Real Estate and Mortgage Market Update for Monday 04-30-2012

The bond market opened a little better this morning with slightly weaker stock indexes. The 10-Year Note at 1.91% and MBS prices up +4/32 (.12 bps) at 830am. March Personal Income at 830am was up 0.4% a little better than forecasts, Personal Spending though at +0.3% was a little softer than thought. On the report treasuries and mortgages didn’t show any reaction. U.S. stock indexes early this morning traded lower, following the markets in Europe.

The DJIA opened down -10, NASDAQ down -7, S&P down -2; the 10-Year Note up +4/32 1.92% (-1 bps) and mortgage prices at 3/32 (.09 bps) from Friday’s close.

At 945am the April Chicago Purchasing Managers Index, expected at 60.0 from 62.2 in March fell to 56.2. The three components; New Orders at 57.4 from 63.3, Prices Paid at 68.6 from 70.1 and Employment at 58.7 from 56.3. Overall it was a weaker report adding to concerns of slowing economy. The weakness is primarily due to inventory levels declining but respondents to the survey also were saying they were looking for a strong summer. The DJIA slipped a little on the report but mortgage prices and the 10-Year Note didn’t show much initial reaction.

Treasuries are going for their biggest monthly gain since September as slowing U.S. economic growth and concern for Europe’s debt crisis are worsening, increased demand for the relative safety of U.S. treasuries. 10-Year Notes are slightly higher for a third day with Spain going into its second recession since 2009 and economists said U.S. reports this week will show growth in manufacturing and services slowed. Not only Spain, the UK is in a double-dip recession since the 1970s as its longest peacetime slump for a century persists. UK GDP declined in the last two quarters. The increasingly serious question for Europe is whether the massive austerity cuts demanded have failed to gain support and are for a number of countries unachievable, leading to further deterioration of economies and dragging other global economies down with it. In the U.S. economists predict Labor Department data this week will indicate U.S. hiring increased in April, though not enough to reduce the jobless rate. Consumer Spending climbed in March, but a little weaker than estimates. The concern we have for the 10-Year Note is that it still has not shown the ability to hold under 1.90% on rallies going back to October.

This week may point to a slowdown in manufacturing, services and construction. A gauge of factory activity (ISM manufacturing) will fall to 53.0 from 53.4 in March, according to the median forecasts. An index of services (ISM services sector), the largest part of the economy, will decline to 54.1 from 56.0, while a construction measure will also fall, economists said in separate surveys. A reading above 50 indicates expansion. We won’t put much confidence on the estimates that recently have been more dart tossing than accurate assessments. This week is more about Employment than any other report however the data this weeks has a number of key points.

The 10-Year Note is approaching 1.90%. Since last October the 10-Year Note has fallen below it on three occasions but in each case the note was unable to hold under it. Not sure what will occur now but history does have an impact; a sustained decline under 1.90% would embolden traders to push rates lower, the next technical resistance under 1.90% at 1.80%.

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Weekly Economic Summary – Third Week of April 2012

Last week in review (April 16 – 20, 2012)
Retail Sales in March rose by a nice 0.8%, as consumers bought all kinds of products. This adds to the increasing trend seen in January and February and is a good sign for our economy, as consumers don’t spend when they aren’t feeling optimistic about their financial situation.

In the manufacturing sector, both the Empire State Manufacturing Index and the Philly Fed Index came in below expectations. This is largely being attributed to a global slowdown, and experts say that the outlook for manufacturing remains positive but is not accelerating at the present time. In the housing sector, Existing Home Sales and Housing Starts also fell in March.

Initial Jobless Claims spiked sharply higher last week. The Labor Department reported 386,000 new claims, which was above the 375,000 that was expected and well over the 350,000 range seen in recent weeks.

The news out of Europe was the growing concern about Spain’s ability to pay down debt, meet new budget deficit targets, and avoid a bailout or debt restructuring. The Spanish situation has prompted the G-20 (Finance Ministers and Central Bankers of the 20 largest economies) to urge the European Central Bank to do more to contain their debt crisis as it threatens global growth. And let’s not forget that besides Spain, we still have France, Portugal, Ireland and Greece to deal with in future months and years.

