Mortgage Market Overview – 06/30/09

The Johnson Redbook chain store sales were down 4.3% yr/yr but fractionally better than -4.4% yr/yr last month. Consumers remain mostly sidelined on job losses and the fear of future jobs being lost.

At 9:00 the Case/Shiller Home Price Index was down 18.1% in April after declining 18.70% in March and better than -18.75% expected. Foreclosures continue to depress prices. The measure declined 19% in January, the most since the data began in 2001. The home-price index figures aren’t adjusted for seasonal effects so economists prefer to focus on year-over-year changes instead of month-to-month.
At 9:45 the June Chicago purchasing mgrs index, expected at 40.0 frm 34.9, hit at 39.9. New orders component at 41.6 frm 37.3, prices pd at 36.6 frm 29.8 and employment  at 28.9 frm 25.0. All components imp[roved but are still contracting—below 50.
At 10:00 eastern the final economic release today, June consumer confidence index; expected at 55.0 frm 54.9 was weaker at 49.3 and May was revised to 54.8. The present situation index fell from 29.7 in May to 24.8 in June. The report is opposite what we had with the U. of Michigan consumer sentiment index but we would put more credibility in the report today.
The Fed is scheduled to buy more treasuries today on the $300B announced bond purchase program announced in March.
Treasuries and mortgage prices continue to fall at 10:15 eastern. Trade is thin and selling today is more technical than substantive so far.

Mortgage Market Overview – 06/26/09

Mortgage backed securities (MBS) prices are higher (rates lower) after yesterday’s volatile trading over the FOMC policy statement and before today’s Treasury auction of $27 billion in 7yr notes that completes the record $104 billion in borrowing. The Fed, encouraged by signs the recession is easing, doused speculation they will pump more money into the economy. Fed policy makers will maintain the size and pace of their program to buy Treasuries, agency debt and MBS. The statement indicated more time is needed to assess the prospects for a recovery before deciding to exit from their unprecedented credit programs and reinforced expectations that interest rates will remain low for some time. Also emphasized was continued monetary stimulus is needed but the risk of inflation is low, easing concern that higher prices will erode the value of the fixed payments from debt. The difference between 10yr note yields and Treasury Inflation Protected Securities (TIPS), which reflect the outlook among traders for consumer prices, narrowed to 183bps from 202bps two weeks ago. The final revision to 1st quarter Gross Domestic Product (GDP), the sum of all goods and services produced, came in at -5.5% reflecting declines in inventories, housing and business spending and capping the worst six month performance in almost sixty years. Residential construction dropped 39%, the most since 1980. Business investment shrank 37%, the biggest decline since 1947. Inventories fell $87 billion, the biggest drop ever. On a positive note, the trade deficit narrowed contributing 2.4% to growth, while core PCE rose only 1.6%. Personal Consumption Expenditure is the Fed’s preferred measure of inflation. Jobless claims unexpectedly rose for a second straight week, 15K to 627K from a revised 4K higher 612K indicating the labor market may take longer to stabilize. The data included unexpected claims from the educational services sector which often shows variability at the end of the school year. The 4 week moving average also increased to 617,250 from 616,750. The total number of people collecting unemployment insurence jumped 29K to 6.74 million. Fed Chairman Bernanke is testifying today before the House Committee on Oversight and Government Reform regarding his role in Bank of America’s purchase of Merrill Lynch.

