Mortgage Bonds are trading slightly higher this morning and with not many economic reports due this week, prices may take some direction from trading in the Stock markets. Stocks are now battling a tough ceiling of resistance at their 200-day Moving Average, which for the S&P, is just above current levels at 1427. Should Stocks pull back lower from this important ceiling, Mortgage Bonds may benefit.
The only economic report that is expected today is the Conference Board's Leading Indicators at 10:00am ET, which shouldn't really move the market unless it wildly misses expectations.
Mortgage Bonds are trading higher, but well off of their best levels of the day. And it is truly amazing to see how this morning's advance was stopped dead exactly at the 200-day Moving Average. Prices are already close to a re-price for the worse range at the early windows on the Bond Page. Let's keep a close eye on this and be mindful that swings are likely, which make calling this market very challenging. Additionally, check the time when your lender posts their price, as the variance from windows can be significant.
The Commerce Department said that the Core PCE price index, which is the Federal Reserve's preferred measure of inflation, rose by 0.1% as expected in April, slowing from a 0.2% increase in March. On a year-over-year basis Core PCE rose 2.1%, just a hair above the Fed's comfort zone of 2%. Remember that the Core level removes the more volatile food and energy components. Headline inflation on a year-over-year basis was reported at 3.2%.
The Chicago Purchasing Managers Index was reported at 49.3, slightly better than expectations of 48.5. The University of Michigan Sentiment was reported at 59.8 and inline with expectations.
Like Rock-a-Bye Baby, Bonds are falling after the break beneath the floor of support, cradle and all. The Bond has only made a decisive cross over the 200-day Moving Average on three seperate occasions in the past three years. This tells us that, barring a timely reversal, we are likely seeing a shift in the market towards higher interest rates.
In today's news, Gross Domestic Product (GDP) grew at an upwardly revised 0.9% in the first quarter, slightly better than the 0.6% estimate because of lower demand for foreign goods and services, and a rise in investment in non-residential structures. Additionally, weekly Initial Jobless Claims were reported at 372,000, a little higher than consensus estimates of 370,000 claims. The four-week moving average for Initial Claims declined by 2,500 to 370,500. The four-week moving average of Continuing Claims rose to 3.06 Million, their highest level since February 2004. The job market is somewhat soft, but still somewhat stable.
The Treasury will auction off $19 Billion in 5-year Notes at 1:00pm ET. Yesterday's 2-year Note auction wasn't received well by investors and was part of the reason for Bonds moving lower. Today's auction, if also not well received, could once again apply some selling pressure to the overall Bond Market.
At 2:30pm ET, Fed Chairman Ben Bernanke is scheduled to speak about liquidity provisions at a risk transfer mechanism conference in Basel, Switzerland. This speech could potentially move the markets.
After four days of downward pressure spurred on by persistent global inflation fears coupled with high energy prices, Mortgage Bonds may have found a bottom at an important floor of support at the 200-day Moving Average. It is amazing how often accurate technical signals are. Once the triple-layer floor of support was broken, the same level has acted as a ceiling. And prices have drifted down to find the next floor of support at their 200-day MA. It is now likely that we will see some recovery in bond prices off of this strong floor of support.
Durable Goods Orders came in at -0.5% when most economists were looking for a decrease of -1.5%. When excluding transportation, bookings for goods meant to last several years rose 2.5%, the most since July. The surprisingly improved reading gave Stocks a modest boost and added more selling pressure on Mortgage Bonds.
At 1:00pm ET, the Treasury Department will auction off $30 Billion of 2 Year Treasury Notes. This may have an effect on the overall Bond Market later today.
Consumer Confidence for April was reported at 57.2, well below expectations of 61 and the lowest reading in 16 years. Within the report, consumer inflation expectations are at an all-time high, meaning that consumers are seeing inflation as a real threat. This inflationary concern within the Consumer Confidence Report is pushing Mortgage Bonds lower.
New Home Sales for April were reported at 526,000, just a shade above expectations of 520,000. The inventory of unsold new homes fell slightly to a 10.6 month level from last month's 11.1 reading. This mildly positive report has given Stocks a boost and even more selling pressure on Mortgage Bonds.
