Mel's Blog

Wednesday's bond market has opened in negative territory following stock gains and a little stronger than expected economic report but it has since righted itself. The stock markets are rebounding from yesterday's losses with the Dow up over 79 points and the Nasdaq up 16 points. The bond market is currently up 6/32, but we likely see little change in this morning's mortgage rates due to strength in trading late yesterday.

Today's relevant economic data came from the Institute of Supply Management (ISM), who reported that their manufacturing index for June stood at 44.8. This was higher than what analysts had forecasted, indicating that manufacturer sentiment was stronger than thought. This is considered negative news for bonds and mortgage rates because strengthening manufacturing activity means that the economy is working towards a recovery. A weak economy makes bonds more attractive and stocks less appealing to investors.

Tomorrow morning brings us the release of two reports, including the almighty Employment report. The Labor Department will post June's unemployment rate, number of new payrolls added and average hourly earnings early tomorrow. These are considered to be very important readings of the employment sector and can have a huge impact on the financial markets. The ideal scenario for the bond market is rising unemployment, a large decline in payrolls and no change in earnings. Weaker than expected readings would likely help boost bond prices and lower mortgage rates tomorrow. However, stronger than expected readings could fuel a bond sell-off and be extremely detrimental to mortgage pricing. Analysts are expecting to see the unemployment rate rise 0.2% to 9.6%, while 363,000 jobs were lost and a 0.1% rise in earnings.

The Commerce Department will post May's Factory Orders data late tomorrow morning, which is similar to the Durable Goods Orders report that was released last week. The biggest difference is that this    week 's report covers both durable and non-durable goods. It usually doesn't have as much of an impact on the bond market as the durable goods data does, but can lead to changes in mortgage pricing if it varies greatly from forecasts. Current expectations are showing a 0.8% rise in new orders from April's levels. A smaller than expected rise in orders would be considered good news for the bond market, and could help lower mortgage rates. However, the employment data is much more important to the markets than this report is.

The financial markets will be closed Friday in observance of the Independence Day holiday and will reopen Monday morning. This may lead to additional volatility tomorrow as traders prepare for and protect themselves over the long weekend. There will not be an early close in the bond market tomorrow, but I suspect that trading will be thin during afternoon hours as market participants head home for the holiday weekend.

                                Mel

Well, it was a tough initial start for domestic stock markets last week as renewed fears of a prolonged global economic slump emerged. What exacerbated the move was a report from the World Bank that that the global economy will shrink 2.9 percent this year, much worse than the earlier prediction of a 1.7 percent contraction. Housing data added to the woes as sales of existing homes rose only 2.4 percent in May, less than expected. Monday witnessed the biggest single-day drop in two months as the Dow slid 201 points. Large financial company stocks are particularly and extremely volatile in these times. However, by the end of the week, the markets had regained most of their composure and had settled back to levels only slightly below the Monday pre-opening levels. The Dow index closed out the week at 8,438 while its NASDAQ cousin finished at 1,838. To put it in context, the Dow is still up a whopping 29 percent from its closing low of 6,547 hit on March 09. However, the Dow "blue chips" still remain a pocket-numbing 40 percent down from the highs set in October 2007. In other words, we still have a way to go before most of us can breathe a sigh of relief when looking at our 401(k) statements.