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Mortgage Market Overview – 06/23/09

Mortgage backed securities (MBS) prices opened lower this morning after yesterday’s gains which were fueled by stock market losses (DOW -200pts & S&P 500 -3.1%) boosting demand for fixed income assets, like MBS. MBS prices have since rebounded. Today the Treasury will auction $40 billion of 2yr notes, first of this week’s three sales totalling a record $104 billion. The last auction drew the most demand since November 2006 from foreign central banks, helping ease concern that international investors will begin to shy away from Treasuries as U.S. borrowing surges to fund bank bailouts, fiscal stimulus spending and a record budget deficit. The budget deficit is projected to increase to $1.85 trillion this year, equivalent to 13% of the nation’s economy. The Fed starts a two day meeting today to consider any changes to its pledge to buy Treasuries, agency debt and MBS to lower consumer borrowing costs, and whether to keep its benchmark interest rate near zero. Fed policy makers will continue to explore how and when to wean the economy off stimulative medicine to avoid fanning inflation. The FOMC statement is due at 1115am pt tomorrow. Fed funds futures show a 40% chance the Fed will raise interest rates by at least .25bps by December. The Fed purchased $7.5 billion of U.S. debt yesterday as part of its effort to stop rates from rising. Chain store sales continue to be very weak, according to ICSC-Goldman & Redbook, due to recessionary conditions and wet weather. Crude oil prices increased after falling three days in a row as a weaker dollar boosted the appeal of commodities as an alternative investment. The dollar declined on speculation that the Fed will temper expectations for an interest rate increase. Existing Home Sales were up 2.4% in May to an annual rate of 4.77 million, but below expectations of 4.85 million. Supply is coming down slowing, at 9.6 months from 10.1 months in April. Prices firmed up 3.8% to a median sales price of $173,000, but are down 16.8% on an annual basis. There was a steep drop in the proportion of distressed sales, to about one third from nearly half in prior months. More importantly, unrealistically low appraisals are scuttling sales and slowing the housing recovery. Can you say HVCC!

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Mortgage Market Overview – 06/17/09

Mortgage backed securities (MBS) prices continue to climb higher (rates lower), extending the rally for a fifth day, after a Labor Department report showed consumer prices rose less than forecast, easing concern inflation will accelerate. Consumer Price Index (CPI), the broadest monthly price gauge because it includes goods and services, increased 0.1% in May despite higher energy costs. The boost in energy costs was due to a 3.1% gain in gasoline prices, though partly offset by declines in natural gas. Higher energy prices restrain discretionary spending, preventing companies from passing increased costs on to customers. The “core” rate, excluding food and fuel, climbed 0.1%. The core index benefited from subdued rental prices, 40% of the total, and falling prices for public transportation, apparel and tobacco. The outlook among traders for consumer prices is 1.78% and down from a 2.23% 5yr average, reflected by the difference between the 10yr note and Treasury Inflation Protected Securities (TIPS). Mortgage applications fell to the lowest level since November, reflecting the dampening effect of rising interest rates and limited credit availability. Purchase applications fell a disappointing 3.5% last week, combined with indications of limited buying interest point to dismal home sales data at months end. The refinance index fell sharply, down 23%, with mortgage rates up about 75bps from a month ago. The jump in borrowing costs discourage homeowners from refinancing and may deepen the housing slump. The Fed is scheduled to purchase 7-10yr securities today, part of its $300 billion buyback program, after buying $6.45 billion of 3yr notes yesterday.