U.S. single-family homes showed a price decline of 14.1% at the end of the first quarter from a year earlier, according to the Standard & Poor's/Case Shiller national home price index reported on Tuesday. The S&P/Case Shiller composite index of 20 metropolitan areas fell 2.2% in March from February and dropped 14.4% from March 2007.
There are inflation concerns abroad as the European Central Bank, ECB has reported their annual rate of inflation at 3.6%, the fastest pace in almost 16 years. June 1st will mark the 10th anniversary of the ECB and in each of the last 8 years it has failed to bring inflation under an ideal target of 2%. This is very interesting and makes you appreciate the tough job the Fed has in maintaining price stability. If you think as a global bond investor, Bond yields across the globe, may rise further to offset the rise of inflation.
Bonds have drifted well below a layer of resistance at the 25, 50 and 100-day Moving Averages. It now appears as though prices are destined to test support at the 200-day MA, about 60bp beneath present levels. I will maintain my locking bias.
After a couple of bad days, Mortgage Bonds are attempting to stabilize, but remain beneath a triple ceiling. Stocks are trading sharply lower, giving prices a modest boost higher, but the gains in Bonds were capped at the aforementioned ceiling of resistance.
Housing News - Existing Home Sales for April were reported at 4.89 Million, better than expectations of 4.85 Million and down slightly from last month's higher revised 4.94 Million. The inventory of unsold existing homes rose to an alarming 11.2 month supply. The median home price is $202,300. Aside from the modest upside surprise in overall sales, the report was pretty weak. This has kept the selling pressure on Stocks.
The trading action so far today is a little negative, as prices pierced resistance and were then pushed lower. Even though prices are slightly higher on the day, we need to be very mindful of this overhead resistance, so like yesterday, a bias towards locking may be the wise play.
Inflation, Inflation, Inflation...the arch enemy of Bonds. This morning, inflation fears have sent Mortgage Bonds lower and beneath important layers of support at the 25, 50 and 100-day Moving Averages. Oil has hit another record high of $135.09 per barrel. It was just yesterday that we discussed this growing concern, and today the Bond Market is waking up and not liking $135+ oil prices. Yesterday afternoon, the Fed Meeting Minutes also contained concerns about inflation, which applied pressure to both Stocks and Bonds.
Initial Jobless Claims were reported at 365,000, below expectations of 372,000 and the lowest reading since April 5, but the more closely watched four-week moving average of initial claims rose by 5,000 to 372,250. This report, while slightly better than expected, still shows a labor market that is struggling.
UBS AG, burdened by $38 Billion in sub-prime related losses, said that it needs to raise even more cash after revealing a further $19 Billion of write-downs from the credit crisis. This news is not good for the financial sector, and it appears that many institutions are not yet free of the sub-prime woes.
Like we have seen in the past, when Bond prices fall through a floor of support, prices often continue to drift lower until they reach the next floor. And currently, that next floor is at the 200-day Moving Average, which is about 70bp below present levels - so a bias towards locking is prudent.
Mortgage Bonds are trading lower this morning after an impressive 150bp rise over the past five days.
There are no economic reports scheduled for release today, but Traders will have something to react on at 2pm ET, when the Fed releases their Minutes from the April 30 meeting. At that meeting, the Fed cut rates by .25% bringing the Fed Funds Rate to 2%. The vote to cut wasn't unanimous as both Richard "Loose Lips" Fisher and "Three Swing" Charlie Plosser preferred no change to rates. And the policy statement had some verbiage, which led the financial markets at the time, to believe the Fed may be done cutting rates. So the Minutes may provide some color as to the Fed's most recent rate cut and the possibility of future cuts. As of this moment, the Fed Funds Futures are pricing no chance of a Fed rate cut at the next meeting on June 25th.
The Fed has a growing concern on its hands, as energy prices continue to skyrocket. Oil hit another record high of $130.47 per barrel today. Unless these prices pull back, it is hard to imagine it not having a negative effect on the consumer, inflation and the economy overall.
