6/8/09-Mortgage Market Review-A New Look

Good morning. There is a different look to my weekly email starting today. I’ve consolidated information from the multiple sources I read each morning into one “review.” Please let me know your thoughts on the new format.

This Morning:

In the news this morning, mortgage backed securities (MBS) prices are lower (rates higher), after opening positive, as the Fed prepares to purchase Treasuries today and also on June 10, part of its plan to cap consumer borrowing costs. The 30yr fixed FNMA required net yield (60 day) is at the highest level since Nov 25. 30yr fixed mortgage rates jumped from a low of in April, and costs for homebuyers are now higher than in December. The combination of an improved economic outlook, rising budget deficits and an 11% drop in the dollar over the last 3 months are potentially inflationary and the catalyst for higher rates. A burst of inflation could sap demand just as the economy is starting to right itself after the biggest contraction in 5 decades. Gasoline prices are up $.54 since May 1, which removes over $70 billion from consumer’s annual spending borrower. The DOW is down over 100pts, but fixed income assets are not benefiting.

Last Week:

Mortgage bond prices had a rough week pushing mortgage interest rates higher. Personal income, outlays, construction spending, ISM Index, and payrolls data came in stronger than expected. This did little to help the already shattered bond market. Oil prices continued to escalate hitting over $70/barrel. The Fed attempts to keep rates in check were not very effective as selling pressure continued. Bernanke tried to calm the markets by reiterating forecasts of tame inflation but his words fell on deaf ears among bond traders and interest rates rose throughout the week.
Last week was a prime example of the divergence between the unemployment rate and payrolls figure along with the risk of floating into important data. Unemployment came in at 9.4%, higher than the expected 9.2%, while non-farm payrolls fell 345,000, not as much as the expected 520,000 decline. Mortgage bond prices fell and rates spiked higher. Bond traders hoped the report would provide a solid indication that the labor market remained weak. Unfortunately it left more uncertainty. The unemployment figure is derived from a household survey while the payrolls number comes from an employer report.

This Week:

This week is light on economic reports, as investors will be focused on the large Treasury auctions June 9-11, particularly the longer term 10yr and 30yr offerings Wednesday and Thursday. With recent economic data generally favorable, investors believe the Fed will not increase it's purchases of MBS or Treasuries, so the level of demand for the new bonds will be closely watched. The most significant economic data will be the Retail Sales (which account for 70% of economic activity) report released on Thursday, along with Jobless Claims and Business Inventories. There are no economic reports due Monday, but Tuesday brings Wholesale Trade and data on chain store sales from ICSC-Goldman & Redbook. Wednesday is the day for the Mortgage Bankers Association's weekly survey of mortgage applications which provides information on purchase activity and refinance demand. The Trade Balance figures are also due out on Wednesday along with the Fed's Beige Book. The week ends Friday with important inflation data on Import and Export Prices and a gauge of Consumer Sentiment. 30yr fixed mortage rates jumped last week to 5.45%, from a low of 4.85% in April; which may sideline consumers planning to refinance or purchase their first home. Costs are now higher for homebuyers than they were in December.

EconomicIndicator
ReleaseDate & Time
ConsensusEstimate
Analysis
3-year Treasury Note Auction
Tuesday, June 9,1:30 pm, et
None
Important. $35 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates.
Trade Data
Wednesday, June 10, 8:30 am, et
$28.7 billion deficit
Important. Affects the value of the dollar. A falling deficit may strengthen the dollar and lead to lower rates.
10-year Treasury Note Auction
Wednesday, June 10, 1:30 pm, et
None
Important. $19 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates.
Fed "Beige Book"
Wednesday, June 10, 2:00 pm, et
None
Important. This Fed report details current economic conditions across the US. Signs of weakness may lead to lower rates.
Retail Sales
Thursday, June 11,8:30 am, et
Up 0.3%
Important. A measure of consumer demand. A smaller than expected increase may lead to lower mortgage rates.
Business Inventories
Thursday, June 11,10:00 am, et
Down 1.0%
Low importance. An indication of stored-up capacity. A stronger figure may lead to lower rates.
30-year Treasury Bond Auction
Thursday, June 11,1:30 pm, et
None
Important. $11 billion of bonds will be auctioned. Strong demand may lead to lower mortgage rates.
U of Michigan Consumer Sentiment
Friday, June 12,10:00 am, et
68.6
Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.

Market Forecast:

Energy prices have risen considerably stoking inflation fears amid record debt levels and as a result the low mortgage interest rates that everyone considered a given have quickly gone away. The Fed continues to purchase mortgage bonds in an effort to keep mortgage interest rates low but they face a daunting task as the selling pressure continues. The Fed still has over $700b marked for purchasing additional mortgage bonds. The question remains whether that will be enough to help rates turn lower. So far it appears additional measures are needed, though expectations are that rates should bounce off their current ceiling of resistance and hopefully see some improvement in the short term.

Some Humor:

A couple in their nineties are both having problems remembering things. During a checkup, the doctor tells them that they're physically okay, but they might want to start writing things down to help them remember.
Later that night, while watching TV, the old man gets up from his chair. “Want anything while I'm in the kitchen?” he asks.
“Will you get me a bowl of ice cream?”
“Sure.”
“Don't you think you should write it down so you can remember it?” she asks.
“No, I can remember it.”
“Well, I'd like some strawberries on top, too. Maybe you should write it down, so's not to forget it?”
He says, “I can remember that. You want a bowl of ice cream with strawberries.”
“I'd also like whipped cream. I'm certain you'll forget that, write it down?” she asks.
Irritated, he says, “I don't need to write it down, I can remember it! Ice cream with strawberries and whipped cream - I got it, for goodness sake!”
Then he toddles into the kitchen. After about 20 minutes, the old man returns from the kitchen and hands his wife a plate of bacon and eggs.
She stares at the plate for a moment. “Where's my toast?”

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