Mortgage Market Overview – 06/16/09

Mortgage backed securities (MBS) prices opened lower (rates higher) as Russia, India and China consider buying each other’s bonds, swapping currencies to lessen dependence on the dollar and shifting reserves out of Treasuries. After release of a wide range of economic data, MBS prices have rebounded to trade near unchanged. The three month LIBOR fell to a record low 0.61% yesterday. Speculation that the Fed will raise interest rates this year, if the economy is recovering, is fading as quickly as it surged the past two weeks. The yield spread, difference between 2yr & 10yr debt, has narrowed as investors become less concerned inflation will increase. U.S. Producer Prices rose 0.2% in May, sharply falling short of expectations, as food expenses dropped. A 2.9% increase in fuel led to the jump in wholesale prices and these costs may rise further in June. Core prices, excluding food and fuel, unexpectedly fell 0.1% in May, the first decrease since October 2006. Overall PPI fell 4.7% on a year over year basis, the biggest decrease since 1949, reflecting the drop in fuel prices late last year that has since partially reversed. The bottom line is that inflation currently is moderate. Energy prices are still a looming problem, but just not today. U.S. Housing Starts soared up 17.2% in May, showing surprising strength, to an annual rate of 532K units that followed a 454K pace the prior month. The May rebound was led by the multi-family component which posted a 61.7% gain after falling 49.4% in April. Good news is the sizeable rise in the single-family component, up 7.5% after a 3.3% rise the month before. Building permits, an indicator of future construction, rose 4% to a 518K pace from a 498K rate the previous month. However, building permits are down 47% from a year earler. Industrial Production fell 1.1% in May, reflecting declines in consumer goods and business equipment that signals the manufacturing slump remains broad based. A large source of weakness was in motor vehicles and parts which plunged 7.9%. Factory production, 80% of total production, was down 15% in the last year, the biggest 12-month drop since 1946. Manufacturing is still contracting, maintaining a moderate decline. Overall capacity utilization fell to a record low 68.3% in May from 69.0% in April. As orders have tumbled, companies have slashed production to lower inventories. The excess capacity will help control inflation as raw material costs keep rising. According to ICSC-Goldman and Redbook, weekly chain store sales show extreme weakness and that June is shaping up to be a big disappointment for non-gasoline retailers.

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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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Mortgage Market Overview – 06/12/2009

Mortgage backed securities (MBS) prices are sharply higher in active trading as demand at yesterday’s 30yr bond auction helped ease concern that international investors will slow purchases amid record U.S. debt sales and after release of this morning’s economic reports. Indirect bidders, an investor class that includes foreign central banks, bought 49% of the bonds on offer yesterday, the biggest percentage since 2006. Japanese Finance Minister said his contry’s confidence in U.S. debt is unshakable. Japan is the second largest U.S. creditor with $687 billion behind China, with $768 billion. The next auctions of Treasuries are set for June 23-25, when 2yr, 5yr & 7yr notes will be sold. U.S. import prices rose 1.3% in May, for the third straight month and the largest increase since July last year, reflecting the increasing cost of oil that threatens to undermine the economic recovery. Prices of imported goods, compared with a year earlier, dropped 17.6%, the biggest decrease since 1982. Prices excluding fuels climbed 0.2% to end a long string of declines, while being down by 5.85% on an annual basis. There are early hints of inflation pressure as commodity prices have been on the rise. The Consumer Sentiment index edged higher 0.3 to 69.0, showing little improvement and some concerns over inflation. The expectations component, which has been driving measurements sharply higher for the last two months, actually fell 4pts, the first decline since February. Inflation expectations rose, which typically appears when coming out of recessions, certainly reflecting higher prices at the gas pump. Crude oil fell from $72.68 a barrel, a 7 month high, to $71.27 a barrel after a record plunge in European industrial production prompted speculation that bets on an economic recovery are premature.

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Mortgage Market Overview – 06/11/2009

Mortgage backed securities (MBS) prices opened lower, but have since turned positive after release of economic data that was at best luke warm.

The DOW is up 100pts in early activity. Traders continue to believe that long term interest rates are headed higher on concern surging budget deficits and a falling dollar will prompt investors to reduce holdings of U.S. fixed income assets, like MBS. Crude oil prices climbed over $72 a barrel today with increased global consumption outlook amid signs the recession is bottoming out. Retail sales rebounded moderately in May, up 0.5%, first time in three months with the gain related to higher gasoline prices and shoppers seeking bargains from ailing automakers. Retail sales on a year ago basis in May were down 9.6% and show little sign of an underlying rebound in spending. Jobless claims fell 24K to 601K, fewer than forecast and the lowest level since January, from a revised higher 625K the prior week as businesses are slowing staff reductions. The improvement is clearly evident in the 4 week moving average, a less volatile measure, which fell to 621,750 from 632,250; its lowest level since February confirming global expectations that U.S. payroll contraction has peaked. Business inventories fell 1.1% in April following a 1.3% decline in March indicating that businesses were not anticipating better conditions, however May appears to have a much less weak month so watch for a pivot in inventory data as retail sales increase. According to the RBC CASH (Consumer Attitudes and Spending by Household) Index consumers economic enthusiasm faded this month as the jobless rate reached a 26 year high, gas prices climbed daily and the intial fervor for the government’s economic remedies waned, even though consumer expectations continue to show improvement. Despite current financial woes increasing numbers are starting to believe the worst is behind them. 1 million option ARMs will reset higher in the next four years, with 750,000 adjusting in 2010 and 2011 and the peak coming August 2011 when 54,000 loans recast. The deliquency rate for payment option ARMs originated in 2006 is soaring to 42.44% from 23.26% in the last year. For 2007 loans, the rate went from 10.1% to 35.25% on loans 60 days or more past due. U.S. foreclosure filings reached 321, 480 properties last month, up 18% from a year earlier. One in 400 U.S. households received a filing last month.

