Improved Housing Affordability Resulted in Existing Home Sales Pickup
If decreasing housing prices bring increased affordability, then what does affordability bring? More buyers. According to the National Association of Realtors, the home affordability index was at the highest level in nearly five years, contributing to a pickup in existing home sales in February. Frank Nothaft, Freddie Mac vice president and chief economist noted drop in prices and resulting increase in sales in his weekly report. "The S&P/Case-Shiller Home Price Index reported a decline of 2.3 percent in from December to January in its 10-City Composite Index and a cumulative decline of 11.4 percent from January a year ago." The mixed, but expected, bad news from the economic indicators resulted relatively unchanged interest rates. The 30-year fixed-rate mortgage (FRM) averaged 5.85 percent with an average 0.4 point for the week ending March 27, 2008, down ever so slightly from last week when it averaged 5.87 percent. Last year at this time, the 30-year FRM averaged 6.16 percent. Meanwhile, five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) averaged 5.67 percent this week, with an average 0.6 point, up a twitch from last week when it averaged 5.56 percent. Read the entire report here.
It's the official start of Baseball season for most of the country today. And after several "wild pitches" from Mortgage Bonds, this morning's action has been relatively quiet. The good news is that prices are modestly higher, on the heels of a strong rally Friday.
The Chicago Purchasing Managers Index (PMI) for March showed a reading of 48.2, stronger than expectations of 46.7. Not much reaction to the number.
Treasury Secretary "Hammering" Hank Paulson is banging away at the mortgage industry and is currently speaking about a plan to have the Federal Reserve become "responsible for overall issues of financial market stability, and not just overseeing the conduct of banks". This is sure to include the mortgage lending industry, but any proposal will likely take some time to be worked out in Congress. But not too much time, as Senator Chris "my offer is nothing" Dodd and Barney Frank have already been working on proposals that show their dislike for our industry.
At 12Noon ET, San Francisco Fed President Janet "always" Yellen will address an audience on foreclosures - she probably won't move the markets like Loose Lips, but it may be interesting to get her read on Housing.
Mortgage Bonds are trading in the middle of a wide 135bp range between a floor of support at the 50-day Moving Average, presently $100.34, and a ceiling of resistance at the $101.69. At the moment, I will carefully float - but as you know, it can change fast.
Back in the zone! The Fed's most favored measure of inflation arrived this morning - and the Core Personal Consumption Expenditure Index (PCE) for February was reported at 0.1%, matching expectations. But more importantly, and thanks to a downward revision to the prior month's reading, the important year-over-year Core PCE rate now stands at 2.0%, and within the Fed's desired target zone of 1 - 2% for core inflation. The year-over-year Core rate had crept up to 2.2% in recent months, so seeing this moderation in core consumer inflation is very good news.
The overall PCE, which includes volatile food and energy costs, was also reported at 0.1% and matched expectations. This left the year-over-year headline PCE at 3.4%. Bonds had opened the day lower, but have since improved on the favorable core reading, and are now attempting to hold their ground back above the 50-day MA.
In other economic headlines, Personal Income rose 0.5%, which was better than an expected increase of 0.3%, and Personal Spending matched expectations of 0.1%. Consumer Confidence for March was reported at 69.5, which was near expectations of 70.0. None of these headlines moved the market very much this morning, and Bonds are continuing to move higher on the favorable inflation news found in the PCE.
Mortgage Bonds are now back above the 50-day Moving Average, and if prices are able to hold their ground, we could see them trade a bit higher still. But if they are forced back under the 50-day MA, the next floor of support is another 40bp below, at the 100-day MA. Once again, we can carefully float new transactions and see if the Bond can convincingly regain its footing above the 50-day MA...but be ready to lock, as lately, it seems a day doesn't go by without an intra-day re-price.
Bonds are trading lower, however, they are significantly improved from their worst levels of the day. The improvement occured right after the Bond tested its 50-day Moving Average floor of support.