The Federal Reserve held steady this week as they announced the minutes from their latest meeting. The Federal Open Market Committee (FOMC) voted unanimously to maintain the federal-funds rate at a range between zero and 0.25 percent. There was some disappointment when the Fed did not boost the size of the $300 billion Treasury-purchase program. Yields on Treasury bonds increased as a result but still finished the week lower at 3.53 percent versus a recent high of 3.95 percent set on June 10. This is good news for mortgage rates, as these rates, for the most part, move directionally in tandem with their 10-year Treasury counterparts. The recent mortgage refinance boom has collapsed of late under the weight of rising mortgage interest rates and so any down-draft in rates is excellent news for consumers and lenders alike. The Mortgage Bankers Association (MBA) cut its forecast of home-mortgage lending this year by 27 percent. It now expects $2.034 trillion of originations of one-to-four family mortgages in 2009, down from a March forecast of $2.780 trillion. This has everything to do with the fact that 30-year fixed-rate conventional mortgage rates have recently been in a range of 5.25 percent to 5.625 percent, up from the 50-year lows of less than 5 percent in April and May. Refinance transactions accounted for a staggering 78 percent of 1-4 family mortgage originations during the first quarter of 2009. Refinance activity accounted for 72 percent of total originations in 2003 when all-time records for lending and refinance volumes were set.

Consumers are starting to spend more as the May data reflected an increase in purchases, the first gain in three months. In tandem with this, the earnings rate climbed 1.4 percent, driving the savings rate to a 15-year high. However, the destruction of wealth caused in large part by the housing crisis may keep savings trending higher which is not necessarily good news for an economy that relies on consumer spending, thereby implying that any economic recovery will be slow in developing. Certainly, Bernie Madoff won't be doing his bit to stimulate any spending anytime soon as he faces as many as 150 years in jail. Maybe he can find solace in the fact that he will be in "good" company and that he might be playing "Charades" with the founder of Adelphia Communications (serving 12 years) , a WorldCom chief executive (serving 25 years), a hedge fund executive (serving 20 years) and a former Refco CEO (serving 16 years). Speaking of incarceration, Texas financier Allen Stanford is currently fighting and hoping that he can continue being served martinis by bikini-clad waitresses on the sun-soaked beaches of Antigua rather than having to settle for bitter prison-brew served up by someone called "Bubba."

This week's economic reports include Consumer Confidence, Construction Spending, Pending Home Sales and Vehicle Sales culminating in the much anticipated Payroll Report on Friday. The unemployment rate which is part of this report is expected to show more grim news as we anticipate a rise in the unemployment rate to 9.6 percent, up from last month's 9.4 percent.

                                Mel

Information provided by Amtrust Bank Capital Markets

Friday's bond market has opened in positive territory again despite stronger than expected results in this morning's economic data. The stock markets are showing mixed results with the Dow down 13 points and the Nasdaq up 10 points. The bond market is currently up 5/32, but we will likely see little change in this morning's mortgage rates.

May's Personal Income and Outlays data was posted early this morning, revealing a 1.4% jump in income and a 0.3% rise in spending. The spending reading was very close to revised forecasts, but the income reading greatly exceeded forecasts. However, a good portion of that increase was due higher unemployment limits and revised payroll withholdings. Therefore, analysts are taking the spike in stride and not with fear that wage inflation is a threat.

The second report of the day also gave us a stronger than expected reading. The revised reading to the University of  Michigan Index of Consumer Sentiment for June came in at 70.8. This was nearly two points higher than forecasts and indicates that consumers were more optimistic about their own financial situations than earlier thought. That is considered negative news for bonds because rising sentiment usually means consumers are more apt to make large purchases in the near future, fueling economic activity.

Yesterday's 7-year Treasury Note sale was also met with a strong demand from investors. Wednesday's 5-year sale went well, helping to set the stage for yesterday's sale. This helped boost bond prices during afternoon trading and eases some concerns about the supply of debt being sold by the Fed, at least temporarily.

Next week is likely to be a very active week for the markets and mortgage rates. There is no relevant data scheduled for release Monday and the markets are closed Friday in observance of the Independence Day holiday. But, in between are several relevant and important reports with one of them being the almighty monthly Employment report. Look Sunday's weekly preview to detail those reports and their potential impact on mortgage pricing.

