Mel's Blog

The unemployment rate jumped over the moon to 10.2 percent during the month of October. Thus, sadly, an increasing number amongst us are denied the pleasure of crawling to work. Around 200,000 jobs were lost in the month of October alone as the Great Recession continues its march through the U.S. and the world economy. Interestingly, according to some news reports, companies are facing hard times in terms of finding and hiring the right person(s) for some job openings. Positions in sectors like health care and technology; and complex specialized jobs in several other sectors including finance and banking, remain unfilled. It is disheartening that such jobs are vacant due to a lack of candidates with the appropriate skills, particularly when there are millions of job-seekers in the market. Perhaps it is indicative of the talent drain from the U.S. that is ongoing as other countries around the world present more opportunities in today’s times. Oh, by the way, those of you who dream of becoming a CEO, you may try your luck at Bank of America which is yet to find a replacement for Mr. Kenneth Lewis. Good luck to you!

The good news, if one may call it that, for the unemployed is that the government, responding to this sober situation, has extended unemployment assistance for an additional 20 weeks. The Bill legislated last week also has a provision that allows companies to set off their current year losses against previous years' income. This has the potential to make loss-making companies look good on paper without altering the company's fundamentals. The government is betting that this provision will allow more time to nurse the economy back to health. One sincerely hopes that this bet pays off.

In a significant victory for the Obama administration, the House of Representatives, late Saturday night, narrowly approved a major overhaul of healthcare administration in the country. The issue has been championed by the Democrats for decades now and the President promised a bill addressing it during his election campaign. The passage of the healthcare Bill faced near-unanimous Republican ire, due to concerns about the long-term monetary costs and healthcare service levels. If this Bill becomes law, it would mark a paradigm shift in the social landscape of the U.S. -- just as passage of the Social Security Act did in 1935 and the Medicare Act did in 1965.

Meanwhile, the stock market appeared resurgent with the Dow ending the week above 10,000 points. The non-farm business productivity in the third quarter surged 9.5 percent on an annualized basis, the biggest gain since the third quarter of 2003. Factory orders for September gained 0.9 percent versus a 0.8 percent fall in August, while total inventories fell 1 percent. Despite the weak job report, U.S. indices gained approximately 3 percent for the week.

On the commodity front, precious metals led by gold moved steadily north with gold touching a landmark $1,100 an ounce. The IMF sold around 280 tons from its coffers, to India, for about $6 billion to replenish its funds. India, on her part, maintained that she was diversifying her holdings across a broader range of assets. The price hike in gold obtained sympathetic support from other base metals such as copper, nickel, lead and aluminum, which also rose in unison. Oil has hardened at the $80 per barrel level even as gasoline consumption in U.S. dropped significantly last summer.

The major focus for this coming week will be the Treasury auction sales, international trade balance and consumer sentiment reports.

                Mel

Information provided by Amtrust Bank Capital Markets

Risk appetite waned considerably over the past week as "Dubai World's" credit concerns triggered safe-haven flows into U.S. Dollar and U.S. Treasury deposits. Now, the stage for bailouts might get even bigger from a corporate level to a sovereign level. In order to avoid systemic risk, many analysts feel that Abu Dhabi is likely to bail out Dubai rather than risk driving investors from the region because of a default. United Arab Emirates stocks nose-dived on Monday (today) as investors waited for clarity on Dubai's plan to delay repaying billions of dollars in debt and government word on how it would tackle a crisis that has rattled global markets recently. Dubai raised fears of a second bout of financial turmoil last week when it asked for a six-month repayment freeze on debt issued by the state conglomerate "Dubai World" and its unit "Nakheel," developer of three man-made palm-shaped islands. All of those who planned to move into those dream paradises in the desert may still have to dream a little while longer.

One may believe that paradise may be lost in Middle East, but it seems to be regaining here in our domestic housing market. The housing news has indeed been mixed in recent months. The good news is that home sales, both new and existing, beat expectations in October by a significant margin. New home sales rose 6.2 percent and existing home sales surged 10.1 percent (higher than the 8.8 percent gain in September). Home sales have improved sharply, driven partly by pull-forward effects related to concerns that the homebuyer tax credit is due to expire, although it was recently extended. However, home prices have weakened anew and most likely declined in September on a seasonally adjusted month-to-month basis. The labor market is making progress toward stabilization as the pace of layoffs appears to be falling sharply, judging from a big drop in initial jobless claims over the past two months. Perhaps the most positive signal of the past few weeks has been the sharp drop in initial jobless claims, which fell to 466,000 last week from around 550,000 two months back. Although the level of initial claims remains high, the pace of gross job losses is abating rather quickly. However, hiring remains depressed, and overall employment levels still seem to be falling.