In today's economic headlines, the final reading on Fourth Quarter GDP was unrevised at 0.6%, and caused no market reaction. Initial Jobless Claims were reported at 366,000 - and while this is not a great number, it is an improvement from last week, and slightly better than market expectations of 371,000. The four week moving average was reported at 358,000, which remains near levels seen prior to each of the last two recessions. Stocks actually moved higher on this news because it wasn't as bad as anticipated. And as we typically see, the improvement in Stocks pressured Bond prices lower.
At 12 Noon ET, a parade of Fed officials will hit the mic - Fed President Dennis "the Spider" Lockhart, Fed President Sandra Pianalto and Fed President Gary Stern will be speaking, and their comments could potentially move the markets a little later today.
Bonds briefly dipped below support at the 50-day Moving Average before modestly improving. Hopefully, you locked on yesterday's Alert and avoided this morning's price loss. But now that the price damage is already done, we can Float very carefully on brand new transactions to see if Mortgage Bonds can remain above important support at the 50-day MA.
A poor Durable Goods reading is helping Mortgage Bonds move higher this morning. The market had expected a reading of 0.8%, so the actual reading of -1.7% has pushed Stocks lower and has helped Bonds improve. But - in this crazy environment, it can all change quickly. So we are happy to see the gains, but watching it carefully.
New Home Sales will be reported at 10:00am, but this shouldn't be a huge market mover unless the report wildly misses expectations.
Technically, the Bond is trading in a wide 130bp range between a floor of support at the 50-day Moving Average and a ceiling of resistance at the recent price peaks of $101.69. For now I advise floating, but very carefully as market sentiment can change directions very quickly, especially when Loose Lips has a microphone.
A little bit of seratonin must have hit the Bond pits this morning, putting Bond traders in a happy mood. This follows a nasty two day depression, which caused Bond prices to drop 120bp on the heels of the Fed rate cut. But things are looking up this morning, after an awful Consumer Confidence number, in addition to Stocks starting the day to the downside.
Consumer Confidence for March plunged to a reading of 64.5, which was far worse than expectations of 73.4 and get this...the Expectations component, which measures consumers' outlook for the future, is at a 35-year low.
Stocks have been on a nice little run higher since the Fed cut last week - but they have run into resistance at their 50-day Moving Average, which lies at 1,343 as measured by the S&P 500. Interestingly enough - at the same time, Mortgage Bonds have just hit their 50-day Moving Average, and are bouncing higher. Remember that Stocks and Bonds typically trade in opposite directions from each other, and while Stocks are battling their 50-day MA as a ceiling of resistance holding them back, Bonds are using their 50-day MA floor of support as a springboard to move higher.
Who am I to spoil the happy mood in the Bond pits...I will Float for now, but remember that the euphoria can wear off suddenly, and thus I will remain at the ready should things change.
Last Thursday's Alert to Lock was a bit on the cautious side, but it is paying huge dividends this morning as Bond prices have been battered lower in the early going due to Stock prices surging higher. Bond prices dove down to hit support at the 50-day Moving Average, but have since rebounded slightly.
The reason for the move higher in Stocks is the expectation that the buyout price of beleaguered Bear Stearns will likely be raised from $2 per share to $10 per share. This is an overall boost to the financial sector, which has been the hardest hit area in the latest Stock market downturn.
Encouraging news for the housing market, as Existing Home Sales for February were reported at a better than expected pace. February's inventory of unsold homes fell to a 9.6 month supply, down from January's 10.3 month supply. The median home price was reported at $195,900. The market had been expecting a far worse report, so this surprisingly decent read on housing is helping Stocks move higher, and pressuring Bonds lower still.
Six for six...last Tuesday's cut to the Fed Funds Rate was the sixth in the most recent cycle that began on September 18th. And once again, Bond prices are worse off, with home loan rates moving higher after the Fed rate cut. The media and your uninformed competition still seem baffled by this - although it makes perfect sense when you understand that Fed rate cuts spur on inflation, the arch-enemy of Bonds.
