Mel's Blog

The first report of the week was the final revision to the 3rd Quarter GDP. It showed a downward revision to 2.2% form 2.8% that was announced last month. This means that the economy grew at a slower pace during the third quarter than previously thought. That can be considered good news for bonds and mortgage rates, but since this data is old at this point and we will get the initial reading of this quarter next month, its impact on trading and mortgage rates has been minimal. Had we seen this much of a variance in either the initial or first revision, mortgage rates likely would have moved lower as a result of the news.

November's Existing Home Sales report was released late this morning. The National Association of Realtors reported that home resales rose 7.4% last month, exceeding forecasts by a wide margin. This follows a 10% spike in October, indicating that the housing sector is stronger than many had thought. However, it is believed that the biggest force behind the sales is the first time homebuyer tax incentive. A one time credit such as that tends to temporarily boost home sales and is not a reliable indicator of underlying strength. In other words, where will sales be once the credit is no longer available? That remains to be seen, but stock traders are taking the news as positive, which has made bonds less attractive to investors.

Mel

This year the economy has performed beyond the wildest expectations of many economists. Who would have predicted that the Dow would be currently sitting well above 10,500 during its nadir of 6,500 during the Ides of March? One wonders if the market pundits paid a little heed to the soothsayer's warning to Julius Caesar, "Beware the Ides of March," that has forever imbued that date with a sense of foreboding. The turnaround (or maybe a semblance of it) has been quite impressive. Home sales rose by a stout 10.1 percent in November to a 6.54 million annualized rate of sale - easily the best pace in some time. With firming home prices and recovering retirement and personal wealth tied to stocks, many investors breathed a sigh of relief and more than a few million consumers are already reaching for their wallets and heading into the malls.

The stock market witnessed an upward move in a holiday-shortened week. All major indices ended in positive territory, gaining around 0.5 percent. The S&P 500 index rose 66.5 percent since hitting 12-year lows in March. The Dow Jones Industrial Average rose 53.66, to 10,520.10. The weak U.S. dollar was a major factor in terms of maintaining the index’s strong showing, as energy and material sectors were leading the stock markets. Also, a more positive employment report contributed to the increase in orders of durable goods for November, helping investors to be more optimistic for an improving U.S. economy.

In another sign of economic recovery, November wages increased by .3 percent, resulting in a jump of .4% and .5% in personal savings and spending, respectively. Savings remained steady at 4.7%. The employment report was like a Christmas carol to investor’s ears: Initial jobless claims surprised everyone, falling by 28,000, which the Labor Department describes as a part of "a long-term trend" of improvement.

In another move to boost the housing market amid rising rates, the U.S. Treasury removed the $400 billion cap from the troubled GSEs, Fannie Mae and Freddie Mac, allowing them to have enough buffer based on projected losses over the next three years to honor securities they sold to investors. Mortgage rates continued moving upwards during this past week after coming in lower in November; the Conforming Fixed 30-year rate topped out at around 5.2% while the Conforming Fixed 15-year rate was last seen at around 4.5%. Standard 5/1 ARM rates were hovering around 4.25%.

                Mel

Information provided by Amtrust Bank Capital Markets

Monday's bond market has opened down sharply following early stock gains that has shifted funds away from the bond market. The stock markets are rallying with the Dow up 85 points and the Nasdaq up 26 points. The bond market is currently down 66 Basis points, which will likely push this morning's mortgage rates higher.

There is no relevant economic news scheduled for release today. As expected, the stock markets are driving bond trading and this morning's mortgage pricing. The early interest in stocks has caused bond selling and moving funds into stocks where better returns are possible. The result is higher mortgage rates this morning.

This holiday-shortened trading week brings us the release of six monthly or quarterly economic reports. Only a couple of the reports being released are considered to be of high importance to the markets. With the Christmas holiday falling during the week we can expect very thin trading, meaning that we may see a larger reaction than normal to some news because there will be fewer traders working and less transactions being made. This will become more evident as the week progresses.

