Mel's Blog

Tuesday's bond market has opened in negative territory as stocks recover a good part of Friday's losses. The stock markets are off to a strong start following yesterday's holiday with the Dow up 115 points and the Nasdaq up 32 points. The bond market is down 6/32.

This week brings us the release of three pieces of economic data to digest, but only one is considered to be of high importance. The first two reports will be released early tomorrow morning. The Labor Department will post their Producer Price Index (PPI) and the Commerce Department will release December's Housing Starts data, both at 8:30 AM. The PPI is much more important to the markets and mortgage rates because it measures inflationary pressures at the producer level of the economy. It is the sister report to last week's Consumer Price Index (CPI) that didn't give us an y major surprises. Analysts are expecting to see no change in the overall reading and a 0.1% increase in the more important core data reading that excludes volatile food and energy prices. Unexpected increases, particularly in the core reading, could mean higher mortgage rates tomorrow.

December's Housing Starts helps us measure housing sector strength and future mortgage credit demand by tracking construction starts of new homes. It is not considered to be one of the more important releases each month, so I don't see it causing much movement in mortgage rates tomorrow. It is expected to show little change from November's starts.

Overall, tomorrow will likely turnout to be the most important day of the week with the PPI scheduled. If it meets expectations or is lower than forecasts, we could see mortgage rates close the week lower than this morning's opening levels. There will be discussion about Congress raising the debt ceiling this week that ma y bring the amount of outstanding U.S. debt in focus again. Unfortunately, if it becomes a hot topic, the bond market may see pressure as everyone is reminded about the large sum of debt we currently have outstanding. But, I don't think we have too much to be concerned with in this week's economic data and could see the rates move little this week.

                Mel

Thursday's bond market has opened in negative territory as yesterday's afternoon weakness continues into this morning's trading. The stock markets are showing noticeable losses with the Dow down 116 points and the Nasdaq down 42 points. The bond market is currently up 9/32.

December's Durable Goods Orders was posted this morning, giving us an indication of manufacturing sector strength. It revealed a 0.3% increase in new orders for big-ticket products, which fell well short of analysts' forecasts of a 2.0% increase. However, if more volatile transportation related orders are excluded, such as orders for new aircraft, we saw a larger than expected increase of 0.9 %. Therefore, this report basically gives us mixed results, but should be considered slightly negative for bonds and mortgage rates.

In a bit of positive news, the Labor Department reported that 470,000 new claims for unemployment benefits were filed last week. This was a decline from the previous week, but was much higher than the 450,000 that were expected. This is good news for bonds but its impact on trading and mortgage pricing is minimal because it is not considered to be very important news due to its single-week tracking.

There are three relevant reports scheduled for release tomorrow morning. The first is arguably the single most important report that we see regularly. The initial reading of the 4th Quarter Gross Domestic Product (GDP) will be posted early tomorrow. This data is so important because it is considered to be the best measurement of economic growth. The GDP itself is the total sum of all goods and services produced in the United States. Its' results usually have a major impact on the financial markets and can cause significant changes in mortgage rates. There are three readings to each quarter's activity, each released approximately one month apart. The first, which usually carries the most volatility, is expected to be an increase of 4.6%. A noticeably weaker reading would be great news for the bond market, questioning the pace of the economic recovery. That would likely fuel stock selling and a rally in bonds that would push mortgage rates lower tomorrow morning.

The 4th Quarter Employment Cost Index (ECI) is also scheduled for release early tomorrow morning. It measures employer costs for employee wages and benefits, giving us an indication of the threat of wage inflation. Current forecasts are showing an increase of 0.4%. A lower than expected reading would be favorable to bonds and mortgage rates, but the GDP reading will be the biggest influence on trading and rates tomorrow.

The last report of the week is the revised reading to the University of Michigan's Index of Consumer Sentiment. This index measures consumer confidence, which is thought to indicate consumer willingness to spend. I don't see this data having much of an impact on the markets or mortgage rates due to the importance of the employment index and GDP figures. It is expected to show a slight upward revision from the previous estimate of 72.8.

                Mel

Thursday's bond market has opened in negative territory then moved up on mixed economic data and a declining stock market. The Dow currently is down 213 points and the Nasdaq is down 25 points. The bond market is currently up 25/32, we will see a improvement in this morning's mortgage rates due to strength late yesterday.