Mortgage Bonds are trading slightly lower and already off the best levels seen earlier today. The bond market will be closing early today at 2:00pm ET and will also be closed on Friday.
Initial Jobless Claims were reported at an almost alarming 378,000, higher than expectations of 360,000 and at levels that suggest recession. The more closely watched four-week moving average rose to 365,250. A reading above 362,000 also suggests the economy is in a recession.
The Philadelphia Fed Manufacturing Index for March was reported at -17.4, which was still lousy, but slightly better than expectations of -18.0. The Index of Leading Economic Indicators (LEI) for February was reported at - 0.3%, which was also met expectations. Stock players were happy to get past this mornings data without a crisis report, and since have moved higher. The move up in stocks is taking some money out of the Bond market.
Speaking of stocks - my Forecast for 2008 included just one stock pick FXP, which is a double short on a basket of Chinese stocks. I mentioned it at $76 and it is presently trading at $122. That is a pretty good return...61%...in two months, especially in a down stock market.
Technically, Mortgage Bonds are trading just below a tough, dual layer of overhead resistance located at $101.69 and $101.81. Prices have not traded consistently above this ceiling in over three years, so the Bond has some headwind to contend with if prices are to continue to move higher. With tough overhead resistance and Stocks moving higher, I think a bias towards locking is prudent.
Easter Holiday Announcement
The bond market will close early today at 2:00pm ET and will be closed the entire day tomorrow in observance of the Good Friday Holiday. Everyone at Excalibur Mortgage wishes you and your family a joyful and peaceful Easter Holiday. My next morning update will be published on Monday, March 24.
Strap on your seat belt again for another wild volatility ride. Mortgage Bonds, which were trading 88bp higher early in the day, have already given back a large portion of those gains. Pricing continues to change very rapidly.
Some big news from the Office of Federal Housing Enterprise Oversight (OFHEO), which just announced that they lifted special capital restrictions that had been put in place for both Fannie Mae and Freddie Mac. This will allow these firms to pump $200 Billion into the mortgage market by way of buying mortgage bonds. This is very good news for our world of Mortgage Bonds because you will have 2 huge buyers in FNMA and FHLMC supporting prices. The significant improvement in Mortgage Bonds prices reflect the markets anticipation that lots of buying will be taking place.
Also helping calm banking fears was a great earnings report from investment banker Morgan Stanley, which recorded a profit of $1.45 per share - well above analysts expectations of $1.03 per share. This strong earnings report on the heels of yesterday's terrific reports from both Goldman Sachs and Lehman Brothers, tells us that the Bear Stearns collapse was more of an isolated incident. Bear Stearns was an enormous buyer of sub-prime mortgages and it came back to bite them. When No-income, 580-FICO, 100% LTV paper hit the street, Bear Stearns was yelling "thank you sir, may I have another".
Yesterday the Fed cut the Fed Funds Rate by .75%, lowering it to 2.25%. There was a lot of chatter that the Fed would cut as deep as 1.0 to 1.25%. The Fed likely kept the cut to .75% because of inflation fears. In their statement the Fed said "Inflation has been elevated, and some indicators of inflation expectations have risen. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully." There were a couple of dissenters at the meeting as both Richard "Loose Lips" Fisher, who blurted out his displeasure and "Three Swing" Charlie Plosser, who preferred the cutting to stop after the third cut in the latest series back in December.
History has shown that Mortgage Bonds don't perform particularly well in the days following a Fed Rate cut, but the news about OFHEO adding to the buying power of the agencies is giving Mortgage Bonds a big lift. For now, we can cautiously float, but be mindful of past history, lenders with itchy trigger fingers and tough overhead resistance. The next clear floor of support lies at the 50-day MA, which is a distant 100bp beneath present levels.
