Market Update for Wednesday 01-11-2012

The market was a little better at the start today; at 830am the 10-Year Note was up +7/32 at 1.94% (-2 bps) from yesterday’s close.  The 10-Year Note once again tested and held the key 2.00% level yesterday and based on closes there was no movement in the bond market and MBSs were also relatively unchanged.  Equity markets in Europe are weaker this morning.  The U.S. indexes prior to the open were slightly weaker.  U.S. interest rateshave been generally unchanged for over a week now; Europe’s debt problems keeping a minor bid in U.S. treasuries while improved economic outlooks are weighing on the markets.  A balance between the two forces has stabilized rates for the moment. 

There is no economic data this morning.  At 200pm this afternoon the Federal Reserve will release its Beige Book.  At 100pm the Treasury will auction $21B of 10-Year Notes.  Yesterday’s 3-Year Note auction went well with decent demand.  Chicago Federal Reserve President Charles Evans on CNBC this morning saying the economic outlook is brightening but is still soft enough to need central bank support and added that the recent data isn’t strong enough or uniform enough to assert momentum is increasing.  Evens is a hawk and one of the most vocal Federal Reserve officials calling for aggressive stimulus actions.  Evans isn’t concerned about inflation and wants the Federal Reserve to tolerate increased inflation, possibly as high as 3.0%.  Inflation fears are way over-done in terms of concern, there is no pricing power and it won’t be surfacing for quite a while. 

News out of Europe this morning; Germany’s economy may be faltering.  German  Stocks slipped after a report showed that the debt crisis caused the economy to contract 0.25 percent in the fourth quarter from the third.  Growth slowed to 3 percent in 2011, the Federal Statistics Office in Wiesbaden said in an unofficial estimate.  Economists including Christian Schulz at Berenberg Bank expect gross domestic product to contract again in the current quarter.  A recession is defined as two consecutive quarters of declining GDP.  After yesterday’s biggest rally in a week a report showed that Europe’s largest economy contracted in the final quarter of 2011, indicating it may be headed for a recession.  Confusion and uncertainty continue to dominate; one day a strong rally, the next talk of recession in Germany’s future.  It is no wonder that markets are essentially frozen with interday volatility with not much change when viewed over a longer period. 

At 930am the DJIA opened down -50, the 10-Year Note opened up +7/32 at 1.94 (-2 bps) and MBS prices opened up +1/32 (.03 bp).

mortgage applications increased 4.5 percent from one week earlier, according to data from the mortgageBankers Association’s (MBA) Weekly mortgage Applications Survey for the week ending January 6, 2012.  The results include an adjustment to account for the New Year’s Day holiday.  The Market Composite Index, a measure of mortgage loan application volume, increased 4.5 percent on a seasonally adjusted basis from one week earlier.  On an unadjusted basis, the Index increased 34.4 percent compared with the previous week.  Therefinance Index increased 3.3 percent from the previous week.  The seasonally adjusted Purchase Index increased 8.1 percent from one week earlier.  The unadjusted Purchase Index increased 41.9 percent compared with the previous week and was 17.9 percent lower than the same week one year ago.  The refinance share ofmortgage activity decreased to 80.8 percent of total applications from last week’s survey high of 81.9 percent.  The adjustable-rate mortgage (ARM) share of activity increased to 5.4 percent from 4.7 percent of total applications from the previous week.  The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 4.11 percent from 4.07 percent, with points decreasing to 0.41 from 0.53 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.  The effective rate also increased from last week.  The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,500) decreased to 4.34 percent from 4.41 percent, with points increasing to 0.47 from 0.44 (including the origination fee) for 80 percent LTV ratio loans.  The effective rate also decreased from last week.  The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA remained unchanged at 3.96 percent, with points increasing to 0.72 from 0.71 (including the origination fee) for 80 percent LTV ratio loans.  The effective rate also remained unchanged from last week.  The average contract interest rate for 15-year fixed-rate mortgages increased to 3.40 percent from 3.37 percent, with points decreasing to 0.37 from 0.50 (including the origination fee) for 80 percent LTV loans.  The effective rate also decreased from last week.  The average contract interest rate for 5/1 ARMs decreased to 2.90 percent from 2.91 percent, with points increasing to 0.49 from 0.48 (including the origination fee) for 80 percent LTV ratio loans.  The effective rate also decreased from last week. (mortgage Bankers Assoc).