The Labor Department reported this morning that 482,000 new claims for unemployment benefits were filed last week. This was much higher than the 440,000 that was expected and hints that further weakness in the employment sector may be ahead. However, this was only a single week's worth of data so look for next Thursday's numbers to be watched closely. Unfortunately for bonds and mortgage shoppers, this data does not usually have a lot of influence on the markets because it covers such a sort time frame. But the surprising jump did garner some attention in the markets, making next week's release more important.

The Conference Board, who is a New York-based business research group, posted December's Leading Economic Indicators (LEI) late this morning. They reported a surprising 1.1% jump, well over the 0.7% increase that was expected. This means that they are predicting a rapid increase in economic activity over the next three to six months. While that is more of a prediction than factual results, if it is an accurate forecast it would not bode well for bonds and mortgage rates in the near future.

There is no relevant economic data tomorrow, so look for the stock markets to be the biggest influence on bond trading and mortgage rates. I suspect it may be a fairly quiet day for rates unless something drastic happens to stocks or unexpected news comes out.

                Mel

Friday's bond market has opened in positive territory following early stock weakness. The stock markets are showing losses despite stronger than expected earnings results from giants Intel and JPMorgan Chase. The Dow is currently down nearly 100 points while the Nasdaq has fallen 24 points. This has made bonds more attractive to investors as a safe-haven. The end result is the bond market is up, which should improve this morning's mortgage rates.

The Labor Department reported early this morning that December's Consumer Price Index (CPI) rose 0.1% and that the more important core data reading increased 0.1%. The core data matched forecasts but the overall reading was slightly lower than expectations. The news is somewhat positive for bonds because it means inflationary pressures remained subdued at the consumer level of the economy. But since it nearly matched expectations, its impact on this morning's mortgage rates has been fairly minimal.

December's Industrial Production report was the second report of the morning. It revealed a 0.6% increase in out at U.S. factories, mines and utilities. That matched forecasts, indicating moderate growth in the manufacturing sector. But since it did not surprise traders, it had no influence on this morning's trading or mortgage rates.

The third and final report of the day was the University of Michigan's Index of Consumer Sentiment for December. It came in at 72.8, falling short of the 73.8 that was expected. This means that consumers were less optimistic about their own financial situations than many had thought. That can be considered favorable news for the bond market because waning confidence usually translates into less consumer spending and weaker economic activity.
                  
                                Mel

The bond market has improved from early gains following a fairly strong 30-year Bond auction. The stock markets have not moved too much from this morning's levels with the Dow currently up 30 points and the Nasdaq up 8 points. The bond market has improved from this morning, currently up 19/32. This will likely improve this afternoon's mortgage rates slightly, even after this morning's improvement. But, many lenders may opt to wait until tomorrow's pricing to reflect this improvement.

The Commerce Department reported this morning that retail level sales fell 0.3% last month, falling well short of expectations. Analysts were expecting to see a 0.5% increase in sales, meaning consumers spent less last month than many had thought. This is good news for bonds and mortgage rates because drops in consumer spending eases inflation and economic recovery concerns. That creates a favorable environment for the bond market and mortgage rates. However, minimizing this news was a sizable upward revision to November's sales, indicating that consumers spent more in November than was previously thought.

There are three economic reports scheduled for release tomorrow morning. The first is December's Consumer Price Index (CPI). This is also one of the most important monthly reports that we see since it measures inflationary pressures at the consumer level of the economy. The overall index is expected to rise 0.2% while the core data is expected to increase 0.1%. Weaker than expected readings should lead to bond improvements and lower mortgage rates tomorrow morning.

December's Industrial Production report is the second report. It will be released at 9:15 AM ET and measures output at U.S. factories, mines and utilities. This gives us a good indication of manufacturing sector strength or weakness. Current forecasts are calling for an increase in production of 0.6% from November's level. A smaller than expected increase would be considered good news for bonds and should lead to lower mortgage rates as long as the CPI doesn't reveal any negative surprises.

The final report of the week is January's preliminary reading to the University of Michigan's Index of Consumer Sentiment. This index measures consumer willingness to spend and can usually have enough of an impact on the financial markets to change mortgage rates. Good news would be if it shows a reading weaker than the 73.8 that is expected. However, it is not one of the week's more important releases and probably will have little impact on tomorrow's mortgage rates due to the importance of the CPI and production reports.

                   Mel

Treasuries and mortgages are bouncing better this morning on yet another wild employment report. Never changes; the monthly employment data has a well defined history of roiling markets and setting off debate that in the end doesn't change anyone's overall opinion. Whether bullish on the economic recovery or still fretting over the lack of jobs and the declining housing sector, the employment report always confuses as it has again this morning.

