Mortgage Bonds are trading higher within a volatile, wide trading range. Bonds have been down as much as -12bp and up as much as +22bp so far this morning. This after a Jobs Report that contained huge revisions, weak job creations, and an improvement in the rate of unemployment.
As we have become accustomed to, the initial headline numbers reported for job creations have almost been reduced to just a guess. And this month's report showed a net loss of 17,000 jobs...instead of the expected gain of 70,000. This number is sure to fan the flames of "conspiracy theorists", who firmly believe the Fed had access to this lousy number, when they cut the Fed Funds Rate by 50bp two days ago. The job loss during January represents the first time a negative number has been posted since August of 2003. But don't be surprised if this changes over the next two months with revisions. There were some enormous revisions to previous month's readings - November was lowered to 60,000 jobs from a prior reading of 115,000 and December, which initially showed 18,000 new jobs was raised to 82,000. All in all, these big revisions netted an additional 11,000 new Jobs during the two months.
Adding to the confusion was a surprising drop in the Unemployment Rate, edging back down to 4.9% - which seems to contradict what you'd expect from such a lousy Report, that shows more jobs lost than created! Average Hourly Earnings crept higher by $0.04 or 0.2% to $17.75 matching expectations, and earnings overall gained 3.7% during the course of 2007.
Stocks have also been all over the place so far this morning, led by headlines that Microsoft is making a bid to acquire Yahoo. Currently, Bond prices are pressed up against the difficult to beat resistance level at the Upper Trend Line, and I'll be watching carefully, but Float on today's modest gains for now.
It's Leap Day...and Bonds are leaping higher. Ever since bouncing off the 200-day Moving Average on Tuesday, Mortgage Bonds have leaped an amazing 216bp higher! Prices have just edged above a dual layer of overhead resistance provided by the 25 and 50-day Moving Averages, so we will have some caution with my Floating stance as prices battle along this ceiling. Much will depend on how stocks fare today, with them already down significantly in the early going. The Core Personal Consumption Expenditure Index (PCE), the Fed's favored gauge of consumer inflation, was reported at 0.3% for the month of January. This matched expectations and left the closely watched year over year Core rate at 2.2%, which is outside of the Fed's desired target zone for Core Inflation of 1- 2% - but not crazy. Bonds reacted little to the report, as "dovish" comments by Fed Chair Bernanke over the past two days released the potential steam out of the report. Personal Income and Spending both matched expectations and offered no surprises. Again, the cuts and stumulus have yet to affect the current environment, so inflation may be a much more serious concern as the year goes on...and that will eventually hurt rates.The Chicago Purchasing Manager's Index was reported slightly below expectations and the University of Michigan Consumer Sentiment Index for February met expectations. The market reacted little to these reports.The Fed will be on parade today with several officials scheduled for appearances. This morning, Boston Fed President Eric Rosengren "colored glasses" and Fed Governor Frederic "Fast Freddy" Mishkin will speak. Later today, Atlanta Fed President Dennis "The Spider" Lockhart and St. Louis Fed President William "Everyone In The" Poole will talk. Question and answer sessions are expected to follow each appearance and the nature of their unscripted commentary during Q&A could sure influence the markets as we've seen in the past. After such a fast rally higher in prices and with the Bond testing a dual layer of resistance at the 25 and 50-day Moving Averages, I will continue to Float, but extra cautiously, as we watch how Bonds react to this ceiling.
Mortgage Bonds are going crazy again this morning. After opening 12bp lower, the Bond has exploded higher on a miserable Initial Jobless Claims reading. But we are watching this closely, as prices are already 16bp off their best levels.
The 200-day MA has helped us call the exact bottom of the recent market, and since changing to a Floating stance just 3 days ago, prices have gained an amazing 170bp. It's time for you to get back on the phone and get those refi's in...especially those who missed the short window of opportunity last month. Remind them of the volatility and show them the tough ceiling of resistance that we are approaching at the 50 and 25-day MA's to get them engaged. Additionally, there is another Fed meeting less than 2 weeks away, which could likely send bonds tanking again.
Initial Jobless Claims were reported at 373,000, which was much worse than expectations of 350,000. This brought the four-week moving average of Initial Jobless Claims to 360,500, which is just below levels seen during the last two recessions of about 362,000.