The euro weakened for the first time in three days against the dollar and the yen as Fitch Ratings added to concern that the region’s debt crisis will spread.  The euro slid versus 14 of its 16 most-traded counterparts after Fitch’s head of sovereign ratings, David Riley, said the European Central Bank should boost bond purchases to avert a collapse of the shared currency.  The bank meets tomorrow.  German data showed the region’s largest economy may be on the brink of recession.  The rating agencies these days don’t just rate debt, they now are saying what banks and central banks should do.  Rating agencies screwed up the sub-prime mess and were instrumental in sending the global economy into a long term slowdown.

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Market Update for Tuesday 01-10-2012

U.S. Treasury rates increased this morning taking the 10-Year Note to its key technical and psychological level of 2.00% at 800am this morning.  Stock indexes were higher indicating a strong open after equity markets in Europe improved.  The MBS market is a little weaker but continues to hold steady against treasuries. The Treasury begins this week’s auctions today at 100pm with $32B of 3-Year Notes, tomorrow $21b of 10-Year Notes and Thursday $13B of 30-Year Notes.  Two weeks ago the Treasury sold $99B of 2-Year Notes, 5-Year Notes and 7-Year Notes; none of the auctions met with the strong bidding that had been the case for the past few months.

Europe still has major influence in U.S. markets, however for the present the worries over defaults and safe haven moves into U.S. treasuries has waned somewhat.  The 10-Year German bond underperformed as all their euro-area peers European stocks rose, curbing demand for the safest fixed-income assets.  Angela Merkel said yesterday that euro-area nations are considering accelerating capital contributions to the region’s bailout fund.  French bonds rose after Fitch Ratings said the nation will probably retain its credit grade unless the European debt crisis worsens.  Merkel will meet IMFs Lagarde today after discussions with French President Nicolas Sarkozy yesterday.  The leaders said they plan to drive forward their agenda for stricter budget rules as they seek to craft a master plan for rescuing the euro. 

French business confidence climbed from a two-year low last month and industrial output increased in November,indicating the threat of a recession in the euro-region’s second-biggest economy is easing.  The numbers suggest that France may be able to skirt a deep recession as European leaders impose austerity measures to contain the region’s sovereign-debt crisis.  The confidence reading suggests French gross domestic product will stall and not shrink in the fourth quarter, the Bank of France said today. 

At 930am the DJIA opened up +110, the 10-Year Note sat at 2.00% and mortgage prices were down 3/32 (.09 bp). 

The only data today is November Wholesale Inventorieswhich was expected up +0.5%, reported up 0.1%, sales up 0.6% with a 1.15 month inventory to sale ratio.  No reaction to the data. 

This morning the 10-Year Note at 2.00%, in previous moves to 2.00% the 10-Year Note has managed to hold and not push above it.  Although many analysts and Wall Street firms are improving their forecasts for the U.S. economy this year, and some are actually recommending moving out of fixed income treasuries, the bond and mortgage markets have so far been able to resist moving higher in rates.  As noted yesterday, the technical momentum oscillators are weakening; the 20-day average today is at 1.99% and so far holding.  The bond market is losing momentum, if the 10-Year Note breaks and holds above 2.00% it will likely test 2.04%; as long as that level holds the outlook will continue to project lower rates.  A move over 2.04% will signal the end to the move projecting the 10-Year Note back to 2.25%.  Europe plays a significant role as does the U.S. equity market.