Tomorrow has two reports scheduled for release. The first is the final revision to the 3rd Quarter GDP. I don't think this data will have an impact on mortgage rates unless it varies greatly from its expected reading. Last month's first revision showed that the economy expanded at a 2.8% annual pace during the quarter and this month's revision is expected to show the same. A significant upward revision would be considered bad news for bonds, but since this data is quite aged at this point I don't think it will have much of an impact on mortgage rates tomorrow.

The second report of the day is November's Existing Home Sales repo rt. This release will come from the National Association of Realtors while Wednesday's New Home Sales data is a Commerce Department report. Both give us a measurement of housing sector strength and mortgage credit demand, however, neither are considered to be of high importance. And both of the reports are expected to show a small increase in sales. Weaker than expected readings would be considered positive for bonds and mortgage rates because they hint at a weakening housing market, but unless the actual reading varies greatly from forecasts the results will probably have little or no impact on mortgage rates.

Overall, I am expecting to see some movement in the markets and mortgage rates this week. The bond market will close early Thursday and will be closed all day Friday in observance of the Christmas Day holiday. This means that firms that trade in bonds will likely be keeping only a skeleton staff the latter part of the week and raises the possibility of a stronger reaction to surprises in the economic data than we normally would see.

          Mel

Wednesday's bond market has opened in positive territory after this morning's inflation data did not cause concern like yesterday's PPI release did. The stock markets are mixed at closing with the Dow down 11 points and the Nasdaq up 6 points. The bond market is currently up 16/32, which should improve mortgage rates.

This morning's major news came from the Labor Department who reported that November's Consumer Price Index (CPI) rose 0.4% and that the more important core data reading was unchanged from October's level. The overall reading matched forecasts but the core data fell short of the 0.2% that was expected. This means that inflation at the consumer level of the economy was not nearly as strong as feared after yesterday's Producer Price Index was posted. This is good news for the bond market and mortgage rates.

Today's second release was November's Housing Starts that gave us an indication of housing sector strength. It matched forecasts of an 8.9% rise in construction starts of new homes, but this data is the least important this week's reports. Its impact on this morning's bond trading and mortgage rates has been minimal.

Later today, the two-day FOMC meeting with adjourn. There is not much debate about what the Fed will do at this meeting with little chance of them raising key short-term interest rates. Therefore, the post meeting statement will likely be the sole source of a market reaction. This statement has the potential to have a significant influence on the markets and mortgage rates as investors look for any indication of what and when the Fed may do next. Generally speaking, the bond market would like to hear something that indicates the Fed will not be raising rates anytime soon.

Tomorrow morning does bring us the release of a moderately important when November's Leading Economic Indicators (LEI). This 10:00 AM release attempts to measure or predict economic activity over the next three to six months. It is expected to show a sizable increase in activity, meaning that it predicts any expanding economy over the next several months. This probably will not have much of an impact on bond prices or affect mortgage rates unless it exceeds current forecasts of a 0.7% increase from October's reading. The lower the reading, the better the news for bonds. If it shows a smaller increase, the bond market may move slightly higher, improving mortgage rates slightly.

          Mel

This week is fairly light in terms of the number of economic releases scheduled for release. There are only three on the agenda but one of them is considered to be very important and can heavily influence the markets and mortgage pricing. In addition, there are two Treasury auctions the middle part of the week that may hurt or help boost bond prices, depending on how strong of a demand there is for the sales. Since all of the relevant data is scheduled for release Thursday and Friday, the most movement in rates will likely be the middle or latter part of the week.

Fed Chairman Bernanke will be speaking to the Economic Club of Washington D.C. at noon tomorrow. This is not considered to be an important speech and likely will not influence mortgage rates. However, whenever he does speak publicly, the possibility does exist that his words could rattle or rally the markets. I am not concerned about this one and don't feel there should be much attention placed on it.