The Preliminary reading on Fourth Quarter GDP was reported slightly below expectations at 0.6%. The GDP Report shows the economy slowed considerably during the fourth quarter of 2007, something many of us already knew but this news makes it official and this has hurt stocks and have added a boost to Bonds.
Today is Day Two of the Ben Bernanke Show as the Fed Chairman testifies before the Senate Banking Committee at 10am ET. Although the session will largely be a rehash of yesterday’s testimony there could be different questions asked by Senators and answers given by Bernanke that could have an effect on the markets. Yesterday, I felt the Bond would like gentle Ben's testimony as we anticipated him justifying his aggressive cuts, which seemingly have little regard for inflation. And the Gentle One delivered...his dovish remarks bolstered Bonds higher. But it remains to be seen if he will be as gentle today.
As I discussed previously, OFHEO announced yesterday that it lifted the capital requirement penalities to the GSEs. The penalty of a 30% required cushion, was imposed for accounting irregularities. GSE's can lend or invest a multiple of their capital worth. But the 30% penalty reduced the amounts that both Fannie and Freddie were able to leverage. In both cases, these entities had more than enough capital as not to be affected by the penalty. But once the GSE's took their write downs from the credit mess, their capital was reduced, which reduced their ability to lend or invest. And because of the added 30% penalty, the GSE's were approaching their limits on the ability to lend or invest. This forced the GSE's to find ways to raise capital, like cutting their dividends and issuing more stock to sell. The dilution of shares and loss of dividend sent their respective prices crashing lower. None of this would have happened if OFHEO would have removed the 30% penalty just a couple of months earlier. The result of the move by OFHEO today will not impact our industry, but if the GSE's decide to buy back shares, they could see a move higher in stock price.
And taking the mic in less than an hour, will be President Bush, talking about Housing. We don't think the markets will react much to this, but then again, anything can happen...and happen fast in this highly charged, volatile market. Also, at 1:00pm ET, the US Treasury will auction $16 Billion in Five-year Notes. This additional Bond supply could put a damper on the overall Bond market later today.
Mortgage Bonds muscled through the 100-day MA ceiling, like a fish in hot water. But as mentioned above, the dual layered ceiling lurks about 50bp above present levels. I am floating for now with a finger on the trigger in case things turn sour.
Mortgage Bonds popped a bit higher on a weaker than expected Durable Goods Report for January. The typically volatile indicator showed a -5.3% reading, below expectations of -4.0%. Adding further weakness was a downward revision to the prior month's reading from 5.2% to 4.4%.
New Home Sales will be reported at 10am ET and it could possibly be a market mover. However, the financial markets are now bracing themselves for Fed Chairman Ben Bernanke, who will deliver his semi-annual monetary policy testimony before Congress. Bernanke will speak to the House Financial Services Committee at 10:00am ET and before the Senate at the same time tomorrow. All eyes and ears will be on Mr. Bernanke as he discusses the economy, inflation, and a plunging US Dollar that has just set record lows against the Euro and other rival currencies. A weaker Dollar results in higher commodity prices that could eventually lead to higher inflation.
Big Ben may attempt to paint a bit of a rosy picture in order to justify the barrage of Fed cuts we have seen of late. As you know, bond prices have reacted negatively to the cuts as bond investors fear the inflation that will erode the fixed return they receive, due to the stimulated economy from the cuts. Remember that it often takes 6 - 9 months for a Fed action to filter its way through the markets and have an effect on economic conditions. The first in the latest series of cuts was only 5 months ago, so we may have yet to see the impact of any of the 225bp worth of cuts. Additionally, the President's stimulus package will add to the mix.
Speaking of inflation, the Wall Street Journal has a headline today saying that inflation could be a bigger problem than many think.
Technically, Mortgage Bonds are looking a little prettier after successfully bouncing higher off of the 200-day Moving Average yesterday. But the positive signs could sour quickly should Bernanke surprise the markets, although as we mentioned earlier - he may be more dovish in his comments. For now we will continue to float and see if Big Ben does indeed help prices improve - but we will be ready to lock in this rapidly changing, volatile environment.