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Market Update for Monday 01-09-2012

It’s all quiet this morning but a still little soft on prices;the stock market indexes a little better.  Germany’s Merkel and France’s Sarkozy are meeting today; nothing but talk however.  The talks are centered on how to save the euro currency from declining further.  This morning the euro is slightly better this morning.  Greece’s struggle to contain its debt is a “special case” and no country must leave the euro, German Chancellor Angela Merkel told reporters after meeting with French President Sarkozy in Berlin.  Additional meetings are planned before the next summit scheduled on Jan 30^th in Brussels.  The two leaders have sponsored a plan to draw up new fiscal guidelines by March to resolve a crisis that began in Greece more than two years ago.  As the contagion moves to the euro-area’s core, policy makers are struggling to persuade investors they can contain the risk and assure the single currency’s survival.

There are no economic releases scheduled today.  Trade will be driven by how the U.S. stock market acts.  In Europe the various stock markets are not moving much.  This week is light on data with most coming later in the week.  The Treasury will auction $66B in notes and bonds beginning tomorrow.  The Obama Administration is preparing a plan to try and unload foreclosed properties held by Fannie, Freddie and FHA.  The plan calls for packaging bundles of REOs with the goal of selling blocks of homes to private investors as income properties (rentals).  It is a plan that has been kicked around for a while but until now, only talk.  Every key agency from the Federal Reserve to FHFA appears to be involved with the plan.  Rental income is up and prices for homes are still falling.  If the prices are right maybe some of the REOs can be sold.  This depends mostly on how much the agencies are willing to give up when prices are set.  There is little reason to expect the plan will be successful, but it’s worth a try; what lender will step up to finance a huge pool of foreclosed houses without a huge infusion of up-front cash?

Today begins Q4 earnings reports with Alcoa leading the way as usual.  Traders are expecting somewhat more positive guidance from key companies.  Equity markets this week will be driven by the data as well as Europe’s travails.

This Week’s Economic calendar:

01/09/12: 0300pm November Consumer Credit (+$7.0B).

01/10/12:  1000am November Wholesale Inventories (+0.5%).

0100pm $32B 3-Year Note Treausry Auction.

01/11/12:  0700am Weekly MBA mortgage Applications.

0100pm $21B 10-Year Note Treasury Auction.

0200pm Federal Reserve Beige Book.

01/12/12:  0830am Weekly Jobless Claims (+3K to 375K).

December Retail Sales (+0.4%; ex auto sales +0.4%).

0100pm $13B 30-Year Bond Auction.

0200pm December Treasury Budget (-$79.0B).

01/13/12:  0830am November Trade Balance (-$44.3B).

December Export and Import Prices (N/A).

0955am University of Michigan Consumer Sentiment Index (71.0 frm 69.9).

At 930am the DJIA opened up +11; the 10-Year Note was down -2/32 at 1.96% and mortgage prices at 9:30 +1/32 (.03 bp).

The charts continue to hold a positive bias, however there have been no real changes in interest rates for weeks,  Prices are tied to a tight range awaiting more substantial news from Europe.  The U.S. economic outlook has improved based on various economic releases over the last couple of months. U.S. markets wrestling with whether the U.S. can grow much with Europe headed for a deeper recession.  Trade today will be no different than we have seen over the last couple of months, if stock indexes decline rate markets should hold and improve, a rally in equities will pressure rate markets.  Either way, we are not expecting much change by the end of the day.

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Market Update for Friday 01-06-2012

The December Employment Report at 830am this morning was stronger than consensus estimates.  December unemployment expected at 8.7% fell to 8.5%, the lowest level since February 2009 when it was 8.3%.  Non-farm jobs expected +155K, jumped to 200K; non-farm private jobs thought to be 160K increased 212K.  Yesterday ADP reported 325K private jobs.  December average hourly earnings, as usual was up 0.2%.  The initial reaction sent the 10-Year Note to 2.03% and mortgage prices fell 8/32 (.25 bp); stock indexes rallied and stocks in Europe were boosted.  At 900am the DJIA futures were up +37, the 10-Year Note fell back to 1.98% (-1 bps) and mortgage prices +1/32 (.03 bps).  Employers added 1.64 million workers in 2011, the best year for the American worker since 2006, after a 940,000 increase in 2010.  Even with the gains, little headway has been made in recovering the 8.75 million jobs lost as a result of the recession that ended in June 2009.  Annual benchmark revisions to the household survey showed the unemployment rate averaged 8.9 percent in 2011, down from 9.6 percent and 9.3 percent in the previous two years.  It still marked the worst three-year period since 1939 to 1941.

