Mel's Blog

Thursday's bond market initially opened well in negative territory but has since rebounded after stocks opened in negative ground. The Dow is currently down 28 points while the Nasdaq has fallen 12 points. While those may be minor losses, the concern is the fact that the Dow has slipped below the 10,000 benchmark that we heard so much about yesterday. Investors' concerns that stocks may not be able to hold recent gains has helped boost bond prices during early morning trading. The result is the bond market currently up 3/32, but I am expecting to see an increase in this morning's mortgage rates.

The Labor Department reported this morning that September's Consumer Price Index (CPI) rose 0.2% and that the core data reading rose 0.2%. The overall reading matched forecasts but the more important core data exceeded expectations. This means that prices rose more than expected at the consumer level of the economy when excluding volatile food and energy prices. While the difference was minor, it still can be considered bad news for bonds and mortgage rates because rising prices raises inflation concerns in the bond market.

They also gave us last week's unemployment figures, saying that 514,000 new claims for unemployment benefits were filed last week. This was a lower total than many had thought, but since this data is not considered highly important, its impact on this morning's trading and mortgage pricing has been minimal.

Yesterday's release of minutes of the most recent FOMC meeting revealed that most Fed members feel that the recession is indeed already over. However, many feel that the weak labor market and modest economic growth expectations still leave a threat to the recovery. The best way to describe the overall thought process is that they feel the recession is over and the economy is starting to grow, but we are no t out of the woods yet. There are still variables that could threaten the economic recovery. Generally speaking, the minutes did give us more detailed insight into the Fed's thoughts and led to speculation that more economic stimulus options may be explored in the future. This is fairly neutral for the bond market as the end of the recession can be considered bad news but the cautious approach still makes bond appealing to investors.

There are two reports scheduled for release tomorrow morning. September's Industrial Production data is the first release of the day and will be posted mid-morning. It gives us an indication of manufacturing strength by tracking orders at U.S. factories, mines and utilities. It is expected to show a 0.1% increase in output from August's level, meaning that manufacturing activity rose slightly.

The last report of the week is October's preliminary reading to the University of Michigan's Index of Consumer Sentiment late morning. This index measures consumer willingness to spend and usually has a moderate impact on the financial markets. If it shows a sizable decline in consumer confidence, bond prices will probably rise. It is expected to show a reading of 74.0, up slightly from September's final of 73.5.

          Mel

Friday's bond market has opened in positive territory after this morning's economic data failed to show any significant surprises and the stock markets opened with losses. Stocks are starting the next leg of their recent roller coaster ride with sizable losses. The Dow has given back yesterday's rally with a loss of 238 points so far. The Nasdaq is not fairing much better with a 50 point loss. The bond market is currently up 44 basis points.

The first of today's three reports was the 3rd Quarter Employment Cost Index (ECI). It showed an increase of 0.4% that matched forecasts. This means that employer costs for wages and benefits rose moderately during the third quarter, but this was expected. Therefore, its' impact on today's trading and mortgage rates has been minimal.

September's Personal Income and Outlays report was the second, revealing no change in personal income last month and a 0.5% decline in spending. These figures pegged analysts' expectations and also have not influenced today's mortgage pricing.

The third and final report of the day was the University of Michigan's update to their Index of Consumer Sentiment for October. They announced a reading of 70.6 that exceeded forecasts of a 70.0 reading. This means that consumers were a little more optimistic about their own financial situations than many had thought. That can be considered bad news for bonds but since this data is only moderately important, it fortunately has been unable to prevent bonds from rising this morning.

Yesterday's 7-year Note auction was met with an average demand. It can't be considered weak or strong. Some of the components that measure the success of the sales pointed towards less interest than Wednesday's auction, but not by enough to cause much concern.

Next week is extremely busy in terms of economic reports being posted. Unlike many, we will see important data posted this Monday. The Institute for Supply Management (ISM) will post their manufacturing index late Monday morning. It is considered to be one of the more important reports we get each month, but it will not be the most important data next week. In addition the data, that includes the monthly employment figures, we also have another FOMC meeting to watch for.

