Mel's Blog

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.

Fed Day is here once again, and at 2:15pm ET, the Fed will announce their interest rate decision and policy statement.  We expect that the Fed will make a .25% cut, bringing the Fed Funds Rate to 2.00%.  But as I mentioned in yesterday's Update, what will really grab attention is the policy statement.  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 - whereas in the past, Bonds have worsened in response to the Fed's cuts, as they serve to fuel inflation.  This announcement should be very interesting so stay closely tuned later today. 

In the mix this morning was a better looking ADP Employment Report, which showed 10,000 new jobs created, far exceeding their own estimates for 60,000 jobs lost.  ADP has not been a super accurate indicator for the official Jobs Report, but this positive reading did raise some eyebrows in the trading pits.  Tomorrow, I will lay out my Jobs Report strategy heading into Friday's important  release.  At the moment, economists are expecting the Department of Labor's report to show a loss of 75,000 jobs for the month of April.

The Chicago Purchasing Manager's Index for March was reported at 48.3, slightly better than expectations of 47.5.  The market offered little reaction to the news. 

Mortgage Bonds are tip-toeing on the 50-day Moving Average, but the news from the Fed this afternoon will trump all technical signals.  I will be patient and carefully float into the Fed announcement later today.     

After two days of nice gains, Mortgage Bonds are taking a little breather as prices test a ceiling of resistance at the 50 and 100-day Moving Averages.  Stocks are under some selling pressure on news that Germany's largest Bank, Deutsche Bank, reported its first quarterly loss in five years after writing down 2.7 Billion Euros ($4.2 Billion) in sub-prime related losses.

Today kicks off the two day Fed Meeting and tomorrow the monetary policy decision and statement will be announced.  I expect the Fed to lower the Fed Funds Rate by .25%, to 2.00% and this is also what the Fed Funds Futures are presently pricing in. 

At 10:00am ET, Consumer Confidence will be reported.  Unless the report wildly misses expectations, I don't expect the market to react too dramatically in advance of the Fed tomorrow.  I will float, but very carefully as prices test a dual layer of resistance at the 50-day and 100-day Moving Averages.  As mentioned in yesterday's update, a signal from the Fed tomorrow that the rate cutting cycle is over should help Bonds.  But because they are testing resistance, this a very delicate situation.  I will float and give the Bond a chance to improve, but be ready to lock should things change in this volatile market. 

With no economic news on the calendar today, action is slow as Traders gear up for what is expected to be a week filled with some of the biggest economic events of the month.  

On Wednesday, the Fed will release their Policy Statement and interest rate decision.  At the moment, the Fed Fund Futures are pricing a 75% probability of a .25% cut to the Fed Funds Rate.  We also see a .25% cut, but of far more importance will be the Fed's Policy Statement.  As you know, Bond prices have reacted very poorly after Fed Rate cuts, due to the expectation that the cut will spur on inflation.  But if the wording of the Policy Statement leads Traders to believe this may be the final cut, it might just have the opposite effect, helping Bonds actually move higher with the reduced prospect of the Fed spurring future inflation.

Right on the heels of the Fed decision and statement, Thursday will bring the Fed's most favored gauge of consumer inflation, the Core Personal Consumption Expenditure Index (PCE).  Especially since it will come after Fed day, it will be interesting to see the inflation read in light of the Fed's decision.  And as if this weren't excitement enough for the week, Friday will bring the important Jobs Report, where early estimates are for a loss of 80,000 jobs. 

With Bonds currently trading between overhead resistance at the 50-day Moving Average and support at the 200-day Moving Average, Bonds will likely take their cues from action in the Stock market today.  For now, I will Carefully Float - but as usual, keep your transactions ready to lock, as we have seen many dramatic intra-day reversals of late.