Mortgage Bond prices are modestly lower, but have shown some positive signs, as they have bounced off the 200-day Moving Average this morning. A look at the chart shows how this pivotal marker has been tested a few times lately and prices have managed to hold themselves above it. So far today, the Bond has dropped down to touch exactly on the 200-day MA before bouncing higher.
The Overall Producer Price Index (PPI), a measure of inflation at the wholesale or producer level, swelled by 1.0% during January, which was more than double expectations of 0.4%. This hot reading left year over year Overall PPI at a smoking 7.4%, which is the fastest rate of year over year wholesale inflation since 1981. Meanwhile, the Core PPI, which excludes energy and food prices, also surged by twice expectations to 0.4%, bringing the year over year Core PPI rate to 2.3%. The steaming PPI data does not bode well for this Friday's Core Personal Consumption Expenditure (PCE) report, and also may put further pressure on the Fed as they try to stimulate the economy in an effort to prevent a deep recession without simultaneously fueling inflation. But PPI does not always translate to higher consumer prices because the additional cost can be taken out of profit margins. But with such a beefy rate of increase, it is likely that some of these costs will wind up being passed on to the consumer, causing higher levels of inflation.
Consumer Confidence was reported at 75.0, which was much lower than expectations of 82.0. This report is in line with recent economic reports, which suggest the economy has indeed slowed some.
At 12:15pm ET, Federal Reserve Governor and voting FOMC member Donald "I Scream" Kohn will speak on the topic of "US Economy and Monetary Policy". The market has been reacting to Fed speak of late, so stay tuned.
Mortgage Bonds are trading at an important juncture. Should prices move convincingly below the 200-day MA, it could signal a trend to higher rates ahead. However, should prices make a confident bounce higher, the Bond may regain some of its recent losses. I will cautiously float and give the Bond a chance to bounce off of the 200-day MA.
Mortgage Bonds are drifting lower after failing to break above resistance at the 100-day Moving Average late last week. The high volatility continues and the recent sharp drop illustrates why it is prudent to be overly cautious, which means sometimes sacrificing small potential upside gains to protect against the large losses that others have been subject to.
Existing Home Sales for January is the only economic report set for release today. The market is expecting a reading of 4.80 Million, down slightly from last December’s sales of 4.89 Million. The report could shake the markets if it wildly misses expectations.
Some Fed speak today as both Fed Governor and FOMC voting members Randall "The Wolf" Kroszner and Frederic "Fast Freddy" Mishkin talk later today. Mr. Mishkin's speech, at 3:30pm ET, will likely catch the eyes and ears of the market as the topic is "Stabilizing Inflation". The market has reacted rather negatively to Richard "Loose Lips" Fisher's remarks on inflation as of late, so we will be watching for a potential market reaction later today.
The Bond is trading in a wide 115bp range between a ceiling of resistance at the 100-day MA and a floor of support at the 200-day MA. It appears as though prices are destined to retest support at the 200-day MA, presently 66bp beneath present levels.
The battle at the 100-day Moving Average resistance level continues. Yesterday, the Bond soared above this ceiling early in the day only to be pushed lower to close beneath this lid. And this morning, prices were trading a whopping 28bp higher before the Bond once again retreated back below this strong ceiling. This type of trading action tells us the 100-day MA is a strong resistance level and may prevent the Bond from improving much further.
There are no economic reports scheduled for release today, but hold onto your hat, because at 1:30pm ET today, Dallas Fed President and voting Fed member Richard “Loose Lips” Fisher is scheduled to talk. You may recall that it was Fisher's concerning inflation comments back on February 7th which completely shook the Bond market and ignited a multi-week sell off in Bond prices. On a day with no news, should he uncontrollably blurt out any more strong words on inflation, the market may move more sharply than usual.
Yesterday's alert avoided some midday lender re-pricings and worse pricing this morning, but on new transactions, we can carefully float and see if the Bond can break above resistance at the 100-day MA. I can't overemphasize how volatile and quickly prices have been moving, so keep a finger near the lock trigger. Should prices be forced lower, the next clear floor of support lies at the 200-day MA, presently a big 118bp beneath current levels.
