Mortgage Market Review - 7/20/09

Good morning. As many of you know I was out of town last week and was unable to email daily updates. Everything will continue normally now as I am back in the office. Please let me know if you have any questions.
Fred

This Morning…Monday, July 20, 2009:
Treasuries and mortgages are weaker this morning after last week's rate increases. This morning the dollar is being hit hard, taking crude and gold higher. Earnings season continues this week with 30% of the S&P 500 reporting. One of the drivers for the stock market last week was the better than expected reports from Goldman-Sachs and other banks, as well as 2/3rds of all those that reported last week. Over the weekend CIT, the 101-year-old commercial finance company, was saved from possible bankruptcy with a cash infusion of $3B from a group of bond holders for short-term financing. While it's unclear that this will provide a long-term solution, it should give some comfort to investors who have bonds coming due in the immediate future.

At 10:00 this morning June leading economic indicators, a measure that is supposed to indicate the economic outlook six months out, was expected at +0.5% after an increase in May of 1.3%. It was up 0.7%. The 4th month in a row the index has improved. The reaction sent stock indexes higher, but no noticeable reaction in the bond and mortgage markets on the knee jerk.

Last Week:

Mortgage bond prices fell pushing rates higher following stronger than expected inflation data last week. The producer price index and consumer price index both came in higher than expected fanning inflation fears. Inflation fears generally cause bond prices to fall and interest rates to rise, which we saw last week. Stronger than expected retail sales, and industrial production data piled on to help equities rally at the expense of mortgage bonds.

At the end of last week, we had quite a bit of economic news: Housing Starts rose 3.6% in June, as did Building Permits., and this was the fourth consecutive increase in single family starts. But on the flip side the Philadelphia Fed Survey continued to show weakness, the FOMC minutes showed that the Fed doesn’t think that we are out of the woods, as there were 1.9 million foreclosure filings in the first half of 2009! This is a 9% increase in total properties from the previous six months and a nearly 15% increase in total properties from the first six months of 2008. The report also shows that 1.19% of all U.S. housing units received at least one foreclosure filing in the first half of the year. The mixed news continues.

This Week:

We’re certainly not getting much economic news, or supply, this week to guide us, although earnings news continues to come out. Today we have Leading Economic Indicators for June, Thursday we have Jobless Claims and Existing Home Sales, and then on Friday Michigan’s Consumer Sentiment survey. That is it – and no auctions! Unfortunately oil prices are back on the rise, but it appears that CIT might be moving away from bankruptcy after their board of directors approved a $3 billion deal with bondholders (which include PIMCO). The money could strengthen CIT's finances and allow more time for the 101-year-old lender to small- and mid-sized businesses to restructure its debt.
The rubber meets the road for bond markets on Thursday when Treasury will release the amounts for the following week's 2 yr, 5 yr and 7 yr note auctions. Last month Treasury auctioned a total of $104B in the three offerings and saw extremely strong demand. Selling in equities, if it occurs early this week may bounce mortgage prices but won't change the not-so-favorable near term outlook as long as optimism continues on recession ending soon.
The leading economic indicators data will set the tone for trading this week. With so few data releases expect oil and stocks to factor into trading.

EconomicIndicator
Leading Economic Indicators
Monday, July 20,10:00 am, et
Up 0.5%
Important. An indication of future economic activity. A smaller increase may lead to lower rates.
Weekly Jobless Claims
Thursday, July 23,8:30 am, et
540k
Moderately important. A measure of employment. A larger increase in claims may bring lower rates.
Existing Home Sales
Thursday, July 23,10:00 am, et
Up 0.6%
Low importance. An indication of mortgage credit demand. Significant weakness may lead to lower rates.
Revised U of Michigan Consumer Sentiment
Friday, July 24,10:00 am, et
64.6
Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.


Market Forecast:

The focus this week will be on Bernanke's semi-annual required testimony to both Houses of Congress. If he can successfully outline a Fed plan to keep inflation from increasing, that may provide some support for long term rates, alleviating investor fears at the long end of the yield curve.

The rate markets have a strong bearish bias now. The stock market is the driver early this week, not to underestimate Bernanke's key two day testimonies at Congress. Stock market volume was thin all week as no real new strong buying occurred. That could change this week if indexes continue to increase, it will drive new buying and continue to push interest rates higher in treasuries and mortgages. We are not yet ready to cast off the negative economic outlook however, to keep the stock market moving higher into new highs for this year, we need to see some confirmation from the economy and so far we haven't seen it. That said, at the present moment the stock market has the momentum, as long as it has it the bond and mortgage markets stand little chance of improving.

Some Humor:

A woman went up to the bar in a quiet rural pub. She gestured alluringly to the bartender who approached her immediately. She seductively signaled that he should bring his face closer to hers. As he did, she gently caressed his full beard. "Are you the manager?" she asked, softly stroking his face with both hands. "Actually, no," he replied. "Can you get him for me? I need to speak to him," she said, running her hands beyond his beard and into his hair. "I'm afraid I can't," breathed the bartender. "Is there anything I can do?" "Yes. I need you to give him a message," she continued, running her forefinger across the bartender's lips. "What should I tell him?" the bartender managed to say. "Tell him," she whispered, "There's no toilet paper, hand soap, or paper towels in the ladies room."