                                Mel

Thursday's bond market has opened up slightly despite no highly important economic data on the calendar today and a positive opening in stocks. The stock markets are showing gains with the Dow up 159 points and the Nasdaq up 31 points. The bond market is currently up 59 basis points from yesterday's close, which should improve this morning's mortgage rates. This morning's release of the final reading to the1st Quarter GDP didn't reveal any significant surprises. It showed that the economy contracted at a 5.5% annual rate during the first three months of the year. This was a small upward revision from the previous estimate of a decline of 5.7%, meaning that the economy did not shrink as much as previously thought. However, since this data is old now (second quarter initial reading comes next month), the size of the revision was not enough to influence bond trading or mortgage rates.

Wednesday's bond market has opened down slightly following early stock gains and a much stronger than expected manufacturing report. The stock markets are showing early strength with the Dow up 43 points and the Nasdaq up 35 points. The bond market is currently up 18/32. The Commerce Department reported this morning that Durable Goods Orders rose 1.8% last month. This was much stronger than the 0.9% decline that was expected and the third increase in orders out of the past four months. This indicates that manufacturing activity, at least in big-ticket items such as machinery, vehicles and electronics, is strengthening quicker than many had thought. This would be considered bad news for bonds and mortgage rates. May's New Home Sales was also released this morning, showing that sales of newly constructed homes fell slightly last month. Analysts were expecting to see a small increase in sales. However, this data only represents approximately 25% of all home sales, so its impact on trading and mortgage rates is usually minimal unless its results vary greatly from forecasts. This week's FOMC meeting will adjourn at 2:15 PM ET today. It is widely expected that Mr. Bernanke and company will not change key short-term interest rates at this meeting. But, market participants will be looking at the post-meeting statement for any hint of what and when the Fed's next move may be. Look for an update to this report shortly after the markets have an opportunity to react to what the Fed says. The only relevant economic data scheduled for release tomorrow is the final reading to the1st Quarter GDP and weekly unemployment claims. The GDP data is quite aged now (covers January through March) and will likely have little impact on the bond market or mortgage pricing unless it varies greatly from previous readings. Last month's first revision showed a 5.7% decline in the GDP. This month's second and final revision is expected to show the same decline.

Tuesday's bond market has opened in positive territory again after this morning's economic data showed weaker than expected results and the stock markets are posting early losses. The major stock indexes are in negative ground with the Dow down 1 point and the Nasdaq down 4 points. The bond market is currently up 6/32, which should improve this morning's mortgage rates. The National Association of Realtors announced this morning that home resales rose 2.4% last month. This was an increase from April's sales, but was a smaller rise than analysts had expected. This indicates that the housing sector did improve last month, but at a slower pace than many had thought. Generally speaking, a softening housing sector makes an economic recovery that much more difficult, which helps to keep bonds more attractive to investors. However, this particular data is not considered to be one of the more important reports we see each month. Therefore, its impact on trading and mortgage rates is usually fairly minimal. This week's FOMC meeting began today but will not adjourn until tomorrow afternoon. It is widely expected that Mr. Bernanke and company will not change key short-term interest rates at this meeting. But, as we have seen so many times in the past, it is the post meeting statement that often creates the most volatility in the markets. They could give an opinion of the overall economy or inflation, hinting at a possible future move or lack of one. Statements like these could cause a knee-jerk reaction in the markets and possibly mortgage pricing tomorrow afternoon. May's Durable Goods Orders is the more important of tomorrow's two reports. It gives us an indication of manufacturing sector strength by tracking orders for big-ticket items or products that are expected to last three or more years. This data is known to be quite volatile from month to month and is expected to show a decline of 0.9% in new orders from April to May. A larger decline would be the ideal scenario for the bond market and could lead to a decline in mortgage pricing tomorrow. Also tomorrow is the release of May's New Home Sales that is similar to today's Existing Home Sales report. This report tells us how well sales of newly constructed homes were last month. It is also expected to show a rise in sales, but will likely not have much of an impact on mortgage rates because this data is considered to be of low importance to the markets.