In yesterday's update we felt that an important bottom was forming and it sure appears as if this is taking place. Prices are up again today on the heels of yesterday's dramatic 100bp reversal and upward bounce off of the 200-day Moving Average.
The Philadelphia Fed Manufacturing Index for February was reported at a dismal -24.0, which is well below expectations of -10.0. Although this is a regional report, it does track very well with the national numbers and suggests overall weakness.
The Index of Leading Economic Indicators (LEI) for January matched expectations by declining -0.1%. Weaker housing data and stock market performance led the LEI to its fourth consecutive monthly decline. The bond market continued to advance on the weaker economic news.
Initial Jobless Claims were reported at 349,000, which was slightly higher than expectations of 345,000. The more closely watched four week moving average climbed by 10,750 to 360,500. In each of the last two recessions, the four week moving average of Claims moved above 362,000, so this morning's report does suggest the economy is teetering on recession.
Technically, Mortgage Bonds appear to have made a bottom yesterday when prices briefly traded below important support at the 200-day MA and then rallied sharply higher. The big rebound higher has caused a Positive Stochastic Crossover, which is also a good sign for Bonds. I will continue to Float, but be mindful of the high volatility.
Mortgage Bonds are on another wild ride this morning, basking in the volatility. Prices started the day down 34bp, and crashed below the 200-day Moving Average floor...but the Bulls have since mustered up a very impressive 50bp reversal which has been aided by a weak Stock market, and Bonds are currently up 16bp on the day, regaining their footing back above the 200-day MA. This type of a move will need to be confirmed by the Bond holding its gains today and improving tomorrow, but it would signal a bottom and an end to the destructive path they've been on of late, which has wiped out a staggering 350bp since January 23rd.
Let's get to the news. The Consumer Price Index (CPI) for January was hotter than expected, with the overall rate up 0.4%, and the Core rate up 0.3%, marking the largest monthly gain since June 2006. The year-over-year Core CPI is now at an eyebrow raising 2.5%, significantly higher than the Fed's 2% upside tolerance level. A look back at our forecast for the year will show you that our biggest concern for 2008 was that inflation would become more of a problem than the markets and the Fed anticipate. It's early - but if we are right, this will be a nagging concern for the Bond markets that will add some buoyancy to rates throughout the year. The early reaction for Bonds was sharply lower, but much of this was priced in after yesterday's debacle.
At 2pm ET, the Minutes from the January 30th Fed meeting will be released. If you recall, the vote to cut by .50% was not unanimous, voted against by inflation hawk Dallas Fed President Richard “Loose Lips” Fisher - known for his uncontrollable outbursts and unbridled blurtings that often roil the markets. It will be interesting to read his comments, as well as those from other Fed officials, which could bring a market reaction later today.
In the housing sector, Housing Starts in January posted a gain of 0.8% for a seasonally adjusted annual rate of 1.012 million, which was in line with expectations and the highest Starts number since last November. Meanwhile, Building Permits continued their slide lower with a 3.0% decline to 1.048 million, their lowest pace since November 1991. Overall, the report suggests the housing market is attempting to further stabilize.
As mentioned earlier, Bond prices are groping for a bottom, and the formation of a Bullish Hammer pattern is a very positive signal. But remember, things can change very quickly in this highly volatile market.
After an extended weekend in observance of President’s Day, Bonds are being pressured lower right out of the gates this morning – and at the moment, have dipped just below important support at the 100-day Moving Average.
Although there are no economic reports being delivered today, several key pieces of news are pushing Stocks higher at the expense of Bonds. First, retail bellwether WalMart reported far better than expected sales and earnings for 4th Quarter 2007, and net sales actually hit an all-time record, breaking over $100 Billion. Additionally, breaking news from Cuba, as Fidel Castro is stepping down as President – a position he has held since 1959. While the communist country has not traded with the US in more than 40 years, it has been speculated that once Castro was no longer in office, trade relations could begin to thaw. Stocks moved higher on the morning’s news, pulling money out of Bonds and forcing prices lower.
And with the inflation measuring Consumer Price Index (CPI) due for release tomorrow at 8:30am ET, more volatility could be in store. While a tame read on inflation would likely help Bonds move higher, an ugly report showing higher levels of inflation would quickly force Bonds down towards the next floor of support at the 200-day Moving Average, which is a whopping 113bps below where Bonds stand at the moment.
