as virtually no one breathing thinks they’ll hike the Funds Rate at their meeting on Tuesday. As usual, however, their policy statement will bear scrutiny, as analysts look for signals that the rate could rise any time soon.

Tuesday’s August Housing Starts should finally show a slight uptick in activity. August Building Permits are also expected to be up a little, even though home builders remain cautious. Some experts feel we’re starting to turn the corner in housing, as a bit of growth is predicted in Thursday’s August Existing Home Sales and Friday’s August New Home Sales. 

>> 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 Austin loan rates.

Economic Calendar for the Week of September 20 – September 24

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months Last week’s Consumer Price Index report showed inflation still under control. So with economic growth slowing, economists overwhelmingly believe the Fed will keep rates where they are at this week’s FOMC meeting and 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:

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.

Release Date: August 10, 2010

For immediate release

Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated.

Measures of underlying inflation have trended lower in recent quarters and, with substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.¹ The Committee will continue to roll over the Federal Reserve’s holdings of Treasury securities as they mature.

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh.

Voting against the policy was Thomas M. Hoenig, who judges that the economy is recovering modestly, as projected. Accordingly, he believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted and limits the Committee’s ability to adjust policy when needed. In addition, given economic and financial conditions, Mr. Hoenig did not believe that keeping constant the size of the Federal Reserve’s holdings of longer-term securities at their current level was required to support a return to the Committee’s policy objectives.

INFO THAT HITS US WHERE WE LIVE Tuesday we had Pending Homes Sales, which after dropping 30% in May, fell just 2.6% in June, with the push to qualify for the tax credit no longer a factor. These figures indicate there should be a drop in Existing Home Sales come July and maybe again in August. But some analysts feel that after this post-tax-credit dip, housing will come back solidly, just like auto sales did after “cash for clunkers” expired last year.

The report did include encouraging words on home pricing from the National Association of Realtors chief economist: “…since home prices have come down to fundamentally justifiable levels, there isn’t likely to be any meaningful change to national home values. Some local markets continue to show strengthening prices.” We all know you can’t time a bottom, but it looks like serious buyers might want to act now.

The Mortgage Bankers Association reported an increase in demand for purchase loans for the third week in a row. Its Weekly Mortgage Applications Survey had purchase loan demand UP 1.5% for the week ended July 30.

>> Review of Last Week

SUMMER RALLY LITE… Coming off July’s hot month for stocks, August began with a 208-point gain in the Dow. But before this summer rally could really take off, investor optimism cooled, sending market indexes up and down by small amounts for the rest of the week. Friday’s July jobs report came in below expectations, which drove stocks lower, though only by 21 points. All major indexes ended UP for the week, so it’s still a rally, if not a particularly strong one.

What made investors cautious included the July ISM Manufacturing Index, which fell from June’s 56.2 reading to 55.5. Wall Street ignored the fact this is still a strong number, above the 50 level that signals expansion. Then Personal Income and Consumption came in unchanged for June. But income after taxes is UP 3.2% annually the last six months and “real” (inflation-adjusted) consumer spending was UP 0.1% for June and UP 1.6% annually the last six months. PCE consumer inflation dropped for the third month in a row, but core PCE, excluding food and energy, is up 1.1% the last six months, calming fears of deflation.

Wednesday, July ISM Services climbed to 54.3 from 53.8 in June, showing continued expansion in the non-manufacturing arena. Now for the July jobs report. Private sector payrolls grew less than expected and government payrolls declined more than expected. But private payrolls are up 90,000 per month since the beginning of the year. In addition, average weekly earnings are UP 0.5% for July and UP 3.0% in the last year, which should continue to drive up consumption and the economy. The unemployment rate held at 9.5%.

For the week, the Dow ended UP 1.8%, to 10653.56; the S&P 500 was UP 1.8%, to 1121.64; and the Nasdaq was UP 1.5%, to 2288.47.

Bonds ended the week well, with the headline numbers in the July jobs report attracting safe haven investors who sent prices up. Mortgage bonds did especially well, with the FNMA 30-year 4.0% bond we follow heading UP 34 basis points for the week, ending at $102.75. Freddie Mac’s weekly survey of conforming loans showed national averages for fixed-rate mortgages down for the seventh week in a row.