Dec non-farm jobs saw a decline of 85K as most economists were expecting an unchanged number; the range of forecasts was -80K to +100K. The unemployment rate was unchanged in Dec at 10.0%. Nov NFP was revised to +4K frm the original release of -11K, Oct NFP was revised from -111K to -127K. Dec average hourly earnings were up 0.2% which is the increase we see every month. No job creation but markets still believe the economy will continue to improve as businesses do better by cutting jobs and spending. Kind of ridiculous that markets are so willing to dismiss the fact that jobs don't matter. Where in the world does that idea permeate from? From The Street and from those making a living touting buying of stocks. Since the beginning of the recession a total 7.2 mil jobs have been lost; in the past year (2008) 4.2 mil jobs were lost and for the past six months 6.1 mil have lost jobs. 661K people have dropped out of the work force; no matter the spinmiesters making this pigs ear into a silk purse, the lack of jobs and the continuing decline in jobs is not encouraging. The 7.2 million drop in payrolls over the past two years has been the biggest as a percentage of all jobs since World War II was ending in 1944-45.

Factory payrolls declined 27,000 after decreasing 35,000 in the prior month. Payrolls at builders fell 53,000 after decreasing 27,000. Financial firms increased payrolls by 4,000, after a 6,000 decrease the prior month. Service industries, which include banks, insurance companies, restaurants and retailers, subtracted 4,000 workers after adding 62,000 in November. Payrolls increased at professional business services and education and health in the last two months. Retail payrolls decreased by 10,200 after a 13,500 decline in Nov. Government payrolls decreased by 21,000 after a 4,000 gain the prior month.

Gag me on the political spin being attributed to this employment report. I am increasingly disgusted listening to politicians making the case that since the economy lost 600K in Dec 2008 and now only 85K lost, that that is a positive; better than in the past but would be employers are not hiring---period. Ask those that have lost jobs and can't find work if that is a plus. Yes, we can't keep losing 600K a month or we will all be on food stamps, but to paint the Dec report as a move toward the view that the economy is rebounding is, as is said, one can make anything out of data look like they want it too----economists and analysts do it daily. Christina Romer, White House economic person----smiling all the way; saying the job losses disappointing but still on the road. The Obama Administration is losing the battle, pumping almost a trillion dollars to save banks, spending a lot of taxpayers money to revive jobs that so far has been wasted. Another stimulus plan? WTF! Interest rates will explode if Obama continues to rack up increasing budget deficits.

At 9:30 the stock market opened weaker on the employment report, the bond and mortgage markets are the recipients with prices better but still very much in a bearish bias both fundamentally and technically. The DJIA opened -38, 10 yr note +9/32 at 3.79% -4 BP, mortgage prices +9/32 (.28 bp).

At 10:00 Nov wholesale inventories were expected to be down 0.3%; increased to 1.5% frm Oct. Sales in Nov were up 3.3%; the inventory to sales ratio fell to 1.14 months frm 1.17 months in Oct. The ratio is the lowest since July 2008 and the increase in inventories is the largest one moth jump since Oct 2003. The 10 yr note and mortgages fell more on the report with the 10 yr unchanged and mortgages +1/32 on the day and down 7/32 (.22 bp) frm 9:30.

Later this afternoon (3:00 PM), Nov consumer credit data; expectations are for another decline in consumer debt by $5.0B; consumer credit has been falling for eight months and likely will continue. Consumers are continuing circling the wagons while simultaneously banks are continuing to deny credit expansion and unwilling to lend.

Mel

Information provided by Rate Watch

Tuesday's bond market has opened in positive territory again following early stock losses. The stock markets are showing minor losses with the Dow down 11 points and the Nasdaq unchanged. The bond market is currently up 55 basis points, which should again improve this morning's mortgage rates.

The positive mood in the bond market continues today despite stronger than expected results from November's Factory Orders report. The Commerce Department announced an increase of 1.1% in new orders for both durable and non-durable goods. This was twice the increase that expected and can be considered negative news for bonds and mortgage rates because it points towards a strengthening manufacturing sector. However, this data is not considered to be one of the more important reports we see each month, so its impact on today's trading and mortgage pricing has been minimal.

Tomorrow's only relevant event is the release of t he minutes from the last FOMC meeting. This will give market participants insight to the Fed's thinking and concerns regarding inflation and monetary policy. It is one of those pieces of information that may cause a great deal of volatility in the markets or be a non-factor, depending on what the minutes show. They will be released at 2:00 PM ET, so they shouldn't affect the markets or mortgage rates until afternoon hours.