The reaction to the stronger Employment Report sent the 10-Year Note to 2.03%, above its 20-day and 40-day averages;it lasted about five minutes before it moved back to unchanged then turned positive.  mortgages also held nicely on the data.  Stock indexes didn’t show much enthusiasm either, after a knee jerk improvement the key indexes fell back to pre-employment levels.  The same scenario in Europe’s markets; a bounce on the data, then retreating to earlier levels.

At 930am the stock market opened generally unchanged,losing all the initial gains on the Employment Report.  The 10-Year Note held a 4/32 price improvement at 1.98% (-1 bps) from yesterday’s close; MBS prices +1/32 (.03 bps).  While the Employment Report was better than expected, there was weaker data out of Germany.  Europe’s confidence in the economic outlook fell to its lowest position in more than two years and German factory orders plunged as the euro area’s leaders struggled to contain a worsening fiscal crisis and global demand weakened.

The take away this morning on the reaction to the better than expected Employment Report in the stock and bond market is that Europe remains the critical focus for traders.  With no inflation fears as the U.S. job market improves, and the Federal Reserve is on record to keep rates low for the next year or so, Europe’s debt problems and the economic outlook worsening  is still the dominant force in the financial markets.

The New York Federal Reserve President William Dudley also added to the strength in the bond market this morning saying more monetary accommodation is appropriate even after a report showed the economy added more jobs than forecast last month, ”Implementing such policies would improve the economic outlook and make monetary accommodation more effective” (said today in a speech to bankers in Iselin, New Jersey).  At the same time, it’s “appropriate” for the Federal Reserve to consider steps to ease monetary policy, he said.

Technically the 10-Year Note once again held near-term bullish levels.  Given that the markets ignored the better jobs data and the decline in the stock market today, the rest of the day should hold well and possibly improve more if equity markets continue to fall as they have been doing since the open at 930am.  That said, we don’t expect any significant improvement in interest rates; next week Treasury will be back auctioning $66B in 3-Year Notes, 10-Year Notes, and 30-Year Notes and Bonds.

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Market Update for Thursday 12-05-2012

Two early reports this morning that should have dealt a blow to the bond and mortgage markets didn’t happen.  At 815am ADP reported their count on private sector jobs; estimates were for ADP to report an increase of 180K and according to the payroll people, private jobs increased a huge 325K in December.  The reaction was somewhat surprising as the 10-Year Note price fell just 5/32, its yield increased briefly to 2.00% then backed off to unchanged and mortgage prices were unchanged.  At 830am Weekly Jobless Claims were expected  to down -6K, fell 15K to 372K.  Last week’s claims were revised higher, to 387K from 381K.  Continuing Claims fell 22K to 3.595 million; the smoothing 4-week. average fell to 373,250 from 376,500, the lowest since June of 2008.

The ADP report didn’t get the reaction the headline might have suggested.  The December number may have reflected the so-called purge effect.  Workers, regardless of when they are dismissed or quit, sometimes remain on company records until December, when businesses update, or purge, their figures with ADP.  Employers attempt to estimate the change when adjusting the data for seasonal variations and because there were fewer firings at the end of 2011 than in previous years, ADP may find it more difficult to formulate a projection.  Traders took that into account in not reacting too strongly to the strong increase.

Prior to the 815am ADP data, the Challenger Jobs Data somewhat countered the strong ADP data;job cuts announced by employers rose in December from a year earlier, according to Challenger, Gray & Christmas Inc.  Planned firings climbed 31% to 41,785 last month from 32,004 in December 2010, which was the lowest monthly total in 10 years.  Normally the Challenger data is seen as a footnote but in this case it tempers the ADP data somewhat.  