                   Mel

Thursday's bond market has opened in negative territory after today's important economic data gave us stronger than expected results. The stock markets are showing strength with the Dow up 86 points and the Nasdaq up 24 points. The bond market is currently down 15/32, but we will probably see little change in this morning's mortgage rates due to strength in bonds late yesterday.

Today's big news was the release of the preliminary reading of the 3rd Quarter Gross Domestic Product (GDP) that is considered to be the benchmark reading of economic activity. It showed a larger than expected jump of 3.5%, indicating that the economy grew at a faster pace than many had thought. This is bad news for bonds and mortgage rates since it raises concerns that the economic recovery may be sooner than later. Generally speaking, weak economic conditions make long-term securities such as mortgage-related bonds more attractive to investors. When the economy is expanding, inflation concerns make those securities less appealing and drive mortgage rates higher.

Yesterday's 5-year Note auction went fairly well. This leads to optimism that today's 7-year Note sale will also go well. If there is a strong demand in today's auction, we may see bonds improve this afternoon. But if the sale does not draw a decent interest from investors, mortgage rates could move higher this afternoon. Results will be posted at 1:00 PM ET today, so any reaction to them will come during afternoon trading.

There are several reports scheduled for release tomorrow. The first is the 3rd Quarter Employment Cost Index (ECI), which tracks employer costs for salaries and benefits. Rapidly rising costs raises wage inflation concerns and may hurt bond prices. It is expected to show an increase in costs of 0.4%. A smaller than expected increase would be good news for bonds and mortgage rates.

September's Personal Income and Outlays report will also be posted early tomorrow morning. This data gives us an indication of consumer ability to spend and current spending habits. It is important to the markets because consumer spending makes up two-thirds of the U.S. economy. Rising income generally indicates that consumers have more money to spend, making economic growth more of a possibility. This is bad news for the bond market and mortgage rates because it raises inflation concerns. Analysts are expecting to see no change in income and decline in outlays of 0.5%.

                                Mel

Tuesday's bond market has opened in positive territory following the release of a much weaker than expected consumer confidence reading. The stock markets are mixed with the Dow up 14 points and the Nasdaq down 26 points. The bond market is currently up 47basis points, which will likely improve this morning's mortgage rates.

The Conference Board said that their Consumer Confidence Index (CCI) for October fell to 47.7. This was much weaker than the 53.5 that was expected and indicates that consumers are less optimistic about their own financial situations than many had thought. That is favorable news for bonds and mortgage rates because it means that consumers are less likely to make large purchases in the near future, therefore, limiting economic growth.

The Commerce Department will post Durable Goods Orders for September early tomorrow morning. This report gives us a measurement of manufacturing sector strength by tracking orders at U.S. factories for big-ticket items. Analysts are currently calling for an increase in new orders of approximately 1.0%. If we see a larger than expected increase in orders, mortgage rates will probably rise as bond prices fall. A weaker than expected reading should be good news for the bond market and mortgage rates, but this data can be quite volatile from month to month and is difficult to forecast.

Also tomorrow is the release of September's New Home Sales. This data covers the remaining 15% of home sales that last week's Existing Home Sales report tracked and is this week's least important data. It is expected to show an increase in sales, but regardless of its results I am not expecting it to have a significant impact on mortgage rates.

Tomorrow also brings us the first of the two relevant Treasury auctions. 5-year Notes will be sold tomorrow, which will help us prepare for Thursday's 7-year Note sale. If the sales go wel l, we may see afternoon strength in bonds that lead to downward revisions to mortgage rates. But lackluster interest in them will probably cause bonds to fall and mortgage rates to move higher. Results of the sales are posted at 1:00 PM ET each day.

          Mel

Stocks are flirting around the Dow's 10,000 point level as investors await the Government's first reading on the economy in the third quarter, later in the week amidst a fresh round of earnings reports. The stock markets seem to be pricing in a "V-shaped" recovery and so far, the data has not been disappointing with earning season already in full swing. However, any data surprise on the downside can have the effect of triggering a significant correction. The U.S. recession is most likely over, but the debate continues as to whether the Government should to do even more to bolster the recovery. Economists polled by Reuters think Thursday's GDP data will show the U.S. not only resumed growing in the third quarter, but did so at a pace substantially above the pre-crisis trend rate of around 2.5 percent. Overseas markets also show rising growth as Asia's economy is well on its way to recovery. South Korea reported its economy grew at its fastest pace in seven years. Other emerging markets like China and India are on fast-track too.