So what does all of this mean for bonds and home loan rates? There will likely be more safe haven trading into the relative safety of the U.S. dollar and bonds (which will benefitmortgage bonds, to which home loan rates are tied) as the uncertainty in Europe continues. And more negative economic reports here in the United States could increase safe haven trading into bonds.

Housing Starts Chart

As you can see in the chart below and as mentioned above, Housing Starts fell 5.8% in March to 654,000 on an annualized basis.

 

 

 

 

 

 

 

In the news this week (April 23 – 27, 2012)
Below is the economic report calendar for this week

 

Real Estate and Mortgage Market Update for Tuesday 04-23-2012

mortgage prices started better this morning with the 10-Year Note yield at 1.92% down 4 bps from Friday’s close.  There are no economic releases today.  The stock market is opening lower supporting the decline in rates in early activity.  U.S. stock futures are lower this morning, following last week’s advance after data showed that manufacturing shrank in the euro-area and China while concern grew about Europe’s sovereign debt crisis.  Most global markets are weaker as euro-area services and manufacturing declined more than estimated in April, while data indicated China’s production will contract for a sixth month. 

Europe is in economic chaos as the debts of many countries are dragging its economy down.  Investors are moving more money to safety into U.S. treasuries forcing U.S. rates back to levels of 2 months ago.  The Euro nations owe 386 billion euros ($508 billion) in bailouts for Greece, Ireland and Portugal after those nations were forced to seek rescues when their borrowing costs become unsustainable.  Concern that Spain and Italy may follow has led their bonds to decline for six weeks, pushing yields toward the 7% level that triggered the other aid programs.  A euro-area composite index based on a survey of purchasing managers in both services and manufacturing fell to 47.4, a five-month low, from 49.1 in March, London-based Markit Economics said in an initial estimate today.  Economists had forecast an increase to 49.3, according to the median of 17 estimates.  Like the U.S. ISM Services and Manufacturing Indexes, below 50 is considered contraction.

In the U.S. this week it is all about the FOMC policy statement at the conclusion of the meeting on Wednesday afternoon and the following press conference Bernanke will hold.  Lots of talk about the Federal Reserve stepping in for another QE, he likely will spend much of his press conference being questioned about it, and being questioned about what he believes it will accomplish.  More jobs?  Hardly.  Strengthening the economic outlook?  Hard to say.  Another huge question: “How much lower can U.S. interest rates fall even with another easing?  The Federal Reserve is already buying the equivalent of all treasuries issued this year and last.

Treasury will auction $99B of notes this week beginning tomorrow with $35B of 2-Year Notes, Wednesday $35B of 5-Year Notes and Thursday $29B of 7-Year Notes.

The DJIA opened down -130, NASDAQ down -33, S&P down -14; the 10-Year Note at 930am at 1.92% (-4 bps), MBS 30-Year price up +6/32 (.18 bps).

Putting some perspective on U.S. interest rates, the 10-Year Note that sets the tone for mortgage rates is trading at 1.92% this morning.  There is strong technical resistance on the 10-Year Note at 1.90%.  There have been only 10 trading sessions where the 10-Year Note traded below it since last November 23rd.  Three times since then the 10-Yer Note went below 1.90%, it held under it for no more than three days.

Real Estate and Mortgage Market Update for Tuesday 04-16-2012

Treasuries and mortgage markets opened unchanged this morning.  At 830am two data reports:March Retail Sales, expected up 0.3%, was up 0.8% and excluding auto sales +0.8% (excluding autos expected up 0.6%).  April Empire State Manufacturing Index was expected at 17.5 from 20.2 in March.  As reported the overall index plunged to 6.56; new orders component at 6.48 from 6.84 and the employment component at 19.28 from 13.58.  Over zero is considered expansion; more indication that there is a slowing in the manufacturing sector.  The Retail Sales report is trumping the Empire State data this morning.  The stock index was better and at 900am the 10-Year Note, after being up slightly (+3/32) was -1/32 at 2.00%, mortgage prices at 900am down -2/32 after opening +3/32 prior to the 830am data.