In news across the pond, The Bank of England voted 8-1 to keep the interest rates at 5% this month as the majority of policy makers argued that a reduction risked letting inflation get out of control.
The Bond is giving back some of it's recent gains, however prices do remain above a layer of support at the 25, 50 and 100-day Moving Averages. If you take a look at the chart on the Bond page, you can see how prices are trading between this layer of support and a ceiling of resistance at $101. You can also see how prices have only closed above the $101 level 4 times since April 4th and hasn't closed above it once in the last 27 days. So here's the play...we can float carefully here as a nice layer of support lies just beneath current levels. However, be mindful that we are just 30bp from the best pricing since April 4th, so gains from here may be limited and the ride could get volatile should prices retest the ceiling at the $101 area.
Mortgage Bonds are slightly higher, but off their best levels of the day, even in the face of softer Stock prices. Bonds were spooked by inflation concerns, as the Core Producer Price Index (PPI), which measures wholesale inflation, arrived at double the anticipated rate. Headline PPI for April was reported at 0.2%, cooler than expectations of 0.4% and much lower than the 1.1% reading in March. On a year-over-year basis, the Overall PPI has risen 6.5%, still high, but down from 6.9% reported in March.
But the Core PPI, which strips out volatile food and energy, rose 0.4% in April, and this was double the expected level of 0.2%. Core prices are up 3% in the past year, representing the biggest year-over-year rise since late 1991. Remember that higher costs for production are not always passed on to the consumer, but this hot Core Producer Price Index must be raising some eyebrows at the Fed, as they look to control inflation on all fronts.
Crude oil prices set a new all-time record, closing overnight above $127 per barrel. Prices rose after the OPEC oil cartel announced it will not increase oil production ahead of its next meeting on September 9th. Stock and Bond traders will continue to closely monitor crude oil futures prices today. Persistently high oil prices continue to raise fears of inflation and the prospect of weaker consumer spending as a result. Oil guru T. Boone Pickens says that he sees oil going to $150/barrel this year.
Stocks are under selling pressure today, after touching resistance exactly on their 200-day Moving Average. Should Stocks continue to move lower, Mortgage Bonds should benefit somewhat.
What a difference a few minutes makes...Mortgage Bonds are trading higher and have improved a whopping 69bp from the worst levels seen earlier in the day, after the worst University of Michigan's Consumer Sentiment number in 26 years. The University of Michigan's Consumer Sentiment was reported at 59.5, worse than expectations of 62.0 and well below whisper numbers of something in the mid-60s.
Some better than expected news in the Housing market as Housing Starts for April rose at a seasonally adjusted annual rate of 1.032 million, far more than the 940,000 estimated and up from the higher revised March number of 932,000. Building Permits increased at a seasonally adjusted annual rate of 978,000 beating estimates of 912,000. This modest up-tick in newly constructed homes is welcomed news, but the cost of materials has risen dramatically and may be a further drag on this sector in the months ahead.
Goldman Sachs, the world's largest securities firm by market value, said today that oil prices for the second half of 2008 will now average $141 a barrel up from an average of $107. The firm went on to say that prices will rise even higher in 2009, averaging $148 a barrel. The nationwide average for a gallon of regular unleaded hit $3.787 up 22% from year-ago levels. Oil hit a record $127.43 a barrel in early trading today. The folks at Goldman are pretty smart and if their forecast is accurate, you have to wonder how further increases in energy prices will impact the consumer and our economy.
Technically, Mortgage Bonds have powered through a triple layer of resistance at the 25, 50 and 100-day Moving Averages. Stocks are battling their 200-day MA ceiling, and if they are turned lower, bonds should rally further - we feel this will happen. And that would give us a run towards the high levels seen during the past few months, making for another refi opportunity.
Bonds are modestly higher this morning as Traders digest an extravaganza of economic reports. Let's get to it:
The New York Federal Reserve Bank reported the NY Empire Manufacturing Index for April at -3.2, worse than expectations of 0.0. This is the third month in the last four that the index has been negative. Readings below zero indicate contraction. The Bond did open lower this morning but quickly turned positive after the weak manufacturing report.
