Then came Ben, giving a speech at the Kansas Fed meeting in Jackson Hole Wyoming.  Stock traders were looking for a policy statement change.  Don’t know why as it wasn’t the right place or time.  What they got was a 17 page speech of old news.  Statements about battling deflation, low mortgage interest rates for and extended period of time, and using every tool if the economy deteriorates further is all they got.  Consequence, stocks tank and bonds rally.

Trouble with that market move is that it didn’t last long.  Once again, value buyers emerged in stocks, taking the Dow up over 100 points as we speak.  Treasuries and mortgage backs have taken a turn for the nurse, down 31/32’s on the 10 year note while current coupon MBS are off 12 to 16/32’s.  Whether this is mortgage bankers unloading August originations or just fixed income traders taking profits, no one knows.  We do know that and end of day close at higher yields (current pricing) will neutralize all bullish trend intensity signals on all time frames (60 minutes through Weekly).

We see this as an early warning sign that risk reward is not in your favor, Austin mortgage borrowers.  Overall sentiment and economic fundamentals will continue to support a low interest rate environment but not without corrections and volatile conditions.  Technically, the price action looks like a topping formation so be very careful out there.  Use the live dog instead of the dead lion school of deciding when to lock in your Austin mortgage rate.  It makes for a better night’s sleep!

Stocks visiting good support and bouncing have added pressure to the fixed income complex as well.  Bigger picture does not support a move to higher Austin interest rates, just one that adjusts value to a more neutral level.  Careful out there as volatility is high and nerves are frayed.  Watch the 30 year bond auction today (12:00 cst).  Participation will be key to near term interest rate direction.  We’ll report the tale of the tape once it’s out.  Meanwhile, keep both hands on the wheel, Austin borrowers!

CPI, inflation at the consumer level, rose a meager .1% while the core (ex-food and energy) remained unchanged. Owner’s equivalent rent (.25% of the index) helped the core index while a drop in transportation costs (-.1%) helped the overall index.  The report was a good one, telling us that there is little to no inflation in the pipeline.  Retail Sales were also released, up a better than expected 1.6% with the ex-autos component  up .6%.  The breakdown was interesting as retail stores increased sales (primarily women’s and teen apparel) yet electronic sales fell 1.3%.  Sales of food and beverages rose .2% and as I mentioned, clothing sales jumped 2.3%.

Year on year, total retail sales are up 7.6% which looks good on the surface but digging into the details, there are concerns. One is that the majority of sales involve purchases of less than $500.00.  Probably pent up demand as sales, especially fashion have not been great since 2007.  The other question is how sustainable is this pace given our soft employment picture.

Mortgage applications for last week were on the slide as well, down 9.6% with both refi’s and purchase applications off an equal amount. A spike in interest rates combined with an under employed borrower will continue to be a challenge.  The good news here is that Austin interest rates will stay low until the recovery brings housing into the mix.  At that time, Austin mortgage rates will go up a bit but no one will care as the public will feel better about the future and homes for sale will have 3 contracts to present the first week they are on the market.  Get ready, it will happen.

As far as the market is concerned, stocks are better (up 50 on the big board), the 10 year note is off 6/32’s (yield 3.83%), and mortgage backs are off the same amount (6/32’s). Buyers have not been able to maintain overnight gains which is consistent with a trendless market.  As we may see more range trading ahead, the overall chart picture has improved on both the market profile and slow stochastics metrics.  The improvement we see in a number of studies will keep us in the neutral/bullish camp for the time being.

Looking at last week’s rally, most of the trade was on short covering which means that traders were not initiating new long positions (expecting the market to continue to rally).  We buy that argument and if correct, we would suggest that you “buy the rumor, sell the news”.  In English, this means that mortgage pricing should remain relatively stable for most of the week and then worsen post Unemployment Report data on Friday.  To be honest, the market is so volatile that any headline seems to lead us up or down by the nose.

Earlier today, Personal Income rose .1% while Spending rose .5%.  PI came in on the low side of estimates and PS was right on the screws.  Construction Spending was also on the docket, down .5%, in line with economist’s expectations.  Private and Public construction both fell while the Federal Government’s construction rose to an all time high of 30.7 billion.  Go figure.