Bonds enjoyed enormous gains yesterday on the heels of the almost unprecedented weekend action by the Fed, cutting the Discount Rate and facilitating the Bear Stearns bailout. And just as we mentioned in yesterday's Alert, this volatile market can sure change direction very quickly - and this morning, Bonds are giving back some of yesterday's 150bp gain.
Stocks are soaring higher on positive earnings results and outlook from two major players in the financial world, "best of breed" Goldman Sachs, and troubled Lehman Brothers. Particularly on the heels of the Bear Stearns situation, this was very welcome news to a jittery Stock market. Goldman Sachs Chief Executive Lloyd Blankfein stated "Market conditions are clearly very difficult, but we saw strong customer activity across many of our franchise businesses in the first quarter. Although market conditions present many challenges at the moment, they also offer considerable opportunities." Good news for Stocks, but as they rocket higher, the positive news is pulling money right back out of Bonds.
In other economic headlines, Housing Starts for February were reported at an annual rate of 1,065,000, stronger than expectations of 995,000. On the other hand, Building Permits came in a little lower than expected, but all in all, not a bad report. Additionally, the Producer Price Index (PPI), which measures inflation at the producer or wholesale level, increased by 0.3% in February matching consensus estimates, with the Core PPI increasing by 0.5%, hotter than expectations of 0.2%. Overall PPI on a year-over-year basis moderated a bit, but the Core PPI did increase slightly on a year-over-year basis to 2.4%. This report does show an increase in core wholesale inflation, but these costs may not be passed to the consumer, as evidenced by last week's tame Consumer Price Index report. Any flavor of inflation is never good news for Bonds, so this helped Bonds move lower still this morning.
And here we go...adding to the already incredibly volatile mix is today's Interest Rate Decision and Policy Statement by the Fed, due to be released at 2:15pm ET. The financial markets are now widely expecting a cut of .75 to 1.0%, with some even saying it could be as much as 1.25%. And for all the criticism this Fed has received, they've been incredibly creative thus far. And the criticism is sure nothing new - Bernanke and this Fed team have been under fire since they got started. When they stopped hiking, everyone complained...now that they are easing, everyone is still on their backs. But think of what this Fed has had to deal with - a US recession in the works, a worldwide credit crisis, major housing and mortgage related issues - and overall, this Fed has responded aggressively, and creatively. Even in the wake of major financial institutions like Bear Stearns crumbling - the market didn't fold and the sun still came up today.
History shows us that in the wake of a Fed cut, Bond pricing may initially pop a bit higher in response, but generally very quickly reverses direction and worsens. Fed cuts fuel inflation, because the lower rates just serve to make it more attractive to buy and finance goods and services...and remember, inflation is the arch-enemy of Bonds. So here's your game plan - Float as you receive this morning's rate sheets, but be totally prepared and ready to Lock. Call your clients, make them aware of what is happening, provide them a copy of our recent article "Why Fed Rate Cuts Do Not Equal Lower Mortgage Rates" which can be found in the HotLinks section of the website, have everything lined up, loaded and ready to go.
Yesterday brought some terrific gains, so explain both the volatility and the dynamics of a Fed cut to your clients, let them know you are watching closely...and let's play it smart. Initially we may see a little pop higher in prices, but ultimately the Bond will likely be forced lower again.
Sunday, Bloody Sunday...adding to an already insane level of volatility was yesterday's coordinated action by the Fed and JPM Chase to bail out troubled investment banker and huge sub-prime holder Bear Stearns. The 85-year-old Bear Stearns is having its stock purchased by JPM Chase at $2 per share, for $236 Million...yes, that's Million with an M. Bear Stearns was trading near $90 at the end of February, with a 52-week high near $160. Bear Stearns was the number one buyer of sub-prime loans, with a huge appetite for this type of paper – their greed for fees pushed them to buy sub-prime transactions with both fists, and this strategy has come back to haunt them.