>> This Week’s Forecast

THE FED, THE INFLATION, THE CONSUMER…Tuesday is Fed day, as the nation’s central bank comes out of another meeting where they look at the economy and decide what to do about the cost of money. No one expects the Fed Funds Rate to budge from its current rock bottom level. But the FOMC policy statement will be carefully scrutinized to see if any changes in wording shed useful light on the state of the recovery. Friday’s CPI numbers look at consumer inflation, expected to stay tame. With prices in check, Friday’s July Retail Sales reports are expected to rebound from June, showing the consumer is indeed helping things along.

>> 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 9 – August 13

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months Virtually no economists think the Fed will touch rates at Tuesday’s meeting, nor for the next two confabs after that. We will all be carefully listening to the FOMC policy statement for any insight on what might quicken the pace of the recovery and add jobs. 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:

For the week of June 28, 2010 – Vol. 8, Issue 26

INFO THAT HITS US WHERE WE LIVE Last week May existing home sales came in UP 19.2% over a year ago. Nonetheless, after beating expectations three months in a row, monthly sales fell short of the gain expected, off 2.2%. But the months’ supply of existing homes dropped from 8.4 to 8.3 months, as inventory slid to 3.89 million homes. And the median price is rebounding, UP 2.7% over last year. Finally, the April FHFA home price index was UP 0.8% for homes financed with conforming mortgages.

May existing home sales came off as disappointing because experts predicted a sales gain after the homebuyer tax credit ended. We saw spikes in February, March and April in pending home sales, which track signed contracts. Clearly many of these have not yet closed so they can be counted as sales. Analysts now expect these gains to show up in June. There’s no question the tax credit encouraged people to buy earlier than they would have. But, overall, home prices, Austin mortgage rates and inventory declines continue to be encouraging signs in the U.S. housing market.

May new home sales fared worse, dropping 32.7%, to a 300,000 annual rate. This was also seen as fallout from the end of the homebuyer tax credit. But April’s 446,000 annual rate indicates the real trend is probably in between, around 375,000, which some analysts feel is enough for builders to move the homes they’re starting. Builders can also take consolation in the fact that the new homes inventory is at 213,000, its lowest level in forty years.

>> Review of Last Week

ONE OUT OF THREE… Stocks suffered their first off week in three, mostly because investors chose to fret over economic data, Fed speak that didn’t meet their expectations and new banking regulations coming out of Washington. In the end, the financial legislation that got through Congress was less harsh than anticipated, which lifted bank stocks and the whole tone of Friday’s trading session, although all three stock market indexes ended down for the week.

But on the economic front, investors wouldn’t budge from their worries. May’s existing and new home sales didn’t meet forecasts, so the positive data in those reports was ignored. Similarly, after the FOMC meeting, Wall Street focused on the changes to the Fed’s policy statement that sounded less upbeat. Example: the economic recovery is now “proceeding” instead of “continued to strengthen.” Investors skipped over the good news the Fed will continue to keep the funds rate at 0%–0.25% for an “extended period.”

And there was other good news. The mid-Atlantic region’s Richmond Fed index was +23 for June, showing rapid growth in manufacturing. Shipments of core capital goods are UP 16.5% annually in the last three months, one of the biggest gains in 20 years! And capital goods orders are ahead of shipments for the third month in a row. Finally, real Q1 GDP was revised down to 2.7% annual growth, but this is still a very good number in light of the economically damaging record East Coast snow storms. Q1 corporate profits were UP 36% annually, which should spike both investment and payrolls going forward.

For the week, the Dow ended down 2.9%, to 10143.81; the S&P 500 was down 3.7%, to 1076.76; and the Nasdaq was also down 3.7%, to 2223.48.

Some of the week’s economic data certainly helped bonds, as did the sliding stocks that sent investors scurrying for safe havens to park their money. This benefited bond prices, so the FNMA 30-year 4.0% bond we now follow did well, UP nicely for the week, ending at $100.81. It’s no surprise that Freddie Mac’s weekly survey reported national average mortgage rates holding near record low levels.

>> This Week’s Forecast

INFLATION, PENDING HOME SALES, JOBS… We’ll have the important PCE inflation reading today, which is expected to remain benign. The week also features the Chicago PMI and the ISM Manufacturing Index, which should continue to show recovery in manufacturing. Thursday gives us May Pending Home Sales, which are expected to decline after the end of the homebuyer tax credit. The big news will be Friday’s June Employment Report. Experts see some job losses after last month’s gains, but the unemployment rate should remain under 10%. We’ll then have our long holiday weekend — Happy Fourth of July!

>> 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 June 28 – July 2

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months The Fed made it clear last week they will most likely keep rates low for the remainder of the year. Most economists believe that will be the case. 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: