Mortgage Market Overview – 06/15/09

Mortgage backed securities (MBS) prices continue to rally higher (rates lower) as weakness in the stock market (DOW down 150pts) is lifting MBS markets as money flows out of equities and into fixed income assets. Market participants note the price rally may continue this week as MBS are likely to benefit from a brief respite in government supply and the Fed’s two scheduled purchases of Treasuries. There is a lull in the Treasury auction schedule until they resume with 2yr, 5yr & 7yr notes on June 23-25. MBS may also garner support from traders who base their strategies on technical analysis of charts and historical data. The 14 day stochastic oscillator, which measures the closing price of a security relative to its highs and lows during a particular period, indicates prices are poised to halt their recent declines. The Empire State general business conditions index fell to minus 9.4 from a minus 4.6 last month as sales and inventories declined, showing the economy is still months away from a sustained recovery. The outlook for the next six months climbed to the highest level in almost two years as the drawdown in goods on hand clears the way for factories to ramp up output. Regional and national purchasing manager surveys have shown a declining rate of contraction in recent months, but actual improvement will not be evident until current new orders pick up and destocking comes to an end. International holdings of long term U.S. financial assets, a safe haven for foreign investors during the global financial crisis, rose a net $11.2 billion compared to $55.4 billion in March. Foreigners were net buyers of equities, but turned sellers of U.S. coporate bonds and agency debt. The key topic among Foreign invetors remains the U.S. commitment to a strong dollar.

This week provides investors information on the housing market and manufacturing, but the most significant economic data released will be the monthly inflation reports. The week begins with the Empire State manufacturing index, a survey of factory executives from New York, New Jersey and one county in Connecticut and the earliest measure of regional manufacturing. Also Monday, the Treasury International Capital report details long term investment inflows from foreign investors. Tuesday the Producer Price Index (PPI) comes out, which focuses on the increase in prices for goods used to produce finished products. Housing starts and building permits provide a view of the housing market and construction industry, both expected to be awful. Rounding out a busy Tuesday is Industrial Production and Capacity Utilization figures. Consumer Price Index (CPI) is the most closely watched inflation report and will come out on Wednesday. The CPI looks at the price change for finished goods sold to consumers, while the core rate excludes volatile food and energy prices. Information on mortgage applications from the Mortgage Bankers Association is due out also on Wednesday. Thursday we get Jobless Claims, Leading Economic Indicators and the Philadelphia Fed Index, all important barometers of the economy, but ultimately the Treasury’s announcement of the size of their next round of debt offerings will be the primary focus of the day. Friday there are no economic reports due out but it is “Quadruple Witching” day, when all cash and futures contracts expire along with the indexes themselves. Tendency is for an extremely volatile day in the equity markets.

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