As you can imagine, Stock markets around the world are all sharply lower on this disturbing news - including pre-open trading on our US Stock market. This has resulted in a "flight to quality" out of Stocks, and into Bonds, which are trading higher. There are many important events coming this week that will shape trading direction moving forward, including tomorrow’s important Fed Rate Decision, which we will discuss. Of perhaps even greater importance will be the earnings reports and especially the outlook from other investment banking giants like Goldman Sachs and Lehman Brothers, who are actually reporting before the market’s opening bell tomorrow – and Morgan Stanley’s earnings and outlook due before the bell on Wednesday.
Aside from the weekend arrangements made to save Bear Stearns, the Fed was also busy slashing the Discount Rate by .25%, bringing it to 3.25%. This is the first time the Fed has taken this type of weekend action in nearly 30 years. The Discount Rate, typically 1% above the Fed Funds Rate, now stands just .25% above the 3% target Fed Funds Rate. This move by the Fed is a bit curious, considering the close proximity to tomorrow's meeting when they would normally make such an announcement. And it's almost a given that the Fed will shave .75% off the Fed Funds Rate, but this surprise cut to the Discount Rate makes us wonder if this already creative Fed has something else up its sleeve.
In other news, the Empire State Manufacturing Index reported a very dismal -22.2 reading. Analysts had already been bracing for a lousy number of -5, but this reading again reinforces the feeling that this economy is dealing with a current recession. And more negative economic news came by way of the Capacity Utilization at 80.9% versus expectations of 81.3%, and Industrial Production, at -0.5%, worse than an expected -0.1%. Bonds received an additional boost on the news.
I am floating for now, in this highly volatile environment – but remain ready to take action should things change.
The markets have been crazy, but the volatility has increased a notch this morning. A surprisingly tame read on inflation, rumors of an emergency Fed cut that could happen as soon as today, and news of Bear Stearns being in deep trouble are all sending shock waves through the markets. Both stocks and bonds are swinging wildly.
Financial Brokerage / Investment Banking giant, Bear Stearns, has seen its liquidity position significantly deteriorate to the point where both the NY Fed and JP Morgan Chase have stepped in to lend money to rescue them from possibly going out of business. The Stock market initially moved sharply lower on this scary news and Bonds have moved higher. Additionally, Fed Fund Futures are just about fully pricing in a .75% Fed cut at next week's meeting and there are rumors swirling that the Fed could cut as early as today to calm the market fears. After the initial shock, stock prices are still down, but much improved. Mortgage Bonds are up solidly, but have given back most of their spiked up gains from the negative news.
As mentioned earlier, the financial markets were delivered one good surprise this morning by way of a low consumer inflation reading. The Overall and Core Consumer Price Index (CPI) were reported unchanged, which was far cooler than expectations of 0.3% and 0.2% respectively. These tame inflation numbers leave the Overall CPI at 4.0% on a year over year basis. And the more closely watched Core CPI remaining at a 2.3% annual rate. This gives the Fed a green light to cut by 75bp on or before next Tuesday's meeting.
The Reuters/University of Michigan Consumer Sentiment Index for March was reported at 70.5, which was better the 69.5 forecast. The number was lost in the sauce amidst the breaking news on Bear Stearns.
We are in an unprecedented period of volatility, and this is hard for us all. I know that you must be feeling a lot of anxiety...and we sure feel it too. The crazy swings make it a challenge.