Asian stocks fell overnight, with the regional benchmark index headed for its biggest drop in almost two weeks after the cost of insuring against a Spanish default climbed and U.S. Consumer Confidence dropped last Friday, clouding the earnings outlook for Asia’s exporters.  Stocks also fell after 5-year credit-default swaps on Spain surged to a record as Prime Minister Mariano Rajoy struggles to prevent the nation from becoming the fourth euro-region member to need a bailout.

European stocks rebounded from four consecutive weeks of losses and U.S. index futures advanced after American Retail Sales increased more than forecast in March.  Spanish bond yields climbed before a debt sale while the euro weakened.  Credit-default swaps on Spain jumped 17 bps to 519.  Contracts on Italy rose seven bps to 441, the highest level in almost three months.  Spanish 10-Year Bond yields jumped as much as 18 bps, to 6.16%, the highest level since December 1.  Five-year credit-default swaps linked to Spanish bonds jumped to an all-time high.  Spain will sell 12-Month and 18-Month Bills tomorrow, followed by auctions of debt due in October 2014 and January 2022 on April 19.

At 930am the DJIA opened up +85, the 10-Year Note traded unchanged At 1.99% and 30-Year MBS prices unchanged.

Although Europe’s debt issues remain,this morning there is a little relaxation about the possibility of default as EU ministers are calling for the ECB to step up and buy Spain’s bonds to keep their interest rates from increasing more.  So far nothing from the ECB but words implying it is “prepared” to act if necessary.  The U.S. bond market remains the safe port for investors and has been one of the reasons we have seen U.S. rates fall over the last two weeks.  The U.S. stock market is rallying this morning on the March Retail Sales increase but U.S. interest rates are not seeing any selling on the better stock indexes.  As long as the debt problems in Europe continue it should keep a bid in U.S. treasuries, thus supporting the mortgage markets.

At 1000am February Business Inventories were expected up 0.5%, as reported inventories increased 0.6%, sales were up 0.7% with an inventory to sale ratio unchanged from January at 1.28 months.  Also at 1000am the April NAHB Housing Index, expected at 29 from 28 in March, fell to 28, the first decline in 7 months; the single family index at 26 is down from 29.  The drop in the NAHB index sparked some increases in bond and mortgage prices.  The DJIA off its high, the NASDAQ has been weaker all session so far.

Technically the treasury and mortgage markets remain bullish.  The 10-Year Note so far today is holding a gain as are mortgage prices, but at 930am both were flat on the day and now boosted by the NAHB Housing Market Index and stock indexes off their best levels.  It Looks like the 10-Year Note is headed to 1.90% (at 1010am was at 1.96%, -3 bps today).

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Real Estate and Mortgage Market Update for Tuesday 04-12-2012

Prior to 830am data the 10-Year Note and mortgage prices were unchanged.  At 830am there were three data points:Weekly Jobless Claims were expected to be about unchanged but reported claims were up 13K to 380K and last week’s claims were revised from 357K to 367K.  Continuing claims were down 98K to 3.251 million.  Claims were much higher than thought but the caveat is being explained by the Easter week that distorted the claims data.  It has always amazed most that economists and analysts that come up with forecasts and estimates don’t seem to take holidays into their estimates until after the data is reported then we have excuses.  That said, it is what it is.

March Producer Price Index (PPI) was thought to be up +0.3% overall and up +0.2% for the core (excluding food and energy).  As reported the overall PPI was unchanged and the core jumped 0.3%.  Year-to-year overall the PPI is up +2.8%, year-to-year core up +2.9%.  The headline implies that inflation is a little hotter than what the Fed pegs as its acceptable target of 2.5%.  Looking into it, we find that the increase in the core PPI was mostly due to light truck prices increasing in March.