The two important Treasury auctions are the 10-year Note sale Wednesday and the 30-year Bond sale Thursday. Wednesday's auction is the more important of the two events and will likely influence mortgage rates more. Results of each sale will be posted at 1:00 PM ET. If they were met with a strong demand from investors, particularly international buyers, we should see afternoon strength in bonds and improvements to mortgage pricing those days.

                Mel

Friday's bond market has opened down sharply due to the results of this morning's Employment report. The stock markets are rallying around the news, pushing the Dow higher by 23 points while the Nasdaq has gained 21 points. The bond market is currently down 28/32, which should translate into an increase in this morning's mortgage rates.

The Labor Department gave us today's news that was so bad for bonds. They reported that the U.S. unemployment rate fell to 10.0% last month when it was expected to remain at 10.2%. They also announced that only 11,000 jobs were lost last month, falling well short of the 125,000 loss that was forecasted. In addition, today's report also revised October's job loss lower by 79,000 jobs. These were big numbers for the markets and indicate that the employment sector was not nearly as weak as many had thought. That is bad news for the bond market and mortgage rates because a strengthening labor market means a broader economic recovery is more likely.

In a small bit of good news, the report showed that average hourly earnings rose only 0.1% last month when it was expected to show a 0.2% increase. This means that earnings paid to workers did not rise as much as thought, which is good news for bonds because it eases wage-inflation concerns. However, this is the least important of the three major readings in the data and had little impact on this morning's bond selling.

Also posted this morning was October's Factory Orders report. It also revealed a stronger than expected reading for October and revised September's orders much higher than previously announced. The 0.6% increase was well above forecasts for October, indicating that the manufacturing sector may be gaining steam. While this data can be considered negative for bonds and mortgage pricing, it is not nearly important as the monthly Employment report and has had little influence on this morning's mortgage rates.

          Mel

Thursday's bond market has opened in negative territory following the release of unfavorable economic news. The stock markets are down with the Dow down 87 points and the Nasdaq up 12 points. The bond market is currently down 25/32, which will likely push this morning's mortgage rates higher.

The 3rd Quarter Productivity revision gave us a lower level of productivity than previously thought and fell short of forecasts. The 8.1% annual rate of worker productivity growth can be considered negative new for bonds because the preliminary estimate stood at 9.5% and forecasts for today's revision were 8.5%. That is still a healthy rate of productivity, but the fact that it fell short of expectations means it is bad news for bonds.

The Labor Department also gave us news that was not so good for bonds and mortgage rates. They reported that 457,000 new claims for unemployment benefits were filed last week. This was a lower total than the 480,000 that was expected and their lowest total since September of last year, meaning the employment situation may be stronger than thought. However, this data usually does not carry too much weight because it tracks only a single week's worth of new claims. Tomorrow's monthly report is a different story though.

Also worth noting is today's Senate confirmation hearing for Fed Chairman Bernanke. I don't think anything said during today's hearing will significantly affect the markets or mortgage rate. He has stated that the economy is coming out of the recession but that there is still more work to be done. Despite some early barbs in the hearing, there is little doubt that he will be confirmed for another term four-year term.

We will here again from the Labor Department tomorrow morning when they post November's Employment report. This is arguably the most important monthly report we se e. It is comprised of many statistics and readings, but the most important ones are the unemployment rate, the number of news jobs added or lost during the month and average hourly earnings. Current forecasts call for no change in the unemployment rate of 10.2%, payrolls down approximately 125,000 and an increase of 0.2% in average earnings. An ideal scenario for mortgage shoppers would be a higher unemployment rate than 10.2%, a larger decline in jobs and no change in the earnings reading.

Also scheduled for release tomorrow is the October's Factory Orders report. This data is similar to last week's Durable Goods Orders release by giving us a measurement of manufacturing sector strength, except this one includes orders for both durable and non-durable goods. This data usually isn't a major influence on bond trading, but there is little chance of it impacting mortgage rates this tomorrow because the Employment report is an extremely important report. Analysts are expecting to see little change in new orders from September to October.

Mel