A sense of calm has started to pervade markets, with many assets now moving in narrow ranges and others just trending gently. This may not be great for active managers, but is a boon for those seeking stable risk-return after all the stormy seas during the past two years. Market tranquility reduces the destructive urge to de-lever our finances all at the same time, and helps rebuild markets and asset values, while keeping short cash and long assets that pay income and growth.

The message from the economic data is that a global recovery is taking hold and is spreading. Few investors still doubt that it is sustainable, while others believe it may continue at least through next year. Stability is most painful for assets that thrive on fear, which means cash. Since March, we have seen a steady and global flow out of cash into assets with an appropriate yield -- equities and bonds. This is not over. An informal look at the global portfolio share of cash hints that with cash returns staying at around zero, we are probably only half-way into the move out of cash. Most investors follow the strategy of borrowing in dollars in this low rate environment and investing in assets across the world. This is commonly known in investment circles as the "carry trade."

Although a very weak currency hasn't yet sparked inflation, the declining dollar is seeing investment money pumping up commodity prices such as gold and other metals, etc. The recent jump in oil prices despite tepid world demand and bloated inventories may suggest that run-ups in some materials prices have no fundamental underpinning. The price of gold continues to shine and some gold bulls are already dreaming of gold prices reaching $1,500 an ounce. However, it is possible in only two scenarios, the first reason being world inflation, which is not likely to happen over the next 2 years, and the other is the risk of a near depression, which may have already been averted. Oil prices reached $82 last week, the highest in a year, in a rally many say was triggered by expectations of an economic recovery and a weak dollar rather than a tighter oil supply and demand balance. Thankfully, gasoline prices are still low and may help us to afford a cozy winter season ahead. Hopefully, the ongoing overheating of commodities prices spares our heating bills.

Additional fresh news about the nation's housing markets was fairly upbeat, if a little uneven. Existing Home Sales, powered by low mortgage rates and low home prices, and additionally triggered by a fast-approaching expiration of the $8,000 "first time" homebuyer tax credit, leapt by 9.4 percent in September. The 5.57 million (annualized) rate of sale was the highest in over two years, and prices firmed while inventories dropped to a closer-to-normal 7.8 months of supply. The supply figures don't count the entire inventory on the market as they may not fully account for short-sales and foreclosure dispositions. While the trend is encouraging, how long it will last is an open question.

The rates market is at a crossroad. This week brings large supply as the market hangs near recent support levels. The larger issue is ongoing concern for longer-term inflation. Barring a sharper decline in inflation data, the Fed will need to take measures to address these concerns for the market to make new yield lows. In the interim, the risk of a move to higher yields remains a valid worry. The Fed is in a difficult position because it rightly fears ongoing deflationary pressures even as bond market experts continue to worry about long-run inflation risk.

The week's economic calendar includes the GDP report on Thursday and the FOMC meeting on Wednesday, November 4th in which the market is discounting a zero percent chance of a rate hike at the meeting. But the market will be watching for any language changes in their statement release. This week, earning season is busy as 149 of the S&P 500 companies are due to report. Economic reports of interest include Wednesday's Durable Good Orders and New Home Sales report.

Mel

Information provided by Amtrust Bank Capital Markets

Thursday's bond market has opened in negative territory again as traders still wait for direction on the stock markets. Stocks are closed up with the Dow up 131 points and the Nasdaq up 14.56 points. The bond market is currently up 6/32, we will likely see an improvement in mortgage rates today.

Neither of today's economic releases were considered to be highly important. The Labor Department gave us favorable news with an announcement that 531,000 new claims for unemployment benefits were filed last week. This was higher than expected, indicating that the employment sector may be weakening. However, this data usually has little influence on mortgage rates unless it varies greatly from forecasts because it tracks a week's worth of new claims.