FOMC members, who meet June 23 and 24 to map monetary strategy, have already indicated the need to keep interest rates low for a "long time" to help revive growth. Rising Treasury bond yields, though, show that Wall Street is concerned that their policy may lead to an inflationary bubble. Ten-year notes reached an eight-month high of 3.95 percent on June 10th. The market is concerned about excess supply and does not yet understand the Fed’s exit strategy. On the other hand, the risk is that higher rates will hold back the budding economic recovery by lifting borrowing costs for existing homeowners and prospective buyers. Economists surveyed by Bloomberg forecast growth of only 0.5 percent in the third quarter, followed by the prior four consecutive quarters of shrinking GDP (gross domestic product). The World Bank estimated in its annual development-finance review that GDP in developing countries will grow just 1.2 percent this year, well off the 8.1 percent pace set in 2007 and the 5.9 percent gain in 2008. The challenge ahead for Bernanke and his colleagues is to balance any optimism with caution and communicate to the markets the clear view on rates and the exit strategy on more than one trillion dollars already pumped into the economy. They are standing at a critical crossroads.

So why the over-optimism for a quick second half recovery and the inflation fear may turn out to be somewhat pre-mature? Consumers are in the middle of a wrenching -- and historic -- adjustment. They are unloading debt taken on over the past decade as a result of cheap financing, lax lending standards and a surge in wealth from home values and stock prices that made it just a little too easy to carry the load. In April they socked away 5.7 percent of their earnings, the most in 14 years. Efforts to unload debt and rebuild savings are sure to limit the pace of economic recovery. But households have already made progress in realigning their finances and de-leveraging has been under way for more than a year already. So this ongoing adjustment is unlikely to cause a sharp upturn in the economy in the second half and may check a quick rise in consumer prices.

Last week marked one of the most volatile weeks in bonds and mortgages that we have seen for some time. Mortgage rates backed down after their upward three-week spiral. A tempering of enthusiasm about how quickly the economy will resume a pattern of growth, and no new auctions of Treasury Bonds contributed to the decline. The average 30-year mortgage rate rose to 5.59 percent earlier this month, the highest since November, before slipping to 5.38 percent during the week ended June 18. The Freddie Mac low for the year occurred twice in April at 4.78 percent. Many borrowers must be wondering whether they will be able to get back to April lows. How quickly the scenario changes when one remembers that not long back there was a lot of chatter about 4.5 percent mortgages. Now, investors demand for better returns as well as the threat by other Central banks that they would be reducing their purchases of U.S. debt have further contributed to the rise in rates. In addition, as we have seen less bad data of late, the demand for higher yields has grown as money is moving out of safer investments and into more risky investments. We are still far from conceding that we are out of the woods... and we may still see interest rates decline in the coming months if the prediction by several economists of more economic doom and gloom becomes reality.

Inflation fears are abated for the time being with weak economic demand in the U.S and abroad keeping prices in check at both the producer and consumer levels. Deflation fears have also eased with a slightly elevated core number at the producer level. The core number at the consumer level remains near the top of the Fed’s comfort zone of 1 to 2 percent, coming in at 1.8 percent on a year-over-year basis. Any number of things could derail the up-tick in growth, including a new drop in the stock market and mortgage rates rising enough to choke off refinancing and home buying opportunities. To really get things moving forward, a resumption of hiring needs to occur, as the 9.4 percent unemployment rate remains a strong deterrent to any upswing in consumer spending. Although layoffs have abated from their peaks, the 608,000 new applications for benefits filed during the week ending June 13 remains high. We note that the number of "continuing" claims -- people on unemployment rolls for some time -- slipped back this week, the first decline since January. However, it's unclear if these people have suddenly found work or simply have exhausted their benefits and are therefore no longer included in the weekly totals. We'll need to watch to see if any trend develops here.