Manufacturing in the Philadelphia region wasn't much better, as the Philly Fed Index was reported at -15.6. However, this number was slightly better than expectations of a -19.0 reading.
Initial Jobless Claims were reported at 371,000, meeting expectations. The four-week average of initial claims, which smoothes out one-time factors such as bad weather or holidays, fell 1,000 to 365,750. In the week ending May 3, the number of people continuing to collect benefits gained 28,000 to 3.06 million - the highest level since March 2004. Overall this report suggests the labor market is still sluggish.
Capacity Utilization and Industrial Production were both reported slightly lower than expectations. Some good news for Bonds - the 79.7% reading on Capacity Utilization is lower than recent readings and has pulled back from levels that were close to sparking inflationary pressures.
Foreigners are digging our stuff - The March Net Foreign Purchases of US securities and bonds far exceeded expectations with a $80.4 Billion reading. The street had expected a number closer to $62.5 Billion so this reading of strong foreign demand for our Bonds has given prices an added boost today.
Mortgage Bonds are currently trading higher after bouncing higher off the 200-day Moving Average floor yesterday. But as you know it has been too common an occurance for Bonds to start off higher and only to fade later in the day. I will keep you posted.
Mortgage Bonds are trading lower in response to a better than expected Retail Sales Report. April Retail Sales dropped 0.2%, matching expectations. However, the drop was led by falling auto sales purchases. When stripping out the auto sales, Retail Sales rose 0.5%, topping expectations of 0.2%. This report tells us us that in spite of higher energy costs, the consumer continues to spend - at least for last month.
Confirming the resilience in the Retail sector was Wal-Mart, who announced better than expected first-quarter results this morning. But they went on to say that second quarter earnings may be lower than previously thought because of rising food and energy prices. And eventually the rapid rise in both food and energy will take it's toll on the consumer. Anyone who just filled their gas tank at the pump can relate to how much money is being spent in this area.
Late yesterday, Richmond Fed President Jeffrey "The Dissenter" Lacker said he is very concerned about a resurgence of inflation. And Federal Reserve Bank of Cleveland President Sandra "Hard Rock" Pianalto also expressed inflationary concerns.
Federal Reserve Chairman Big Ben Bernanke spoke this morning and said financial markets remain unsettled and the Central Bank will increase its auctions of cash to banks as needed. He went on to say "while markets have improved, they remain far from normal and we stand ready to increase the size of the auctions if further warranted by financial developments''.
Technically, Japanese Candlestick patterns are often accurate indicators of turning points in the market. Back on Friday, I expressed concern over the emergence of a Bearish Dark Cloud Cover Pattern after an uptrend and since then pricing has dropped 121bp. Hopefully last Friday's and yesterday's Update, as well as the recent string of lock alerts, has protected you from this swift price erosion - but on brand new transactions, a carefully floating bias may be prudent. Here's why - take a look at the Bond Chart, you can see a Rising Trend Line, which currently lies at $99.82. The Bond bounced higher off this floor twice in the past 30 days and has done so thus far today. The trend is usually your friend.
Mortgage Bonds are trading just above dual floors of support at the 50 and 100-day Moving Averages. There are no economic reports set for release today, so once again technical factors and action in the Stock market may influence the direction of Mortgage Bonds.
London based HSBC, Europe's biggest bank, has set aside a smaller than estimated $3.2 Billion for bad loans in the US and said that first-quarter profit increased. This surprisingly good news from the financial sector is helping Stocks a bit overall.
Friday's Daily Update and subsequent Alert to Lock should have helped you avoid the pricing erosion we have seen since Friday morning, but on new transactions, we can carefully Float while Bond prices sit just above support.
Bond prices are currently trading a bit lower after starting the day significantly higher.