For now – it’s all about the 100-day Moving Average, and if it will hold throughout the day. Although this morning’s damage has already been done, your pipeline should have been protected by our string of Lock Alerts, including last Thursday’s, when prices were 100bps higher than present levels. And while tomorrow’s CPI numbers will drive which way Bonds move next, remember those numbers come out at 8:30am ET, before the market opens and rate sheets are delivered. Your current pipeline should be locked and protected, but on brand new transactions, you will need to discuss the current volatile climate with those clients as you make decisions in advance of that report.
For the moment – I will Cautiously Float as we watch to see if the 100-day Moving Average can hold.
After opening the day higher, Mortgage Bonds have since reversed lower. There has been considerable technical damage done the past two sessions as prices have broken below both the 50-day Moving Average and Lower Trendline. There is a saying amongst Traders "don't try and catch a falling knife", and when prices fall sharply as we have seen the past couple of days, Traders may be very reluctant to step in and buy Bonds. Additionally, any little rallies like we saw early today may be an opportunity for Traders to sell Bonds and limit some of their losses.
The volatility in market has just been incredible and we don't see any end to it. Very often we see Bonds and Stocks trade in opposite directions. But yesterday both traded sharply lower because of Inflation, which both Stocks and Bonds hate. If you take a look at my forecast article, you can see how I believed "inflation is actually a much bigger problem than most out there realize" and how the "Fed is fighting inflation with one hand tied behind it's back". We are now seeing a Bond Market that has sobered up to the idea that Inflation is a very real threat and future Fed cuts could fan the inflationary flames higher. The media has not grabbed onto this as they are still talking about how mortgage rates have shot lower due to the Fed cuts, meanwhile we have been getting re-prices for the worse on a daily basis for the past couple of weeks.
The latest slide, known as the drop of the salami, began on Thursday February 7th, when Richard "Loose Lips" Fisher, uncontrollably spewed his concerns on how future Fed Cuts would "juice" inflation. Mortgage Bonds have lost 187bp since his tirade.
Also pressuring both Stocks and Bonds lower was news late yesterday that Moody's, a credit rating agency, downgraded FGIC, one of the largest bond insurers. This story is also a concern we outlined in our forecast as the downgrades of the Bond insurers also threaten the ratings of the Bonds they insure. If the added saftey from insurance on Bonds is in doubt, the yield typically increases to compensate investors for the additional risk.
Import and Export prices both jumped higher in January with food prices rising by 3.1% while oil prices surged by 5.5%. On a year-over-year basis, Import Prices rose 13.7%. Meanwhile, Export Prices increased by 1.2%, the largest increase since January 1989. The data suggests inflation is advancing with higher food and energy costs and this will be a concern for the bond market.
NY Empire State Index for February is showing contraction in manufacturing activity in the often volatile New York Region with a reading of -11.7. This is well below consensus estimates of +7.0. Levels below zero indicate negative growth while those above zero indicate expansion.
Industrial Production and Capacity Utilization for January were both reported in line with expectations and offered no surprise to the markets. However, the University of Michigan Consumer Sentiment Index for February was reported at 69.6, which was well below expectations of 76.5. This was the lowest reading in 16 years!!! Plus, the inflation outlook within the report jumped higher as consumers see and feel inflation on the rise. This report which showed slower growth and inflation concerns was bad for both Stocks and Bonds.
At 1:15pm ET, Fed Governor and voting FOMC member Fast Freddy Mishkin is scheduled to talk about the tools the Fed can use for responding to financial crisis. The bond market may respond to comments made during an expected audience question and answer session.
The Bond is now trading between resistance at the 50-day MA and support at the 100-day MA. After getting clobbered the past few days, prices may try to stabilize today in a shortened session. We will float with caution.
The Bond Market closes at 2pm ET today and will be closed on Monday in observance of Presidents Day. The next Daily Update will be posted next Tuesday.
Love is in the air...It's Valentine's Day. But Mortgage Bonds have been feeling pretty neglected lately, as prices have dropped by 175bp since January 22nd. And this morning's trading has been a very wild ride, after yesterday's 47 point drop. Prices actually opened higher this morning, then fell a whopping 60bp, but have since recovered most of their losses. The volatility continues with no end in sight.