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Mortgage market Overview – 06/10/2009

Mortgage backed securities (MBS) prices opened sharply lower (rates higher) as demand for better yielding assets increases amid rising confidence in the global economy. The monthly rollover took place overnight for FNMA securities switching the current coupon from June to July.

The government will sell $19 billion of 10yr notes today after demand was stronger than average, 2.82 bid to cover ratio, at yesterday’s 3yr note auction. Foreign investors purchased 44% of the total as the government relies on them more to sustain record borrowing. The budget deficit is projected to increase to $1.85 trillion for the year, equivalent to 13% of the nation’s economy. Crude oil prices rose above $71 a barrel for the first time in seven months on stockpiles dropping and speculation the dollar will extend its decline as investors turn from fixed income assets, like MBS, to other assets classes including commodities seeking an inflation hedge. The dollar fell on speculation central banks around the world may try to diversify their reserves away from the U.S. currency. The average 30yr fixed mortgage surged highest since November, offsetting low home prices and buyer incentives to push mortgage applications to the lowest level since February, threatening to deepen the housing slump and sideline prospective home buyers. According to the Mortgage Bankers Association’s weekly survey the purchase index gained 1.1% while the refinancing gauge fell 12% as the jump in borrowing costs discourage refinancing. The U.S. trade deficit widened in April as exports dropped 2.3%, the lowest level in three years as worldwide demand contracted further. The drop in exports reflected reduced demand for engines, machinery and metals. Exports to Japan plunged to the lowest level since 1994. Imports decreased 1.4%, led by declines in fuel, drilling equipment, computer accessories and toys. On a positive note, a higher level for imported consumer goods suggests that businesses believe that the consumer sector will be rebounding in the coming months. At 11am pt the Fed releases the Beige Book, the report on economic conditions used at the upcoming FOMC meeting, and its impact on MBS markets can be dramatic. Also at 11am pt, the Treasury releases the monthly budget report for May, an account of the surplus or deficit of the government. May typically shows a moderate deficit, however April posted a record $20.9 billion deficit when surpluses existed for 25 years.

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Mortgage Market Overview- 06/09/09

Mortgage backed securities (MBS) prices opened strong and have continued to trade higher (rates lower) as investors believe yields may have peaked, citing technical analysis showing the increase losing momentum, which may spur demand at this week’s Treasury auctions.

Chain store sales according to ICSC-Goldman were down 0.8% , the lowest reading since early May, while Redbook reports a plunge of 4.3% citing cooler weather and the prior months stimulus check burst of spending fading. Wholesale inventories fell a steep 1.4% in April, as distibutors tried to cut excess supply to better reflect decreasing sales. Today’s figure was larger than expected and follows a revised lower 1.8% decrease in March and indicates that firms are still in deep drawdown mode, but given the prospect of economic recovery, should help to boost future production and employment as firms restock to meet demand. Risk premiums have fallen as investors continue to search for higher yields; risk premiums on “junk” bonds have fallen to their lowest level since September 26.

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