Some grim news from insurance giant American International Group (AIG), has pressured Stocks lower. AIG said they are looking to raise $12.5 Billion in fresh capital after reporting an enormous first-quarter loss yesterday of $7.81 Billion or $3.09 a share, compared with earnings of $4.13 Billion a year ago. The important part of this is loss is due to write-downs on Mortgage Bonds. This tells me that the credit crisis is not yet behind us.
Oil is $126 a barrel. And that is not good news for either Stocks or Bonds, because of its inflationary effects on the economy. Mortgage Bonds may be sobering up to that realization today. Today's rate sheet should see slightly improved pricing from yesterday, so it may be prudent to lock in on today's rate sheet and protect the recent gains. At the moment, Mortgage Bonds are showing early signs of Bearish Dark Cloud Cover and this has me a little concerned.
Initial jobless Claims were reported at 365,000, slightly below expectations of 375,000. The more closely watched four-week average of Claims edged higher to 367,500. This not so good read on the labor market helped Bonds improve from their worst levels of the day.
As expected, The Bank of England and the European Central Bank (ECB) have left their benchmark interest rates unchanged today as they also cope with inflation pressures and a slowing economy.
In the absence of market moving news this week, we have been seeing Mortgage Bonds respond to the action in the Stock market as well as technical factors. Yesterday, the Dow closed below the psychological 13,000 level, and Mortgage Bonds responded by moving higher. Should Stocks look to regain their footing after yesterday's losses, Mortgage Bonds may give back some of yesterday's gains. From a technical standpoint, the Bond continues to ride sideways above a layer of support at the 50 and 100-day Moving Averages and at the moment, prices have popped above the 25-day MA. For now, I will continue to float.
Last night, Federal Reserve Bank of Kansas City President Thomas "Tommy Boy" Hoenig said inflationary pressures are "troublesome" and if inflation gets too high, the economy could suffer greatly. He went on to say that if the Fed does move to a tightening bias, the interest rate hikes could be swift. Although Fed President Hoenig is presently a non-voting member, his comments sure sound as if the current cutting cycle may indeed be at an end.
In this morning's economic headlines, the Preliminary Productivity Index for the 1st Quarter increased by a greater than expected 2.2% annual rate as the "hours worked" component fell by 1.8%, its largest decline in five years...and another sign of a recession. Unit Labor Costs, a key measure of wage-based inflation, increased by 2.2%, but was below expectations of a 2.6% increase. Overall, this report was good news for inflation-hating Bonds.
This afternoon at 1:00pm ET, the Treasury will auction $15 Billion in 10-Year T-Notes. Although we know that our fixed rate sheets are based on Mortgage Backed Securities and NOT the 10-Year T-Note (as the media still seem to believe), this auction could influence the entire Bond market across the board...so i'll be watching this closely later today. As long as prices can remain above both the 50 and 100-day Moving Averages, I can float, but very carefully.
Bonds are moving higher this morning after bad news was released for Fannie Mae, the largest provider of US home financing. The company said it lost $2.19 Billion in the first quarter due to the current housing and credit crisis, which equates to a loss of $2.57 a share compared with a profit of 85 cents a year ago. And like Freddie Mac, the company plans to raise capital and cut its dividend. Stocks traded lower on the news, pushing money into Bonds and helping Bond pricing improve.
In other headlines, oil hit a new record high of $120.93 this morning. Oil prices have doubled over the past twelve months, pushing the average price at the pump to $3.60 a gallon. Goldman Sachs is forecasting that black gold could rise to $150-$200 a barrel in the next twelve months. If this plays out as they suggest, the inflationary effects of high oil prices could pressure Mortgage Bonds lower, causing home loan rates to move higher...so this will be a story to watch.
For now, Bonds continue to ride a dual floor of support at the 50 and 100-day Moving Averages. I will continue to Float for now, and watch how the Bond behaves near this strong floor.
Mortgage Bonds are attempting to hold above a floor of support at the 50 and 100-day Moving Averages. The ISM Services Index for April was reported at 52, far better than expectations of 49.5. The report also showed an increase in the prices paid component, which is a potentially inflationary signal. On the better than expected news and inflationary signs, Mortgage Bonds, which had traded higher earlier in the day, moved lower.