Adding to the mix is testimony from Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson, which is just getting underway before the Senate Banking Committee. Will Big Ben and Hammerin' Hank send a message of love or will they raise concerns about inflation? Remember that last week, comments about inflation by Richard "Loose Lips" Fisher sent prices much lower. We will be watching it closely for you.
In this morning’s economic news, Initial Jobless Claims were reported at 348,000, which was slightly better than expectations. The more widely-watched four-week moving average of new claims rose by 12,000 to 347,250 claims. The data does suggest a softening in the labor market, however, the better than expected reading did apply selling pressure to Mortgage bonds.
If you take a look at the chart on the Bond page you can clearly see how Bond prices fell pretty sharply once they closed beneath the floor of support at the 25-day Moving Average. The Bond has now fallen below another important floor of support at the 50-day MA...a level it has not closed consistently below since last July. Should prices be unable to break back above the 50-day MA, that once solid floor of support will become a ceiling of resistance. Prices are, however, attempting to hold at support at the Lower Trendline after falling beneath this level earlier today.
Retail Sales were surprisingly good for January. Economists were looking for a reading of -0.3%, but the final number was +0.3%, far stronger than expectations. Auto sales, which account for 20% of the reading, increased unexpectedly after poor sales data from last month. After factoring out the effect of auto sales, Retail Sales (ex-auto) gained 0.3%, which matched expectations. Stocks moved higher on the news, while Bonds headed lower.
President Bush is expected to sign the highly anticipated stimulus package today. This means that HUD will have 30 days or less to come up with the median prices for areas throughout the country, which may then cause an increase to the conforming limit in those markets.
Mortgage Bonds continue to trend lower and appear poised to test support at the 50-day Moving Average, which presently lies around 30bp beneath present levels.
Mortgage bond prices are heading lower as stocks begin the day by trading higher. The bond market may be susceptible to further erosion if the stock market continues higher today.
One reason stocks are moving higher is Berkshire Hathaway, led by legendary billionaire investor Warren Buffett, who announced the company made an offer to reinsure $800 billion in municipal bonds backed by troubled bond insurers Ambac, FGIC, and MBIA.
On the Fed speaking calendar, San Francisco Fed President Janet Yellen will do some yellin’ of her own to address a local planning and urban research group in San Francisco, California at 11:05am ET. Unlike Richard “Loose Lips” Fisher, Yellen usually stays on topic. So we don’t expect much from her to roil the markets, although we will be on watch.
Technically, the mortgage bond market is stepping lower toward support at the 50-day MA located at $100.41. Prices are now about halfway between this level and overhead resistance provided by the 25-day MA at $101.17. I have a bias towards Locking, although there is no current rush to do so, as it appears prices will test the 50-day MA, about 34bp below present levels.
Mortgage Bond prices are slightly lower in the absence of any tradable economic news. While the 10-year Note appears to be soaring higher – don’t be fooled. Bonds are currently being supported by softer Stock prices.
As mentioned, there are no economic reports scheduled for release today and this week’s calendar features mostly mid-level economic reports with the exception of Wednesday’s potentially high-impact Retail Sales Report.
President Bush is set to sign the Economic Stimulus Plan on Wednesday. Bond prices are currently trading between the 50 and 25-day Moving Averages, and will likely take direction from Stocks throughout the day.
After a wild ride lower yesterday, Bonds are now working to regain some ground this morning. What happened yesterday? Dallas Fed President Richard “Loose Lips” Fisher was speaking in Mexico City, and earned his nickname once again. He seemingly couldn’t help himself, uncontrollably blurting out comments and rhetoric that were completely off topic, and roiling the financial markets as he went along.
You know that we continually discuss how Bonds hate inflation, and that cuts to the Fed Funds and Discount Rates can be inflationary. And yesterday, "Loose Lips" Fisher, who dissented against the most recent 50bp cut on Jan 30th made these comments: "My dissenting vote last week was simply a difference of opinion about how far and how fast we might re-spike the monetary punchbowl…Given that I had yet to see a mitigation in inflation and inflationary expectations from their current high levels, and that I believed the steps we had already taken would be helpful in mitigating the downside risk to growth once they took full effect, I simply did not feel it was the proper time to support additional monetary accommodation.”