The February International Trade Deficit was expected down -$52B but the deficit reported  was down -$46.03B.

The focus this morning on the 830am data is about the increase in Jobless Claims,although Easter holiday week may have distorted the data somewhat.  The jump in the core PPI has been dismissed due to the increase in light truck prices.  Inflation isn’t much of an immediate issue now.  Janet Yellen, Vice Chair at the Fed commented, “I consider a highly accommodative policy stance to be appropriate in present circumstances.”  She also said that allowing the Fed’s program to extend the maturity of the assets on its balance sheet to expire in June wouldn’t amount to a policy tightening.  She agrees with Bernanke by saying unemployment will decline “only gradually.”  “Over the next several years, I anticipate that we will fall far short in achieving our maximum employment  objective, “Yellen said.  Still, “considerable uncertainty surrounds the outlook, and I remain prepared to adjust my policy views in response to incoming information.”

At 930am the DJIA opened up +20, 10-Year Note at 2.02% (-1 bps) with MBS prices up +4/32 (.12 bps).

At 100pm this afternoon the Treasury will complete its auctions with $13B of 30-Year Bonds, re-opening the bond issued in February.  The 10-Year Note yesterday and the 3-Year Note auction on Tuesday were both OK but were not met with very strong demand,  Today’s 30-Year Bond auction will likely be the same, not too cool but not too hot, just right.

Treasuries and mortgages are being trumped a little so far this morning by the stock market.  The stock market has ignored the increase in Jobless Claims so far, the DJIA opened up +20 but since then the index as well as the NASDAQ and S&P indexes are gaining ground.  The mortgage market was +4/32 (.12 bps) at 930am, at 1000am were up +1/32 (.03 bps).  The 10-Year Note, driver for mortgage markets was up +4/32 at 930am but now is up just +1/32.  The wider outlook is bullish for the bond and mortgagemarkets, however the 10-Year Note has found resistance at 2.00% levels.  The idea of another easing move from the Fed is still out there but the recent swift decline in yields after the weak March Employment Report may have already discounted the easing move; and there is still a lot of analysts and traders holding that the Fed will not ease any time soon.

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Real Estate and Mortgage Market Update for Tuesday 04-10-2012

A quiet start this morning in the bond, mortgage and stock markets.  At 900am the 10-Year Note was up +3/32 at 2.04% (unchanged), MBS prices on 30-Year Fixed up +2/32 (.06 bps) and the DJIA index up +9. By 930am the 10-Year Note yield was up +5/32 (-1 bps) and MBS prices on 30-Year Fixed was up +5/32 (.15 bps).  The DJIA opened down -20 points.  European stocks fell to a two-month low and Asian equities retreated on concern growth is slowing after China’s imports missed economists’ forecasts.  Bernanke said in a speech yesterday that the U.S. was still “far from having fully recovered.”  The Bank of Japan kept its key interest rate unchanged today and no policy maker proposed extra stimulus.  China reported a trade surplus for March as import growth trailed forecasts.  March exports rose 8.9% from a year earlier, after an 18.4% increase in February.  There is growing concerns that China’s economy is slowing as imports slide.

The German 10-Year Note yield sits at 1.67%.  Spain’s 10-Year Note yield is at 5.94%.  The spread the largest since late November as Spain struggles to cut expenses.  Spain’s 10-Year Note is up 18 bps from last week.  The euro regions the debt problem hasn’t gone away despite the liquidity support from the European Central Bank, a strong support for U.S. treasuries as safety moves increase to treasuries.

Today begins earnings season for Q1 with Alcoa reporting late this afternoon. There is concern that earnings in Q1 may be lower than in Q4 when very strong earnings dominated.  Economic slowing in China and Europe will likely push earnings lower.  The U.S. economy will accelerate 2.2% this year, up from 1.7% in 2011, according to the average of 72 estimates compiled by Bloomberg.