Stocks are under some selling pressure on news brokerage giant UBS AG, Switzerland's largest bank, said it may be forced to eliminate 8,000 jobs citing a loss in the 1st-quarter of $11.4 billion. Writedowns at the UBS have now reached $38 billion since the credit crisis began. Financial institutions around the world have now written down $319 Billion. Should Stocks continue to pull back from their recent rally, Mortgage Bonds may benefit.
For now I will float carefully, but if prices move lower from current levels and beneath the dual layer of support at the 50 and 100-day MAs, I will quickly switch to locking.
The Labor Department reported 20,000 jobs lost in April, which was better than market expectations of 75,000 jobs lost, with the unemployment rate falling to 5%. On the news, Mortgage Bonds quickly fell a whopping 134bp in a matter of minutes. Yes, 134bp...that's exactly the type of knee-jerk reaction we had anticipated. But once the details of the report were unpacked, including downward revisions to the last two Jobs Reports, as well as some realization that the economy still lost 20,000 jobs, Mortgage Bonds have staged an enormous recovery. So...while prices are still negative, they are much improved from the lows after the initial knee-jerk reaction to the Jobs Report headlines.
As we discussed yesterday, the birth-death ratio is used to help figure the Jobs Report, and in a declining Job Market like the one we have now, the number is likely to be overly optimistic about the actual condition of today's job market. Therefore we feel strongly that downward revisions are in the cards for the next two months.
It appears that on short-term transactions, yesterday's Update advice and Alert to Lock may have protected you and your clients, as prices have suffered a bit over the past 24 hours. But as we also said, "if you have more time and have the stomach for a turbulent period, float carefully as prices should come back". This morning's sharp rebound higher from the lows leaves the Bond trading above support at the 50 and 100-day Moving Averages. For now I will Float - but carefully in this volatile environment.
During the recent easing cycle, the Fed cut rates six times prior to yesterday. Each time the media got it wrong by saying it was good for rates, but your advice to clients and referral sources was right on the money. Congratulations for knowing that Bond prices would react negatively on inflation fears from rate cuts. Then yesterday, CNBC's Diana Olick and many others thought they finally had it figured out and said the impact of this 7th Fed cut will cause home loan rates to worsen and move higher. Unfortunately for the media listeners and viewers, they went 0 for 7, as they again incorrectly analyzed the impact of yesterday's .25% cut to the Fed Funds Rate. Although the Fed cut rates once again, my update and advice said "There is speculation that the Fed may signal the present cutting cycle is nearing an end, especially in light of renewed concerns over inflation. If this is indeed the case, we may actually see Mortgage Bonds improve on the news".
The cut to the Fed Funds Rate bringing it to 2% was not a unanimous decision. The vote was 8-2 in favor with Dallas Fed President Richard "Loose Lips" Fisher and Philadelphia's "Three Swing" Charlie Plosser, dissenting and preferring no cut. This is part of the message that the Fed is now in a "pause" mode instead of an "easing" one. Both Loose Lips and Three Swing Charlie had dissented at the last meeting as well. But that was in regards to not cutting as deeply - this time, they wanted no cut at all. Additionally, the Fed statement was very clear that they will "monitor" the situation, as they used that word twice in their carefully crafted short statement. This tells us that the Fed is done with cuts, unless something really ugly happens.
The headline Personal Consumption Expenditure Index (PCE) was reported at 3.2% on a year over year basis, slightly improved from last month's 3.4% reading. The Core PCE, the Fed's favorite inflation gauge, was slightly higher in March. PCE was up 0.2%, which was hotter than expectations of 0.1%. This brought the important year-over-year Core PCE to 2.1% and just above the Fed's desired range of 1 to 2%. Personal Income was reported at 0.3%, a bit higher than expectations of 0.4%. Personal Spending was reported at 0.4%, twice as hot as expectations of 0.2% and may show how rising food and commodity prices in March have negatively affected consumers.
Initial Jobless Claims were reported at 380,000, much worse than expectations of 360,000. This left the four week moving average of continuing claims at the worst level since early 2004.