Judging from the mood in shopping malls over the Thanksgiving weekend, all reports on the global recession seem to be made up fiction. Many more shoppers turned out for the traditional start of the Christmas shopping season over the Thanksgiving weekend compared to a year ago, but less was spent and lower-priced items were in vogue. The National Retail Federation estimated 195 million people visited shopping malls and online retailers Thursday through Sunday, up from 172 million last year, but that the average amount spent per shopper fell nearly 8 percent to $343.31. The estimated overall tally for the four days was $41.2 billion, on par with last year. This year carries particular weight because consumers have been ravaged by the recession and spending has yet to fully recover.

The falling dollar is helping keep our interest rates low. Treasury auctions have enjoyed strong foreign demand. Many analysts feel that the dollar’s continued weakness has contributed to the impressive Treasury results. On the other side, the Fed’s stance to keep rates accommodative for some time is also contributing to the weakness in the U.S. dollar. Mortgage borrowers are also enjoying low mortgage rates, which is further supported by the Fed's MBS purchasing program until March 2010. Aside from mortgage rates, low market interest rates should remain for a while. The minutes of the November 3-4 Federal Reserve meeting reveal that the members continue to support the Fed's large-scale asset purchase programs which would have the Fed purchase $1.25 trillion of agency MBS by the end of the first quarter of 2010. While there was some discussion of possible exit strategies, none of the members seemed to feel that any action was imminent or necessary.

                Mel

Information provided by Amtrust Bank Capital Markets

Monday's bond market has opened in negative territory following stronger than expected economic data and a sizable rally in stocks. The stock markets are starting the week with strong gains with the Dow up 132 points and the Nasdaq up 30 points. The bond market is currently up 22/32.

The National Association of Realtors reported late this morning that sales of existing homes rose over 10% last month, greatly exceeding analysts' forecasts. This fuels the theory that the housing sector is strengthening, which is thought by many to be needed for a broader economic recovery. Therefore, this data can be considered bad news for bonds and mortgage rates, but this was one of the week's least important reports so its impact on rates has been minimal.

Tomorrow morning brings us the first revision to the 3rd Quarter Gross Domestic Product (GDP). The GDP revision is expected to show a downward revision from last month's preliminary reading of a 3.5% annual rate of expansion. Current forecasts call for a reading of approximately 2.9%, meaning that there was less economic growth during the third quarter than previously thought. This would be good news for the bond market and mortgage rates, but it will likely take a smaller than expected reading for this report to improve mortgage rates.

November's Consumer Confidence Index (CCI) will also be released tomorrow morning, but during late morning trading. It gives us a measurement of consumer willingness to spend. If consumer confidence is rising, analysts believe that consumers are more apt to make larger purchases, essentially fueling economic growth. This raises inflation concerns and usually pushes mortgage rates higher. Analysts are expecting to see little change from last month's 47.7 reading, meaning consumer were just as concerned about their own financial situations as they were last mo nth. A weaker than expected reading should be good news for mortgage rates, but a stronger than expected reading could push mortgage rates higher tomorrow.

Also worth noting about tomorrow is the release of the minutes from the last FOMC meeting and the 5-year Treasury Note auction. Both are afternoon events and both have the potential to heavily influence the bond market or be a non-factor. The results of auction will be posted at 1:00 PM ET. If there was a strong demand from investors, we could see bond prices rise and mortgage rates fall during afternoon hours. But a lackluster interest in the sale could lead to higher mortgage pricing.

The FOMC minutes may be a major mover of the markets or a non-factor, depending on what they say. The key will be concerns over inflation and the Fed's next move. If the Fed members were concerned about inflationary pressures and overly optimistic about economic growth, we may see the bond market move lower and mortgage rates higher tomorrow afternoon. However, if they indicate a likelihood of another rate cut in the coming months, we should see the bond market rise and mortgage rates drop during afternoon trading.