And he went on, “Monetary policy acts with a lag. I liken it to a good single malt whiskey or perhaps truly great tequila: It takes time before you feel its full effect. The Fed has to be very careful now to add just the right amount of stimulus to the punchbowl without mixing in the potential to juice up inflation once the effect of the new punch kicks in.” Whoa. His very hawkish (and somewhat unusual) comments about inflation didn’t sit well with the Bond market, and sparked the sharp sell-off we saw yesterday.
In other interesting news yesterday – the Senate voted 81-16 to approve an amended version of the Economic Stimulus Plan. The Bill will now go back to the floor of the House for approval of their amendments. One provision that is pertinent to our industry – and an issue that you know we have been active proponents of – a loan originated between July 1, 2007 and December 31, 2008 may be purchased by Fannie and Freddie, as long as the loan amount does not exceed the higher of $417,000 OR 125% of what HUD determines to be the area median home price, with a maximum cap of $729,750. This will allow some loan amounts higher than $417,000 to have significantly better pricing, at least for a limited time frame.
Here’s a link to the actual verbiage: HR 5140 Title II, but in typical government style, it is poorly written and poorly explained. We can only attempt to guess the intent – but if it only means the ability to refinance loans done over the past seven months, it does severely limit the benefit. It is however, great news for your clients looking to purchase and finance a home in higher price ranges, which may have previously been considered a Jumbo loan and been subject to higher interest rates.
With continued volatility and uncertainty in the markets – Stocks could struggle a bit today, with no apparent driving force to cause investors to go long into the weekend. Bonds took a run at the 25-day Moving Average, but were back pushed lower from this ceiling of resistance. Remember earlier this week, when I described the way Bonds were hanging from the Upper Trend Line, like slabs of meat in a butcher shop…and how a drop off the “hook”, could cause a sharp fall lower? That’s precisely what happened, and was exacerbated yesterday by the uncontrolled blurting by “Loose Lips”. However – it does appear that the reaction to his comments was somewhat overblown, so I’ll Float for now, as we watch Bonds dance with the 25-day Moving Average.
In this morning's economic headlines, Initial Jobless Claims were reported at 356,000 claims, which was above expectations of 340,000. Additionally, the prior week’s claims were revised higher to 378,000 from 375,000. The more significant four-week moving average of Initial Claims increased to 335,000...while continuing jobless claims increased by 75,000 to 2.78 million, their highest level since October 2005.
And here's why these numbers are of particular interest, with fear of a recession in the media headlines. The last two recessions back in 1990 and 2001 started just as the four-week moving average of claims reached 360,000. Now the four-week moving average is only 335,000 at the moment, but the two-week average is now an alarming 367,000 claims. The data suggests a continued slowing of job growth and an economy that may be on the brink of recession.
The Bank of England cut their benchmark funds rate by 25bp to 5.25% as expected, while the European Central Bank left their key lending rate unchanged at 4.00%, also as expected. There will be some potential market moving speeches as Atlanta Fed President Dennis "The Spider" Lockhart, and Dallas Fed President Richard "Loose Lips" Fisher hit the podium later today.
History tells us the Bond's recent sideways trading pattern is setting up the Bond market for a breakout - a sharp move one way or the other. In this ultra volatile market - it's hard to say which way prices may break, but I know the Bond has been unable to make any move higher above the Upper Trend line. While I will float very cautiously for now, don't be surprised if you receive another Alert to Lock later today, as the Bond has already given up some of its early gains.
Prices began the day to the upside, but have since hung lower. This means that prices are already down 9bp since 10am, and have us watching carefully.
Preliminary Productivity for the fourth quarter of 2007 was reported as slowing to a 1.8% annual rate, which was stronger than expectations of 0.5%, but well below the third quarter’s torrid pace of 6.3%. A weakening trend in productivity would negatively impact our Gross Domestic Product and preliminary fourth quarter readings already show an anemic 0.6% growth rate. Productivity growth and labor force growth determine the potential GDP growth for the future. We already saw a weak Jobs Report last Friday, so we will continue to watch the trend of productivity and jobs to gauge the economic strength of the economy as it teeters on recession.