Late this morning the Conference Board, who is a New York-based business research group, said that their Leading Economic Indicators (LEI) rose 1.0% last month. This was a larger jump than what analysts had expected, meaning that economic activity may increase over the next three to six months at a faster pace than many had thought. This is negative news for bonds and mortgage rates because rapid economic growth raises fears of inflation that makes long-term securities such as mortgage-related bonds less attractive to investors.

Yesterday afternoon's release of the Fed Beige Book didn't give us any significant surprises. It pointed towards a stabilizing economy in most regions and slight growth in some, which was the general consensus anyhow. This made it a non-factor on mortgage rates late yesterday.

September's Existing Home Sales will be posted late tomorrow morning. This National Association of Realtors report gives us an indication of housing sector strength and mortgage credit demand by tracking home resales. It likely will have little influence on the bond market or mortgage rates unless its results vary greatly from analysts' forecasts. It is expected to show an increase in sales from August to September, meaning that the housing sector likely strengthened.

                   Mel

Tuesday's bond market has opened in positive territory following weaker than expected economic reports and early stock losses. The stock markets are negative ground with the Dow down 52 points and the Nasdaq down 14 points. The bond market is currently up, which will likely improve this morning's mortgage rates.

The Labor Department reported this morning that September's Producer Price Index (PPI) fell 0.6% while the core data fell 0.1%. Both of these readings were weaker than expected, indicating that inflationary pressures at the producer level of the economy remained subdued last month. This is very good news for bonds because inflation erodes the value of a bond's future fixed interest payments. Therefore, a low inflation environment makes bonds more attractive to investors and leads to lower mortgage rates.

September's Housing Starts was also released this morning. It also showed weaker than expected results, meaning that the number of construction starts of homes fell short of expectations. This is good news for bonds because a weak housing sector makes a broader economic recovery less likely. However, this data was not nearly important to the markets as the PPI readings were.

The only data scheduled for release tomorrow comes during afternoon trading when the Federal Reserve will release its Beige Book at 2:00 PM ET. This data details economic conditions throughout the U.S. by region. It is relied upon heavily by the Federal Reserve during their FOMC meetings when determining monetary policy. If it reveals stronger signs of inflation or economic growth from the last release, we could see mortgage rates revise higher shortly after its release.

                Mel

Investors were ecstatic as the Dow Jones Industrial Average broke the 10,000 mark for the first time in 2009. The New York Times called the Dow's rise to 10,000 “a milestone of the stock market’s recovery from the depths of the financial crisis.” Given struggles with all-time highs in foreclosure rates and unemployment rate soaring toward 10 percent, it’s a big boost to investor’s morale.

The Federal Open Market Committee (FOMC) minutes also eased investors' fears of the Fed’s withdrawal of support in the near future. The Fed believes that the economy has started its recovery process, but that it is still not ready to survive without its support.  Furthermore, The Fed's outlook for inflation is still soft, although oil prices bumped up their numbers for headline inflation.

As the stock markets continued their upward climb this past week, all major indices trended positive, with gains of up to 2 percent. Fueled by an upward movement in oil prices, the energy sector rose nearly 5 percent over the last week.  Among varied economic indicators, third quarter corporate earnings have kept investors and analysts very busy.  All major economic indicators, from retail sales to the manufacturing index, either met investors’ expectations or exceeded their expectations. Even the investors’ biggest challenge, the employment numbers, were modestly better.  Continuing claims dipped below six million, while jobless claim numbers also fell below market expectations. 

JP Morgan Chase posted an earning per share of $.81, beating the market expectation of $.51. In another major boost to the stressed financial sector, both Goldman Sachs and Citigroup also reported better than expected earnings. However, due to increased credit losses, Bank of America fell short of investors’ expectations. The service sector is still facing the heat of the recession, as both IBM and GE posted third quarter losses. Google helped offset that bad news, though, with its positive earnings release.

Rising commodities are usually seen as a proxy of a growing economy. With oil and gold prices hitting their highest levels in 2009, there is little doubt that the rate of expected economic improvement has risen in tandem. The weak U.S. dollar and less-than-expected increases in inventory have contributed to a further rise in oil prices.