Friday's bond market has opened in positive territory as investors digest the week's events. The stock markets are showing gains with the Dow up 6 points and the Nasdaq up 22 points. The bond market is currently up 38 basis points, but we will still see an increase in this morning's mortgage rates because we only recovered a third of yesterday’s sell off. There is no relevant economic data scheduled for release today. This makes it likely that bonds will be influenced mostly by changes in the stock markets today. As long as the major stock indexes remain calm, I would expect bonds and mortgage rates to follow suit. If the stock markets give back this morning's gains, bonds may react favorably as the day goes on. However, afternoon weakness seems to be routine lately so we should go into the weekend with a cautious approach. Next week is fairly active in terms of economic releases. There are several scheduled for release that may influence mortgage pricing, but we also have an FOMC meeting on the calendar next week. In addition to those items, there is another round of Treasury auctions on the agenda that may also affect bond trading and mortgage rates. None of the economic data or relevant events take place on Monday, so look for it to be a day of preparation for the week's events.

Thursday's bond market has opened in negative territory as yesterday's afternoon weakness continues into this morning's trading. The stock markets are showing gains with the Dow up 64 points and the Nasdaq up 3 points. The bond market is currently down 97 basis points, which will likely push this morning's mortgage rates higher. The Labor Department reported early this morning that 608,000 new claims for unemployment benefits were filed last week. This was slightly higher than what analysts had expected, but not enough of a difference to have much influence on mortgage pricing. The Conference Board gave us today's second piece of news with the release of its Leading Economic Indicators (LEI) for May. It revealed a 1.2% increase that exceeded forecasts and points towards a sharp increase in economic activity over the next three to six months. This is bad news for bonds because strengthening economic activity makes bonds less appealing to investors and leads to higher mortgage rates. Yesterday's morning rally in bonds was short-lived as trading turned sour as the day went on. What looked like a potentially wonderful day for mortgage shoppers ended up being a bad day. A combination of a couple of factors led to the selling, including a weakening dollar that makes U.S. securities less valuable to international investors. The negative tone has carried into this morning's trading and with no important economic data this afternoon or tomorrow to stop the selling, we may see mortgage rates revise higher this afternoon and possibly tomorrow.

Wednesday's bond market has opened in positive territory following the release of this morning's key inflation data. The stock markets are relatively flat with the Dow up 3 points and the Nasdaq up 7 points. The bond market is currently up 11/32, which will likely lead to an improvement in this morning's mortgage rates. The Labor Department reported that their Consumer Price Index (CPI) rose on May 0.1%. They also said that the core data that excludes more volatile food and energy prices rose 0.1%. The overall index was expected to rise 0.3% while the core data matched forecasts. This indicates that prices at the consumer level of the economy remained in-check last month. Some market participants had feared that inflation may be strengthening and that the Fed may need to raise key short-term interest rates sometime in the near future. Today's report also gave us an interesting stat that is worth mentioning though. The 0.1% rise in the overall reading brought the total decline over the past 12 months down to 1.3%. That is the largest annual decline in the CPI since 1950. But it is no surprise that the biggest contributors to that fall are gas and energy prices. However, as long as these inflation indexes show results that indicate inflation is not gaining steam, investor and Fed concerns should remain minimal. This is good news because if the Fed becomes concerned about inflation, we would likely see bonds fall considerably and mortgage rates rise sharply. May's Leading Economic Indicators (LEI) will be posted late tomorrow morning. The Conference Board, who is a New York-based business research group, will post this data at 10:00 AM ET. It attempts to predict economic activity over the next three to six months. If it shows rapidly rising levels of activity, bond prices will probably drop, pushing mortgage rates slightly higher tomorrow morning. But, a weak er than expected reading could lead to lower mortgage pricing. It is expected to show a 0.9% increase. The Labor Department will give us last week's unemployment figures. They are expected to say that 602,000 new claims for unemployment benefits were filed last week. This would be close to the previous week's number of claims. However, this data usually has little influence on bond trading and mortgage rates unless it varies greatly from forecasts.