New Home Sales were also released, up 6.6% to an annual rate of 307K units.  Good news for builders yet they will continue to look over their shoulder at the massive amount of foreclosed properties still coming to market.  The market continues to slip day after day.  Reasons behind the move seem to be “from 10,000 feet”, talking about how quantitative easing will raise inflation expectations, etc. etc.  Seems a stretch to me.

Overall, we do not see that the fundamental economic picture has changes much at all.   Technically, we are in an intermediate term bear market correction.  One that could push the market to yields on the 10 year of 2.75%/2.78% (currently 2.70%).  If correct, we should see good support from the 62% Fibonacci level (comes in around 2.75%).

Caution is advised to Austin mortgage borrowers!

Meanwhile, New Home Sales were unchanged in August, hovering at the lowest level since December 2003.  Stocks took the ex-transportation number (Plus 2.0%), coupled it with a statement by hedge fund manager Tepper that he is a “buyer” (stocks), and rallied out of the gate.  Bonds, notes, and mortgage backs ran for cover, falling 1 point in the 30 year bond.

Currently, the 10 year note is off 12/32’s with mortgage backs following suit, now down 8/32’s.  Overall, volume is light with money coming out of fixed income and being redeployed into stocks.  Mr. Tepper is said to be one of the top hedge fund managers on the street.  His returns, along with a number of hedge firms have been anemic this year (1.0% to 1.50%).  This is not a good way to keep your clients.  Not saying that he’s in buying stocks and trying to talk the market up but……….

Hard to see anything substantial in gains on the Dow/Naz until we put people back to work.  By the same token, it’s hard to see Austin mortgage interest rates move much higher given the many head winds the economy is faced with.

The next step for the market is to consolidate and find “value”, a level where buyers and sellers are neutral.  Given the longer term neutral/bullish bias, the most we should see the market sell off to is 125 03 in 10 year futures.  Austin mortgage borrowers are encouraged to take advantage of any rallies.  Too many cross currents leads to high levels of volatility.  Play it safe and take advantage of your opportunities!

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:

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.

FHFA (home price index) was plus .8% in April, reversing a two month slide.  On balance, housing looks to be stable but guarded.  Pimco strategist, Richard Clarida is on the wire talking about the Fed changing their language in tomorrow’s policy statement.  The change is regarding the economy as “sluggish” from stable, noting that since April, world and US economies have softened.  We have treasury paper coming to auction as well.  2’s today, 5’s tomorrow, and the 7 year note on Thursday.  Shouldn’t be a problem here.

We also got a peek at early predictions of month end extension needs.  Those are for money funds, etc. that much adjust to meet the Barclay’s index.  Extension needs for June look to be a bit larger than normal with the treasury complex needing to add .6 years and MBS .10 years.  In a nut shell, this will create buying in fixed income, adding support to Austin mortgage pricing.  Technically, the bias is neutral looking to buy weakness and sell strength.  Nothing new here as this has been the trend for the past several sessions.

Nothing huge here as the Dow is plus 107, 10 year note down 20/32’s (yield 3.29%), and mortgage backs off 7/32’s.  Potentially, this is big news but then again it is China.  Let’s just say traders have “trust” issues.  The week ahead will fire up tomorrow with Existing Home Sales, FHFA House Price Index, and day one of the FOMC meeting.  Wednesday, the FOMC concludes with any change in Fed Funds rate/monetary policy due at 1:15 pm cst.

New Home Sales will also be out in the morning.  Thursday’s data will release Durable Goods, Weekly Unemployment Claims, and the Kansas City Fed Survey.  We’ll end the week with final GDP Q1 and the Michigan Sentiment Survey.  This week’s data will be important as the focus will be on Housing, Unemployment, and the Fed.  All three seem to be the biggest drag on the economy.

In the “for what it’s worth” department, top analyst Meredith Whitney has a bearish call on equities (stocks) and expects the U.S. economy to have a rough second half.  If true, expect Austin mortgage rates to stay low into 2011. Technically, I completed my chart work on the cocktail napkin Friday night.  Bears have the advantage but only slightly, leading us to believe we’re trapped in a triangle pattern range trade.  Let’s call the market neutral and have great week.

For the week of June 7, 2010 – Vol. 8, Issue 23

INFO THAT HITS US WHERE WE LIVE The National Association of Realtors (NAR) reported the Pending  Homes Sales index rose in April for the third month in a row, registering a 6% increase over the upwardly revised March figure. This index measures the number of homebuyers signing purchase contracts. April Pending Home Sales hit their highest level since October 2009 and are UP 22.4% year-over-year. Like Existing and New Home Sales the week before, a good part of the gain was put to the tax credit expiration that required a signed contract by April 30. The NAR also forecast new home sales will be UP 18.5% for the year.

April construction increased 2.7%, its fastest gain in a decade. This includes commercial, government, and home construction. Home improvements led the residential gain, but new single-family homes were up as well, showing increased confidence among homebuilders.

>> Review of Last Week

SUMMER SLUMP… The Memorial Day-shortened trading week ended with a slump in stocks on Friday. This was driven by concerns that Hungary may default on its debt, followed by the May Employment Report, whose payroll numbers were lower than expected and had investors selling off big time. The Dow lost over 300 points on the day and all three major indexes were down for the week.

The facts did not actually justify such extreme investor reaction. No U.S. bank has major exposure to European debt and Europe accounts for only a minor percentage of our export business. Yes, the employment report showed a headline payroll number below expectations, with the private sector adding just 41,000 jobs. But the average workweek went from 34.1 to 34.2 hours. If hours per worker had remained the same, that extra labor demand would have created 315,000 more private sector jobs. For the moment, employers are clearly preferring to meet rising labor needs with more hours for existing workers, rather than new hires. Ignored in all the negative hoopla was the DROP in the unemployment rate to 9.7%, which beat expectations.