At 930am the DJIA opened down -45, the 10-Year Note was down -1/32 at 1.99% (unchanged) and mortgageprices generally unchanged on 30-Year Fixed rates s and +.12 bp on 15-Year Fixed rates.  Stock indexes continued to fall after the open and  by 945am mortgage prices were up +4/32 (.12 bp) on the day (see below for 10:10 prices that reflect the ISM services sector report that hit at 10:00).  

At 1000am December ISM Services Sector Index,expected at 53.0 from 52.0 in November, was at 52.6.  The sub components; New Orders at 53.2 from 53.0, Employment at 49.4 from 48.9 and Prices Paid 61.2 from 62.5.  Overall it wasn’t much support for the ADP jobs numbers earlier.  The reaction sent stock indexes lower, increased the gains in MBSs and Treasuries.  At 930am when most prices were set in the mortgage market MBS 30-Year Fixed rates were up +2/32, at 1005am up +5/32 (+ .09 bps); the 10-Year Note yield fell to 1.95%.

Europe’s problems continue to trump much of the better data coming from the U.S.  Today’s ADP and Weekly Jobless Claims took a back seat to comments out of Greece.  Greek Prime Minister Lucas Papademos warned that his country may face economic collapse as soon as March 2012.  France sold 7.96 billion euros ($10.2B) of debt, with borrowing costs rising in its first bond auction of the year as credit companies threaten to cut the nation’s AAA rating.

U.S. interest rates still hold a slight bullish technical bias.  Today’s reaction to the stronger employment data has been pushed aside, meaning it’s still all about Europe.  The 10-Year Note, the bellwether for U.S. long-termrates briefly rose above 2.00% on the ADP and claims data but it once again found support from the news out of Europe.  As long as investors and traders are fearful of debt defaults that may seriously damage Europe’s fragile banks, safety in treasuries remains the preferred strategy.  That said, U.S. interest rates have not moved much over the past two weeks and safety is still the way to go however the movement into treasuries has slowed.  No reason to bail on treasuries but not much solid reason to make huge moves to away.

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Market Update for Wednesday 01-04-2012

Treasuries started a little better this morning and mortgage prices were generally unchanged in early trading.  Yesterday Europe’s markets rallied and as they did the U.S. indexes rallied; better manufacturing readings out of Germany and the U.S. ISM data overrode the debt problems still facing Europe and to an extent global markets.  This morning it’s back to debt concerns that banks will need to raise more capital to weather the debt crisis.  Countries in Europe are borrowing these days setting up a question of whether the single euro currency will survive.  Germany and Portugal sold bonds today, kicking off a competition for finance.  The offers will be followed by auctions from Greece, Italy and Spain later in the month as common-currency members commence sales that may reach 262 billion euros in the first quarter and 865 billion euros in 2012, according to Deutsche Bank AG forecasts.

The weeks may have been short and the seasonal adjustment difficult but mortgage application activity definitely declinedduring the two weeks ended December 30th (December 23 week was included due to the holiday).  This is the conclusion of the mortgage Bankers Association whose purchase index over the two-week period fell a very steep 9.7%.  The drop interrupts what had been a steady stream of good news out of the housing sector.  ReFinancing was down 1.9%, which makes up the great bulk of mortgage activity, at 82% for the highest share of 2011.  Homeowners are increasingly reFinancing their mortgages as rates sink.  For the lowest rate of 2011, the average 30-Year Conforming mortgage ($417,500 or less) was 4.07% in the period.

At 930am the DJIA opened down -30, 10-Year Note was down -2/32 at 1.96% (+1 bps) and mortgage prices were up +2/32 (.06 bp).

At 1000am November Factory Orderswere expected up 2.0%, as reported orders increased 1.8%, October orders origninally reported -0.4% were revised to -0.2% with no market reactikon.

Later today December Auto and Truck Sales will be reported with expectations are for a slight increase over November.  Generally the report doesn’t have any direct impact on markets.