                Mel

Thursday's bond market opened in positive territory following early stock losses that have made bonds more attractive to investors. The stock markets are showing sizable losses with the Dow down 116 points and the Nasdaq down 40 points. The bond market is currently up 3/32, which should improve this morning's mortgage rates.

The Conference Board posted their Leading Economic Indicators (LEI) late this morning, announcing a 0.3% increase. This was a little weaker than the 0.4% that was expected, but not enough of difference to influence this morning mortgage rates. That data indicates that economic activity is expected to increase moderately over the next three to six months. That is acceptable to bonds, as many economists and the Fed expect the economy to expand slowly.

The Labor Department said this morning that 505,000 new claims for unemployment benefits were filed last week. This was very close to forecasts and also has had little impact on this morning's bond trading and mortgage pricing.

                Mel

Wednesday's bond market opened in negative territory despite some extremely favorable economic news. The stock markets are also in negative ground with the Dow down 11 points and the Nasdaq down 11 points. The bond market is currently down 6/32, which should again keep this morning's mortgage rates unchanged.

This morning's major economic news was the release of October's Consumer Price Index (CPI). It revealed a 0.3% increase in the overall reading and a 0.2% rise in the more important core data reading. Both of these figures were stronger than expected, indicating that prices at the consumer level of the economy rose more than thought. This can be considered bad news for bonds and mortgage rates because it raises concerns about inflation in the economy. Inflation is the number one nemesis of the bond market because it erodes the value of a bond's future fixed interest payments. This leads to bond selling and higher mortgage rates.

The second report of the day was October's Housing Starts. It showed a surprisingly large drop in starts of new construction homes. The 10.6% decline in starts drops them to their lowest level in six months and is a setback for those who felt the housing sector may be strengthening. Unfortunately for mortgage shoppers, the negative CPI news is much more important to the markets than the favorable housing data is. There, this data has had little impact on this morning's mortgage rates.

The Conference Board will release its Leading Economic Indicators (LEI) late tomorrow morning. This is a moderately important report that attempts to predict economic activity over the next three to six months. It is expected to show a 0.4% increase, meaning economic activity will rise over the next couple of months. Generally speaking, this would be bad news for bonds. However, since this data is considered only moderately important, its results need to vary greatly from forecasts for it t o affect mortgage rates.

We will also get weekly unemployment figures from the Labor Department tomorrow morning. However, unless there is a wide variance between the number of claims announced and forecasts of 504,000, I don't think this report will have much of an influence on bond trading or mortgage pricing.

          Mel

Tuesday's bond market opened in negative territory despite some extremely favorable economic news. The stock markets are showing minor gains with the Dow up 30 points and the Nasdaq up 6 points. The bond market is currently down 12/32, which will likely keep this morning's mortgage rates close to yesterday's levels.

The Labor Department gave us the first and more important of today's two relevant economic reports. They announced that the Producer Price Index (PPI) rose 0.3% last month, falling short of expectations. However, the big news was the core data reading that fell 0.6% when it was expected to rise 0.1%. This means that inflationary pressures at the producer level of the economy were well below what analysts had thought. That is very good news for bonds and mortgage rates, but it appears that the bond market was not too impressed with this morning's news.

The second report of the morning was October's Industrial Production data. It showed that output at U.S. factories, mines and utilities rose only 0.1% when it was expected to rise 0.4%. This is also good news for bonds because rapid increases in manufacturing activity indicates a strengthening economy.

                   Mel

Monday's bond market opened in positive territory despite early stock gains and mixed economic news. The stock markets are kicking the week off in positive ground with the Dow up 137 points and the Nasdaq up 32 points. The bond market is currently up 22/32, which with Friday's late gains should improve this morning's mortgage rates.

The Commerce Department reported this morning that October's Retail Sales rose 1.4%, exceeding forecasts of a 0.9% increase. At first look, this headline number is bad news for bonds. However, two factors prevented the bond market from selling. The first was a sizable downward revision to September's sales that indicated consumers were spending even less than previously thought. Last month's estimate was a decline of 1.5% in sales, but it now believed that sales fell 2.3% that month. The second piece of positive news was the reading that excludes October's more volatile auto sales. With those transactions excluded, sales rose only 0.2%, which was weaker than the 0.4% that was expected. So, today's report can't really be considered favorable or negative for bonds and mortgage rates. Its impact has been fairly neutral.