The volatility just won't let up. Bonds are trading sharply lower, but much improved from where they were earlier this morning, all on the heels of news that the Carlyle Group, which manages a portfolio of mortgage-backed securities, will not be able to meet a margin call. Last Friday's Update explained how margin calls work, so go to the Update archive to review the impact of margin calls. The Carlyle Group is heavily leveraged, having about 3% equity, compared to 97% owed or on margin. Even though their portfolio is AAA rated and performing well, the downgrades have reduced the value of these holdings - and because of the leverage, each dollar of downgrade is equal to $32 in loss for The Carlyle Group, which they then either have to meet with cash, or sell holdings. The large dumping of mortgage paper from The Carlyle Group this morning had savvy traders licking their chops. Just like buyers scoop up homes being sold under duress at cheap prices, traders took in these mortgage-backed securities at much lower price levels, as Carlyle was under duress to sell. Since the initial shock, Bond prices have stabilized and come back to regain half of the price decline from earlier this morning.
Gold hit a milestone by crossing the $1000/oz mark today, and oil trades near historic highs. Stocks and Bonds both continue to swing wildly in this crazy volatile market. And what promises to add to the volatility mix, tomorrow morning we will get the inflation measuring Consumer Price Index (CPI) report for February.
On the news front, Retail Sales were reported at -0.6%, which was worse than expectations of 0.2% and indicates that consumers are hunkering down and tightening their wallets. Initial Jobless Claims were reported at 353,000, which was slightly lower than expectations of 355,000. The four-week moving average of Initial Claims declined to 358,500. This morning's economic news is really Bond friendly, but the excessive liquidation of mortgage-backed securities leaves prices lower.
As I write to you, Treasury Secretary "Hammering Hank" Paulson is banging away at the mortgage industry, calling for more oversight, more disclosure (like we don't have enough), and stricter national licensing standards. It's a shame that for a few bad actors out there in the industry, many of whom are already gone, will likely be the catalyst to bring about a more cumbersome process for the rest of us.
Mortgage Bonds are trading significantly higher, adding to yesterday's nice gains. Today is a slow economic news day, but that doesn't mean we are taking a break from the volatility - prices have already swung in a wide 63bp range so far today.
The Bond trading pits are still buzzing about the Fed’s new liquidity crunch management tool, the Term Securities Lending Facility (TSLF), which was announced yesterday. The TSLF will provide borrowing banks with $200 Billion to draw on, and will accept some mortgage-backed securities as collateral.
The Bond made an impressive bounce higher off the 200-day Moving Average yesterday. I will continue to advise floating, but very carefully in this volatile environment...especially as the Bond approaches a dual ceiling of resistance at the 25 and 100-day Moving Averages.
Mortgage Backed Securities have basically just been upgraded by the Fed. In an effort to inject liquidity and break the freeze in the credit markets, the Fed announced a new lending instrument for banks, which allows Mortgage Backed Securities to be used as collateral. This clearly helps increase the value and perception of Mortgage Bonds.
Stocks are roaring higher on hopes that this latest Fed move can help cure some of the ailments in the credit markets - but are battling a technical barrier for the Dow at 12,000. If Stocks break above this level, they could have room to rally higher, which may add some selling pressure to Bonds.
Before the news, Mortgage Bonds were down 62bp and below the important 200-day Moving Average, and the 10-year Note was sinking as well. But the Fed move helped Bonds greatly reduce their losses, and claw their way back above the 200-day MA. Meanwhile...the 10-year Note is still wallowing lower. Another day to be glad that your uninformed competition continues to watch the wrong indicators.
Technically, it's all about the 200-day Moving Average. Mortgage Bonds are attempting to hold their head above this important floor of support. For now, I will Float, but very cautiously in this wild trading environment.
After a nice day on Friday, Bonds had some good follow through to the upside in the early going this morning, as they were up as high as 31bp. But then the rumor mill got going with chatter of an "inter-meeting" or emergency Fed Rate cut prior to next Tuesday's scheduled Fed Meeting. As we know, Mortgage Bonds have not reacted well to Fed Rate cuts - and this morning's talk of a Fed Rate cut promptly reversed the upward course of Bonds, and have sent them significantly lower.