ICSC-Goldman earlier this morning and now Redbook both report strong acceleration in same-store sales for the December 31week with Redbook up on year-on-year at 4.9% vs. 5.3% for ICSC-Goldman.  The year-on-year rate just three weeks earlier, for both reports, was far slower at only plus 2.9%.  Redbook attributes strength in the latest week to deep markdowns especially at department stores.  Despite the strength, Redbook’s monthly comparison of December vs. November shows a deep decline of 2.1%.

Banks in Europe are still hanging on by the fingertips; hoarding assets that they may need as collateral if they have to borrow from the ECB.  Each day we get news from the region that the ongoing and frustrating mess is nowhere near a resolution.  U.S. interest rates and equity markets will likely continue to be driven by the news and comments out of anyone considered official.  For two plus weeks now there hasn’t been anything from the ECB, the EU or the IMF. The U.S. rate markets are not improving nor are they worsening, just hanging in a narrow range awaiting any solid news out of Europe while focusing on what appears to be at the moment a better economic outlook.

After two hours the bond and mortgage markets are not doing much and it looks like it’s going to be a quiet session.  Yesterday’s strong equity market rally has so far shown no follow-through.  The bond and mortgagemarkets have been relatively unchanged for the past few hours.

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Market Update for Tuesday 01-03-2012

Happy New Year!  Not a good start to the year in the bond and mortgage markets this morning.  The rate markets are being pressured by better than expected employment data in Germany.  Europe’s stock markets are higher today.  U.S. stock indexes in early trading this morning indicating the DJIA at 930am would open 185 points higher.  The number of people out of work in Germany fell 22,000 to a seasonally adjusted 2.89 million, the Nuremberg-based Federal Labor Agency said today.  Economists forecaster a decline of 10,000, the median of 20 estimates.  With the exception of a 6,000 increase in October, German unemployment has now fallen every month since June 2009.  The average jobless total in unadjusted terms for 2011 squeezed below the 3 million mark at 2.97 million, the lowest since 1991. 

For most of 2011 Europe’s debt problems drove the volatile market moves.  While there isn’t anything that has changed in Europe, markets seem to be believe the debt mess won’t be as significant to economic growth that had been widely expected.  Most of the recent U.S. data reports have been better than forecasts and in Europe it’s somewhat the same picture.  Is it a momentary thing based largely on the lack of any real actual defaults or bank failures, or a turning point in thinking?  Germany’s unemployment rate declined to 6.8% from 6.9%.  In the U.K. its manufacturing index, similar to the U.S. ISM index, fell unexpectedly.  The Chartered Institute of Purchasing and Supply rose to 49.6 from a revised 47.7 in November; the consensus forecast was for a drop to 47.3 from an initially reported 47.6 in November.  A level below 50 indicates contraction.

While data from Europe is supporting and adding to the improvement in U.S. equities this morning,there hasn’t been much change in the sentiment that Europe’s debt issues have been alleviated in the least.  The potential change in thinking is that global economies won’t be hurt as badly as had been believed based on recent reports in the U.S. and a few counties in Europe.  Presently markets are somewhat less fearful, but it is a fragile belief that doesn’t have a lot of substance yet.

At 930am the DJIA opened up +140, the 10-Year Note was down -21/32 at 1.95% (+6 bps) and mortgage prices were down -8/32 (.25 bps).

At 1000am December ISM Manufacturing Index was expected at 53.4 from 52.7 in November; as reported the index hit at 53.9.  The components; New Orders at 57.6 from 56.7, Prices Paid at 47.5 from 45.0 and Employment at 55.1 from 51.8.  Any index over 50 is considered expansion.  The initial reaction added a little to the already strong stock market.

Also at 1000am November Construction Spending was expected up 0.5%, jumped 1.2%.  November Construction Spending originally reported up 0.8% was revised to -0.2%.

Later this afternoon at 200pm the minutes from the December 13th FOMC meeting will be released.

Regardless the various momentary influences on U.S. markets,particularly the bond and mortgage markets, the 10-Year Note continues to find resistance when it falls below 2.00%; this morning it’s at 1.95% and holding.  Most technical remain bullish, however it won’t last much longer unless the yield continues to decline.

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