Fed Chairman Bernanke is making a lunchtime speech to the Economic Club of New York today. I don't believe that we will see too much reaction to his speech, but the possibility always exists whenever he speaks. Therefore, we should not ignore it, but if we see the markets move noticeably between noon and 12:30 PM ET, it likely is a result of something he said.

There are two reports scheduled to be posted tomorrow morning. The first is October's Producer Price Index (PPI) that is one of the two key inflation readings this week. The PPI measures inflationary pressures at the producer level of the economy. There are two portions of the index that are used- the overall reading and the core data reading. The core data is the more important of the two because it excludes more volatile food and energy prices. If it reveals stronger than expected readings, indicating that inflationary pressures are rising, the bond market will probably react negatively and should drive mortgage rates higher. If we see in-line or weaker than expected numbers, mortgage rates should fall tomorrow. Current forecasts are calling for an increase of 0.5% in the overall reading and a 0.1% increase in the core reading.

Tomorrow's second report is October's Industrial Production data. It gives us a measurement of manufacturing sector strength by tracking output at U.S. factories, mines and utilities. It is expected to reveal a 0.4% increase in production. Stronger levels of production would be considered bad news for the bond market and mortgage rates, but this data is not as important as the PPI readings are.

                Mel

Thursday's bond market has opened down slightly following another stock rally. The stock markets are showing strong gains with the Dow up 203 points and the Nasdaq up 50 points. The bond market is currently up 19/32, which will likely keep this morning's mortgage rates near yesterday's levels.

This morning's release of the 3rd Quarter Productivity data gave us favorable results. It showed a spike in productivity of a 9.5% increase. This was much stronger than expected, but that is good news for bonds for this type of data. Strong levels of productivity allow the economy to grow without inflation strains. Since inflation is the number one nemesis of the bond market, any news that eases inflation concerns is considered positive for bonds and mortgage rates.

The Labor Department also gave us last week's unemployment figures, reporting that 512,000 new claims for unemployment benefits were filed last week. This was lower than forecasts and can be considered negative for bonds, but fortunately this data is not important enough to heavily influence mortgage pricing.

October's monthly employment figures will be released early tomorrow morning. This extremely important report is comprised of many statistics and readings, but the most watched ones are the unemployment rate, the number of new jobs added or lost during the month and average hourly earnings. Current forecasts call for a 0.1% rise in unemployment to bring the national rate to 9.9%, a drop in payrolls of approximately 175,000 and a 0.1% increase in average earnings. Weaker than expected readings should rally bonds and lead to improvements in mortgage rates, while stronger than forecasted results would add fuel to the growing economy theory and likely lead to bond selling and higher mortgage rates tomorrow.

          Mel

This week's FOMC meeting has adjourned with no change to key short-term interest rates. This was widely expected, but we still have seen a negative reaction in bonds. The stock markets had a knee-jerk downward move after the post-meeting statement was released, but they have since recovered those losses. The Dow is currently up 110 points while the Nasdaq has gained 15 points. The bond market is currently down 16/32, which will likely cause an upward change to mortgage rates.

In the post-meeting statement, the Fed indicated that key short-term interest rates will remain near current levels for quite some time. That can be considered good news for bonds because it means the Fed is not too concerned about inflation. However, they also renewed previous comments that the economy is indeed growing. Even though there is cautious optimism about the economy being able to continue to expand, hearing the Fed further support the theory that the economy may be able to do so has hurt bond prices.

Also contributing to this afternoon's bond selling was word that the Fed has lowered the amount of mortgage-related debt it is planning to purchase by $25 billion. The Fed is still expecting to make large purchases of those securities to help fuel mortgage lending and boost the housing sector. But the reduction from previous estimates has helped create a negative tone in the bond market this afternoon.

There was no important economic news posted this morning. Tomorrow's data is relatively important to the bond market though. The 3rd Quarter Productivity reading is expected to show an increase in productivity at an annual rate of 6.5%. A larger increase would be good news for the bond market because higher levels of productivity allow the economy to expand without inflationary pressures being a concern.

The Labor Department will give us last week's unemployment figures tomorrow morning also. They are expected to report that 522,000 new claims for unemployment benefits were filed last week. This would be a decline from the previous week, but unless we see a wide variance from expectations I don't believe this data will have much of an impact on tomorrow's mortgage rates. Especially with October's monthly numbers coming Friday morning

                   Mel