Today there are no major economic reports scheduled for release and no Federal Reserve officials scheduled to speak. But that doesn't mean the volatility is going away, especially as the price of the Bond heads towards important support at the 200-day Moving Average, which is located 18bp below current levels.
And currently Mortgage Bonds find themselves a whopping 78bp higher, but have been smacked lower off the 200-day Moving Average ceiling.
Adding to the mix is this mornings Jobs Report - which is the biggest market mover of the month. And The Labor Department reported a loss of 63,000 jobs in February, which was far worse than expectations of 25,000 job creations. Adding further weakness to the report, were downward revisions for both January and February, erasing an additional 46,000 jobs from what was previously reported. So it appears my Jobs Strategy yesterday was accurate, as this negative report has sent Mortgage Bonds soaring higher so far today, but unfortunately only erasing most of yesterday's wild sell-off.
So what happened yesterday? As we all know - only fools think that mortgage rates are based on the 10-year Note - many of them in the media. Yesterday's action simply underscores this fact. History shows us that Mortgage Bonds and the 10-year Treasury Note are only an exact match 1 trading day out of 100. So, watching the 10-year Note for mortgage pricing is the equivalent of using a broken watch to time your appointment.
Yesterday, losses from The Carlyle Capital Group and Thornburg Mortgage decreased their capital to the point where their financial backers had asked for cash back in the way of a "margin call". What does this mean? Imagine a home that received a loan with a 50% LTV...but a provision in the loan stated that under no circumstances could the equity fall below 50%. And the home would need to be appraised every day to evaluate this. If that home lost significant value, the lender would be entitled to an immediate repayment. And when the home actually decreased in value, the lender would make a call for capital to make sure their margin of LTV was intact...a margin call. If the homeowner had the cash to meet this call - all is fine. But if the homeowner did not have the cash, the only way to satisfy the lender would be a sale of the home. And that is what Carlyle Capital Group and Thornburg Mortgage had to do yesterday...they didn't have enough cash to meet their margin call, so they were forced to sell mortgage loans that they were holding. This flood of mortgage paper on the market, pushed Mortgage Bond prices lower...much lower. But this didn't have any impact on Treasuries, which were in fact higher on the day. As we have always said, these two securities trade independently.
This morning, the Fed announced additional liquidity through its TAF or Term Auction Facility. This began in December and played a major role in bringing down LIBOR rates, as it added a competitive supplier of short term funds. This helps ARM resets and warehouse lines, but not much help for bonds.
It's an important day, with the Jobs Report in store for tomorrow morning...and right now, the battle at the significant 200-day Moving Average is on. Bonds are now trading just slightly below this important floor of support, however, this is an enormous improvement from earlier in the day when Bonds traded as much as 63bp lower on the day. We've discussed in the past the importance of the 200-day Moving Average, and if you take a look at the Bond Page in a 2-year view, you can see that once the Bond breaks convincingly above or below this level, it generally remains above or below it for a significant amount of time. When Bonds last closed below this floor back in May 2007, it took prices over five months to climb back above this ceiling. Bottom line, this is a very important juncture for Bond prices.
In today's news, Initial Jobless Claims were reported at 351,000, which was a bit better than expectations of 360,000 and the lowest reading since the end of January. The four-week moving average of Claims held steady at 360,000, which is teetering on levels seen before each of the last two recessions. All in all, this report is slightly better than recent Claims reports, but contraction is still evident in the labor markets.
Jobs Report Strategy
Heading into tomorrow's Jobs Report, I am seeing that the recent trend of economic reports suggests that the economy is indeed slowing, which does tend to slow the labor market in turn. Yesterday's ADP Report indicated weaker hiring levels. Initial Jobless Claims have moved higher of late, hovering around 360,000. Lower Unit Labor Costs shows productivity has improved, which also leads to less hiring. At the moment, economists are expecting 25,000 new jobs to be created in March, lowered on the heels of the ADP report from their previous estimates of 40,000. Bottom line, I just don't see this Jobs Report coming out as a blockbuster.