Last up was the ISM report (Institute of Supply Management Manufacturing Index) which fell 1.9 points to 56.5.  The decline came from a drop in new orders and production.  Given the data, we would expect to see at least 15K in manufacturing layoffs in this Friday’s report.  Since this is the first day of March, it also means it’s the last month for the Fed to buy mortgage backed securities. The removal of this stimulus brings the question of “how much of the news is priced in”.  Fed Vice Chairman Donald Kohn said that any increase in rates is likely to be “modest” but added “that judgment is subject to considerable uncertainty”.  Thanks for the advice!

To be sure, we would advise a defensive bias for those clients locking an interest rate this month.  While a number of guru’s are talking about mortgage rates (by year end) being 5.75% to 6.25%, this month will be more critical that most. Someone will need to pick up where the Fed leaves off so be cautious.

Technically, the stall below the tough resistance level tested last week has created a neutral, inside day.  Important point here is that it is not a reversal, only a stall which is corrective in nature.  To get this market moving to the upside (rally) again, the 10 year note will need to close at or below 3.59%.  Currently, we are trading a 3.62% yield, off 8/32’s on the day.  Mortgage backs are off 5/32’s and stocks are plus 81 on the big board.

Traders were expecting the same old, same old and got sideswiped by the hawkish detail I just mentioned.  This one is a tough call, trying to figure out if it’s the beginning of a tightening cycle or the Fed’s way of testing the market towards removal of accommodation (stopping the Treasury/MBS purchase program, etc.)  With so many cross currents it’s tough to remember who’s on first.

I can tell you from a technical stand point that the market put in an outside day down, including a test of the best levels we’ve seen since November and then failing.  The rejection from the top and outside day down are strong indicators of a market top in the making.  This does not mean that the consolidation we expect will be huge, just that it has a very high probability.  Given the fact that the 8 day moving average held, sellers will need to trade the market above 3.65% for a sustained period of time to do any real damage.

For now, the brackets to watch are 3.65% to 3.57% (we are set to close right at 3.65%).  Anything outside these parameters to the high side is bearish for interest rates and below 3.57% is bullish.  Given the uncertainties on so many fronts, you should expect the unexpected right along with volatile trading and mortgage pricing.  Hopefully, the State of the Union Speech will give us a little help.

November Housing Starts were also on the calendar, rising 8.9% to 574K units.  Although the print was up from last month, it came in below economists’ estimates of 580K units.  Supply of existing homes fell to 7 months, a nice improvement from the peak of 11.3 months in 2008.  Overall, we feel that the housing market is stabilizing but will need to content with another wave of foreclosures as homeowners remain underwater and the loan modification programs to date have been a bust.

All eyes have now turned to the FOMC and any change in interest rates/policy statement.  Given Global uncertainty (think Dubai, Spain, Greece, etc.) and year end constraints, we see today’s FOMC as a carbon copy of last month’s release.  Technically, the combination of oversold conditions and good support at the 3.60% yield level has given life to our bond market.  Currently, the 10 year note is up 13/32’s (yield 3.55%), mortgage backs up 6/32’s, and stocks up 25 points on the big board.  Technically, the market is trading in a counter trend move (rally) within the larger bearish trend.  Good resistance remains overhead at the 40 day moving average (3.49% yield).  The limited range is forming a neutral, inside day with the bears still in control.  As much as we want to like this market, it is nothing more than putting “lipstick on a pig.”  Keep your defense on the field.

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The MBA Purchase Index reflects the latter with new applications off 4.7% even though interest rates are low.  Reinforces our belief that the Fed will continue to buy mortgage backed securities, helping to keep mortgage rates low into the new year.  Market reaction to all of the above has been a bit choppy.  Mortgage backs were down as much as 10/32’s this morning, in line with fast money selling of treasuries.  We have started to recover but are still off 6/32’s.  Stocks opened slightly lower, then accelerated to the downside but have now cut their losses in half (Dow down 37 points).  The dollar index is once again on the slide, falling below 75 after yesterday’s brief, dead cat bounce ( no offence cat lovers).  The slide has everything to do with the Obama Administration trying to convince the Chinese to let the Yuan appreciate, helping American exports.  Fat chance given their (China’s) treasury and real estate holdings in the U.S.

Technically speaking, the market continues to rattle around within the confines of a bullish upward sloping trend channel.  Most oscillators, including trend intensity are giving bullish reading yet the chart fails to make new highs.  This is somewhat of a concern so we need to be careful.  That said, the onus is still on the bears to take control which just hasn’t happened.  We like the market but want to see a new high (lower yield on the 10 year) by week’s end.