The imperiled housing sector is even more troubled, as foreclosures rose to an all-time high. With the U.S. Treasury losing its shine versus stocks, the mortgage sector also witnessed an upward move in rates. The Conforming Fixed 30-year rate was hanging at around 5.0 percent while the Conforming Fixed 15-year rate was around 4.45 percent. Standard 5/1 ARM rates were hovering around 4 percent.

                                Mel

Information provided by Amtrust Bank Capital Markets

Meanwhile, after a spirited rally from July through September, the stock markets in the U.S. also cooled and in tandem with the zeitgeist, headed southwards this past week. The three major indices lost around 2 percent in value. Reports of a weak job market, with unemployment touching 9.8 percent, raised concerns about the pace of recovery. It is reported that upward of a half a million people have given up looking for a job or have taken up part-time work. Economists refer to such people as underemployed. If the number of underemployed workers is included, the unemployment rate could be as high as 17 percent. Even with the hope of an optimistic annual 3 percent compounded economic growth, the Fed Chairman, Ben Bernanke, expects the unemployment rate to remain above 9 percent through the end of 2010.

On the positive side, the housing market is showing some signs of stability. For the 7th straight month, sales of existing homes have risen. The S&P Case-Shiller index -- which tracks home prices across 20 metropolitan regions in the U.S. -- has continued to rise for the third straight month. One hopes that the housing market has finally bottomed out and that it continues to stabilize and improve in the coming months.

Mortgage rates are also looking very attractive. The 30-year fixed mortgage rate averaged 4.94 percent this week, falling to a four-month low. The 15-year fixed rate at 4.36 percent is the lowest rate since Freddie Mac began tracking in 1991. First-time home-buyers should note that the $8,000 tax credit for buying a home is valid only until December 1, 2009, unless the government extends the subsidy. The hope is that buyers will clinch a good deal while the market remains extremely attractive.

It has been a year since the $700 billion TARP bailout package was announced. To date, $450 billion has been used to stabilize various sectors in the economy. Some economists feel that these efforts helped avoid a global economic collapse. However, on the flip side, this massive government spending has weakened the U.S. dollar and increased the debt envelope, which has ballooned decisively. Since March, the dollar has lost 14 percent of its value against a basket of seven currencies, raising concerns as to whether the dollar can maintain its status as the world's leading currency.

Despite all the above issues, Treasury Secretary Timothy Geithner indicated that the government is not yet ready to roll back stimulus plans. An exit strategy, requiring a careful and measured macro approach, would have to be contemplated in a phased manner, and only once "conditions stabilize and growth strengthens."

Gold, in particular, and precious metals in general have risen and gold prices crossed the threshold $1000 per ounce mark, notwithstanding the news that the IMF has decided to sell around 380 tons of the precious metal to bankroll their governmental lending programs. Base metals and commodities are also showing signs of recovery while oil is still moving sideways in a tight price band of $66 - $72 per barrel.

                Mel       

Information provided by AMtrust Bank Capital Markets

Friday's bond market has opened relatively flat despite weaker than expected economic data. The stock markets initially opened well in negative territory but have since recovered a good portion of those losses. The Dow is currently down 12 points and the Nasdaq is down 5 points. The bond market is down 2/32, but we still should see an improvement in this morning's mortgage rates.

The Labor Department gave us today's big news with the release of September's Employment report. They reported that the U.S. unemployment rate stood at 9.8% last month, as expected. However, the number of lost jobs was 263,000, exceeding forecasts of 180,000. The third important component of the report- average hourly earnings, did not rise as much as thought. Overall, this data is favorable to bonds, but we have not seen much buying this morning as it appears the recent rally may be running out of steam.

The second report came from the Commerce Department, who said that new orders at U.S. factories fell 0.8% in August. This was much lower than the 0.5% increase that was expected and indicates that the manufacturing sector is weaker than many had thought. That is also good news for bonds and mortgage rates, but the employment figures were much more important to the markets than this factory report. Therefore, its impact on trading has been minimal.

Next week is pretty light in terms of economic reports, so look for the stock markets to influence trading and mortgage rates. Since the bond market has failed to rally around today's news, it may be time to take a conservative approach towards mortgage rates if still floating a rate with your lender

Mel