10-Year treasury yields would have to rise about 120 basis points to track the estimated price-earnings ratio for the S&P 500 as they did during the first three quarters of 2011.  The differential primarily reflects the Federal Reserve’s plan to keep its benchmark interest rate close to zero at least through late 2014.

Last Friday’s very soft employment data for March is continuing to dominate traders’ thoughts.  Was the data a one and out thing with job growth likely to bounce back in April?  Or was it the beginning of a downturn in job growth that will continue as the global economic outlook declines.  Europe’s economies, with the exception of Germany and France are declining as cost cutting and job losses widen.  Talk of QE 3 increased immediately on the employment data.  While still uncertain about what the Federal Reserve will do, the momentum is building for another easing.  The Federal Reserve however isn’t likely to move

quickly, wanting to see more key data and possibly the April Employment Report on May 4^th.  Whether or not the Federal Reserve does ease again, the outlook for another easing has increased in the rate markets.

The only data point today, February Wholesale Inventories were expected up +0.5% but reported up 0.9%.  Sales were up 1.2%, the inventory to sale ratio of 1.17 months was unchanged from January.  Stock indexes sold off while the bond andmortgage markets gained a little on the report.

This afternoon at 100pm the Treasury will begin three days of auctions with $32B of 3-Year Notes.  The auction is expected to see strong bidding.

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Real Estate and Mortgage Market Update for Monday 04-09-2012

Friday’s March Employment Report (non-farm jobs were up +120K and private jobs up +121K) was half what was expected by economist and analysts.  The reaction was swift and strong sending mortgage prices up 28/32 (.88 bps) and the 10-Year Note yield down to 2.04% (-14 bps).  mortgage rates down about 12 bps.  The stock market was closed on Friday for Good Friday.  This morning the key indexes are catching up to the reaction to the soft employment.  The DJIA opened at 930 down -90, NASDAQ down -44, and S&P 500 down -15.  Within five minutes the DJIA was off -143.  The 10-Year Note was up +4/32 to 2.03%  (-1.0 bps) while MBS prices were up +4/32 (.12 bps) frm Friday’s close.

Employment didn’t come close to the forecasts, while not unusual for the monthly report, it was so far off the mark it sent traders and investors back into treasuries on increased belief the Federal Reserve may be more inclined to ease further.  It was not only Employment that drove rates down as Europe’s debt problems are back again after a month or so of little news.  Spain’s prime minister saying his country is in “extreme difficulty”.  Once again investors are turning to safety on the idea Spain is going to need a bailout and reprise concern that Europe’s economies will drag the region into recession and resurrect the concerns that the EU may not survive.  The renewed fears are hitting U.S. equity markets.  After the strong rally in the key indexes stocks were prime for some decline but until Spain and the Employment Report took control the pull back in stock markets was being thought of as a buying opportunity.  Now the outlook has become much less optimistic.  Not only is Spain in the headlights but The European Central Bank’s Financing for Portuguese lenders rose to a record in March.  Portugal became the third euro-area country after Greece and Ireland to require aid and will receive 78 billion euros under its agreement with the International Monetary Fund and the European Union.

Although job gains in March were half of what the last four months revealed, is that enough to get the Federal Reserve to ease again?  Not a question easy to answer.  One month of disappointing job growth isn’t in itself enough to get the Federal Reserve to ease.  Besides as long as long-term rates are at the present low levels an easing move wouldn’t likely add much to pushing rates much lower.  Low interest rates are not the problem for the economy.  Low rates haven’t driven employment up or done much for the housing sector.  That said, the potential of another QE will be debated now for a month.  Investors are plowing into Treasuries at a record pace as the supply of the world’s safest securities dwindles, ensuring yields will stay low regardless of whether the Federal Reserve undertakes more stimulus to fight unemployment.

Treasury will auction $66B of note and bonds beginning tomorrow with $32B of 3-Year Notes, then Wednesday with $21B of 10-Year Notes and finish with Thursday’s $13B of 30-Year Bonds.