There was some good news for Bonds as Unit Labor Costs, a key measure of inflation that represents a 2/3 share of overall business costs, increased at an annual rate of 2.1% in the Fourth quarter - this was far cooler than the 3.5% expected. Better productivity makes it cheaper to produce goods...that's welcome news for inflation hawks.
He is Marshall...Richmond Fed President Jeffrey "The Dissenter" Lacker is currently speaking at Marshall University. Fed Governor Randall Kroszner is speaking at 12:30pm ET while Philadelphia Fed President Charles Plosser is speaking later today. The bond market may react to the Fed on parade, depending on comments made about the economy, inflation or monetary policy.
The US Treasury will auction $13 billion in 10-year notes at 1:00pm ET. Take note of pricing on our Bond page. The 10-Year Note is trading sharply lower, while Mortgage Bonds trade near unchanged...why? There is added supply of Treasuries, not mortgage bonds, and the market is pricing accordingly. Be sure to point out this disconnect to your clients and relationship partners, who may be misled to think the 10-Year Note drives mortgage rates.
A look at the the bond page may remind you of a trip to the meat store, pork store or deli...why? Notice how prices appear to be hanging from resistance at the top of the trading range. This increases volatility. Should Bonds lose their hold of the ceiling, a sharp drop may follow. I will float, but with an eye out for a sudden change.
Surprise, surprise...the ISM Services (non-manufacturing) Report for January was released earlier than expected this morning due to a possible leak of information and the reading was ugly and well below expectations. Economists had expected ISM to be reported at 53.0, so when this early release showed a 44.6 reading, money immediately flowed out of the Stock market and into Bonds. The 44.6 reading suggests that the service sector is contracting for the first time in 58 months. Adding to the confusion and uncertainty this morning are some brand new changes to the way ISM is reported. The headline number of 44.6 is a new composite index to reflect changes in current measures of business activity, new orders, employment and supplier deliveries. The "old" and previously followed headline number is now called the ISM Services Business Activity component, which was reported at 41.9. So no matter which number you follow, the readings are weak and suggest the economy is slowing. It was well known that the manufacturing sector has slowed down, but the service sector had held up pretty well. While this is only one report, the markets are fearful that this could be the proverbial "other shoe to drop" towards a recession.
Bad economic news is typically good news for Mortgage Bonds and this morning's poor ISM was no exception and helped prices improve. The Bond is now once again sitting at the best levels since mid-2005. The Bond does have resistance at the Upper Trend line, which lies about 16bp higher than present levels. This level has caused mortgage prices to retreat several times of late. I will continue to float for now, but with a watchful eye on how the Bond reacts to the aforementioned resistance level.
Volatility remains high, even though there aren't any economic reports due for release today. Mortgage Bonds woke up angry and on the wrong side of the bed, shedding 25bp early, but have since halved their losses. Over the past week, Mortgage Bonds have been unsuccessful in pushing through resistance at the Upper Trend line, with prices eventually tiring and moving lower. As we have seen many times in the past, resistance becomes more formidable each time it successfully turns prices back.
Why such volatile and crazy times? As we know, Bonds and Stocks are frequently polar opposites of each other. When one is strong, the other is weak. Back on July 6th of last year, the SEC eliminated the "up-tick rule", which had allowed a stock to only be "sold short" after the price had ticked higher during the trading day. This made it harder to short stocks because you had to wait for a bit of a recovery before beating it down again. The elimination of this rule means that you can beat a stock down relentlessly, therefore causing more price swings or greater volatility. More volatility in Stocks leads to more volatility in Bonds...and we sure can all testify to that of late. But the important message is that volatility is here to stay.
Recently, prices have been near the top of the trading channel as well as being overbought. This has caused me to be a little more cautious in my lock alerts, as I am very aware of the high level of volatility. I am more willing to give up 10-15bp near the top in order to avoid the big washout of pricing. That said, I am glad to have given up a bit at the top on Friday to avoid the 50bp decline since. The market looks weak again today, so stay on guard for another possible alert to lock if prices erode further.