We will likely see this afternoon's tone in bonds extend into tomorrow morning's trading unless the major stock indexes are showing sizable losses or gains. The release if the FOMC minutes is not one the reports that market participants hold positions until its release or make protective moves ahead of it. With no important economic data on the schedule for tomorrow morning, this afternoon's trading and the opening stock markets will likely drive bond trading and mortgage rates tomorrow until we get to the 2:00 PM release.

The final report of the week comes Friday morning when the Labor Department will post December's employment figures. The Employment report is considered to be one of the most important monthly releases we see. It gives us the national unemployment rate, the number of jobs added or lost during the month and average hourly earnings, which is a key measure of wage inflation. Its results are expected to heavily influence the markets and mortgage rates.

          Mel

Summing up the paradox that was 2009, someone recently asked me the question, "How can the stock market be going up when so many people are losing their jobs?" The short answer is that stock market participants don't drive by looking in the rear-view mirror or even the side-view mirror of current events. Market levels today are driven by expectations about where the economy, corporate profits, and interest rates are going to be in the future. And right now, the stock market and other risk-asset markets are looking ahead to a pretty decent recovery.

Last year was a roller-coaster ride that went well beyond the regular roller-coaster ride that is the norm in the financial markets. We opened the year with the world looking at the prospect of a major "Armageddon." Lehman Brothers, a firm that many on the Street had regarded as "Too Big to Fail", had just been declared bankrupt. Important sectors of the financial markets were still effectively frozen, and policy-makers were working desperately to restore confidence and bring the markets and the economy back from the brink. In this panic environment, risky assets were already priced at deeply distressed levels, and they continued to deteriorate all the way through March. The only assets anyone wanted to own were Treasury Securities and cash "under the mattress." Treasuries were the only asset providing any genuine diversification to offset losses in virtually every other market. The happy ending to this story is that the markets did resume functioning and the economy did begin showing signs of life and growth as the year progressed.

After the roller-coaster ride was over, the S&P 500 (representing the largest companies) posted a very nice total return of nearly 27 percent for the year, while smaller-company stocks and more growth-oriented companies delivered returns in the 35-40 percent range. Foreign stocks in developed markets likewise posted returns of about 37 percent in dollar terms. Stocks in emerging markets were the biggest winners, with overall returns in the 75-80 percent range, with Russia leading the pack with a whopping 128 percent return for the year. U.S. real estate investment trusts, which were beaten up so badly in the real estate crisis, rebounded smartly with a 30 percent gain. Rounding out the risk-asset category, high yield bonds (a.k.a. "junk bonds") delivered very strong returns in the 50-60 percent range, depending on the level of "junkiness." Basically, the riskier the asset, the more severely it was depressed at the end of 2008, and the more strongly it rallied when the panic eased.

Near the other end of the risk spectrum, diversified bond portfolios posted hum-drum returns in the 4-7 percent range, depending on maturity and asset mix. Treasury notes and bonds fell as their panic-induced price premiums from late 2008 began melting away. Long-term Treasuries were down more than 12 percent for 2009, even after taking into account reinvested interest. Shorter-term Treasuries also fell in price, but to a lesser degree. Investors who kept their money in safe, short-term assets like Treasury Bills and money market funds earned returns in the 0 percent to 0.5 percent range, as Federal Reserve policy was deliberately engineered to keep short-term rates low and give "Chicken Little" investors a kick in the pants to get them back out onto the risk spectrum. Watching your money collect dust at 0.25 percent provides just that incentive.

Now that the economy has taken a few steps down the recovery path, policy makers face the challenge of how to gently disengage their arsenal of economic stimulus without sending the markets and the economy back into a tailspin.

For this week, there are quite a number of economic releases on the calendar. The biggest will be the employment report on Friday. The expectation is for the jobs number to be flat (approximately the same number of jobs created as lost in December), and although that may sound bad, if it comes to pass it will be the first time in two years without a negative reading. The unemployment rate is expected to tick up to 10.1 percent. It may seem counter-intuitive for the unemployment rate to rise if the job count doesn't shrink, but remember that there is natural growth in the workforce population. So there's a pretty significant hurdle of job creation that has to be met just to absorb the additional workers.

Thanks for your business. Have a great week and a very profitable 2010!

                Mel

Information provided by Amtrust Bank Capital Markets