Additionally, the technical outlook has improved. Bonds were in an oversold state following their recent downtrend, but now are clawing their way back higher towards the important 200-day Moving Average.
With the weak labor data we've observed of late, technical factors showing some positive signs, and most of your pipeline already protected - I feel it is prudent to advise Floating into tomorrow's Jobs Report, which will be released at 8:30am ET.
In this highly volatile environment, prices are up this morning, but are now facing a difficult challenge presented by the ceiling of resistance at the 100-day Moving Average. It will be interesting to see how the Bond reacts to this pivotal barrier. Should the Bond be pushed back lower...and we think it will, there is a long way to fall before hitting a floor of support. But a breakout to the upside above the ceiling gives the Bond room to run higher before reaching the next ceiling. It is no coincidence that the price has stalled at exactly this level.
The ADP Employment Report for February was released showing a loss of 23,000 jobs in the private sector and this was below consensus estimates of +15,000 new jobs. After adding the most recent three month average of 25,000 government created jobs, today's ADP Report suggests Friday's official Labor Department Jobs Report will be close to Unchanged for February. At the moment, economists are expecting Friday's Jobs Report to show 25,000 new jobs gained, so this weak ADP Report is helping the markets prepare themselves for a soft number on Friday and giving Bonds a lift.
Some good inflation news for Bonds this morning - Unit Labor Costs in the 4th quarter rose just 0.9%, indicating little labor-based inflation pressure. And with the labor market weakening, labor-based inflation should pose less of a threat in the coming quarters.
The ISM Services Index for February came in at 49.3, better than the 47.5 the markets were expecting. After last month's ugly number, stocks should react well here and Bonds may turn lower.
After a couple of very bad days for Bonds, prices are now attempting to claw their way back and have reached resistance at the 100-day MA, but as mentioned earlier - this will be a tough fight. Tomorrow we will lay out our Jobs Report Strategy heading into Friday's important release, but for now I will recommend Locking as prices are going to have a hard time breaking the ceiling at the 100-day MA. Stay tuned, the volatility isn't going away.
The bond is trading very actively as inflation talk is raising concerns. The Bond has been pushed back below the dual layer ceiling of resistance at the 25 and 50-day Moving Averages.
Philadelphia Fed President and voting member "Three Swing" Charlie Plosser came out of the gate with some surly comments early this morning, suggesting the Fed is losing its credibility as an inflation fighter and that monetary policy "should be reversed quickly once the threat from financial markets abates"...meaning that he believes the Fed should take back some of these cuts.
I have been also saying for sometime and highlighted in my forecast that inflation could be a much bigger threat than many believe, and Plosser seems to agree. Three Swing Charlie also said "'One cannot and should not ignore other fundamental aspects of policy, especially the tendency for inflation to accelerate when policy is unduly easy..." and "Deviations (in monetary policy) should be temporary and limited and promptly reversed when conditions return to normal...to do otherwise risks eroding central bank credibility and unleashing inflation expectations." Bonds didn't like any of this talk and have been under some selling pressure so far today.
The ISM Manufacturing Index was reported at 48.3, which was better than expectations of 48.0 and rumors of an even worse reading. On the news Bonds turned lower, erasing a rebound attempt in prices. Stocks had been expecting a stinker of a number, so they actually improved from much worse levels after the ISM.
At 2:00pm ET, Fed Governor and known hawk, Randall "The Axe" Kroszner will speak. Kroszner may also voice his displeasure with the Fed's desire to fight recession at the expense of inflation. As we have seen already this morning, the market could react to his take on the economy, inflation or Fed monetary policy.
The Bond is now trading below both the 25 and 50-day Moving Averages...this is not a good signal. The market is very volatile and prices could make their way back above this dual layer of support, but should prices remain at or lower than present levels I feel a bias towards locking is prudent as prices could erode quickly from these levels.