Before Friday’s market slide, other economic data had sent stock prices up. We had the great Pending Home Sales gain covered above. The ISM Manufacturing index continued to show strength in that sector, hitting levels not seen since 2004, while the ISM Services index showed non-manufacturing business at its highest level in almost four years. And final Q1 productivity came in at a 2.8% annual growth rate, UP 6.1% from a year ago.

For the week, the Dow ended down 2.0%, to 9931.97; the S&P 500 was down 2.3%, to 1064.88; and the Nasdaq was down 1.7%, to 2219.17.

Bonds blasted skyward on Friday fueled by the goulash coming out of Hungary, then boosted further by the lower than expected payroll numbers. The flight to safety benefited the FNMA 30-year 4.5% bond we watch, which closed UP 66 basis points for the week, ending at $102.69. National average mortgage rates held at their historic levels for another week, according to Freddie Mac’s weekly survey.

>> This Week’s Forecast

CONSUMERS WEIGH IN… This is a fairly quiet week for economic data, but we’ll have a good look at the consumer’s participation in the recovery with Friday’s May Retail Sales. The June Michigan Consumer Sentiment index will follow. Expectations are for continued improvements in these numbers. Initial and Continuing Unemployment claims will also be watched closely given last week’s jobs report. Thursday’s April Trade Balance will show us the strength of U.S. business in the global economy.

>> 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 7 – June 11

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months With jobs still not enthusiastically joining the rest of the recovery, most economists now feel we’ll be in a low-rate environment for a considerable period of 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:

The big news in this week’s economic data came from the housing sector. March Existing Home Sales rose 7% from February, and existing home sales were 16% higher than one year ago. Inventories of unsold existing homes fell to an 8-month supply, from 8.5-months in February. March New Home Sales were even better, jumping 27% from February to the highest monthly rate since last July. This marked the largest single-month increase in new home sales since 1963. The chief economist of the National Association of Realtors (NAR) credited the homebuyer tax credit for the strong March housing data. Buyers must sign a contract by April 30 to take advantage of the tax credit, so the April data should benefit as well.

Friday morning, CNBC reported that support is growing among Fed officials to begin sales of mortgage-backed securities (MBS) from the Fed’s portfolio. In a program which ended March 31, the Fed purchased $1.25 trillion of MBS to help lower mortgage rates and boost the economy. According to CNBC, “at least” six members of the Fed’s policymaking committee support near-term MBS sales if the economy continues to improve. The selling could begin as soon as the third or fourth quarter of this year. Fed Chief Bernanke still views the likely time frame to begin MBS sales as next year, but his recent comments have indicated a willingness to keep more options open. With the next Fed meeting taking place on Wednesday, the 2:15 et release of its statement will take on added significance. If the Fed actually conveys an intention to begin to sell MBS soon, Austin mortgage rates would be likely to rise on the news.

In other news, Durable Goods, items which are supposed to last 3 years or more, fell 1.3% yet ex-transportation, the index was plus 2.8%.  Orders for transportation equipment fell 12.9%, dragging the overall index into the red.  New Home Sales were also released, up 26.9% to 411K annual units.  The print blew away economists estimates of plus 330K.  Every region of the country rebounded with the “South rising again”, up 43% month on month.  Although the numbers were great, they are coming off the worst month (February) in 22 years.  The gains also smell of the last mad rush for 8K in buyers credit money before we put that program to bed the end of next week.

Given the fundamentals of the economy, bond pricing is very expensive, meaning that if that market was not being influenced by outside forces (global debt crisis, etc.) Austin mortgage rates would simply move higher.  That’s why borrowers need to be careful as every day is a new day and expecting the unexpected is more common place than you think.  We tipped you off to the technical trade that was developing yesterday and our bearish expectations.  It was a text book classic double top, fuel injected 6 speed and Hemi powered, convertible top with navigation and a kicker sound system.  Sorry, I got carried away.  The pattern did play out and added to the bond bearish news of the day, having pinched mortgage pricing for another .25 point.  Currently, the 10 year note is off 11/32’s (yield 3.82%), MBS off 8/32’s, and stocks up 9 points on the Dow.

We still feel that the trade is range bound between 3.75% and 3.83% so given our digits, additional selling is starting to lose favor.  Short term momentum is over sold in both notes and bonds which should give us a little support as well.  Call the market neutral with a little recovery due as we move into the last week of the month.  We’ll try to wrap this up later today.

Greece is a helper on that front as well with more uncertainty, adding 35 bps to their yield (10 year debt) and then there’s China, tapping the brakes on real estate lending.  That sent the Shanghai index down 5% in early trading.  Stateside focus is clearly Goldman but also on 1^st quarter earnings.  Citi reported before the bell, actually making a profit of .14 cents a share.  At any rate, it’s a good thing for the tax payers since we own a big chunk of the company.

Leading Economic Indicators were also released, up 1.4%.  The print was .4% better than market expectations but in reality, the index is such a rear view mirror piece of data that most traders blink as it goes by.  Speaking of data, it’s a light week with the next release due for Thursday and Friday.  Existing Home Sales, New Home Sales, and Durable Goods Orders will be the headliners.

The tactical bias for Austin mortgage rates and pricing is to remain neutral, trading a range on the 10 year note between 3.75% and 3.82%.  Stocks want clarity on the Goldman/SEC issue which will lead bonds to react accordingly.  Our work on the 10 year note chart is providing neutral to bullish trend signals and overbought conditions at the same time.  Classic example of a mixed bag.

Currently, the 10 year note is off 3/32’s (yield 3.78%), mortgage backs off 3/32’s, and stocks off 8 points on the big board.