Mortgage Market Review - 7/9/09

This Morning…Monday, July 6, 2009:
Treasuries and mortgages started a little better this morning with the early trade in the stock indexes pointed to a lower open. There is not much in the way of economic data this week; the equity markets are still absorbing that the economy may not be on the recovery path that had been mapped recently. Today Treasury will sell $8B of 10 yr inflation indexed notes; through the rest of the week Treasury will add another $65B of borrowing.

Last Week:
Once again it was volatile through the week but by the end of trade last Thursday there ultimately was not much change overall in the bond and mortgage markets. The stock market didn't fare well last week, driven lower by the jump in non-farm job losses. Non-farm job losses were over 100K more than expectations rattling the equity markets with the DJIA taking a 223 point hit, NASDAQ -49 and S&P -26. The June employment report saw more jobs lost than expected, 467K against 360K expected; the unemployment rate at 9.5% was +0.1% but slightly less than 9.6% expected. This report sent many analysts back to the drawing boards to re-assess their more rosy outlooks. June consumer confidence was weaker than in May, another negative for the economic outlook. Over the previous two months consumer confidence and consumer sentiment had been improving. June construction spending was weaker than forecasts.. Most publications out this weekend were saying the same; that the economy isn't at the edge of the woods as had been widely believed. Although equities fell the rate markets didn't find the kind of traction we might have expected. The only bright spot last week came with the ISM manufacturing report, the overall index improved as did the interior components; rebuilding of inventories likely the reason for the slight increase

This Week:
This week will be dominated with Treasury supply with only a smattering of economic data on the slate. Treasury will hold auctions everyday through Thursday. With the federal budget shooting up like a skyrocket on the 4th of July and the Fed running the printing presses 24/7 The US will have to borrow more than ever before to deal with this year’s $2T budget deficit. Three reports will deserve a good look; the ISM services sector index on Monday, Consumer credit for May and on Thursday weekly jobless claims. Optimists have recently been enthused that initial unemployment claims are "only" at 600K a week.

Trade in the bond and mortgage markets this week will be heavily influenced by how the equity market performs and Treasury auctions. As long as stocks are moving higher it plays against any real opportunity for interest rates to improve much. Rate markets fear any increase in economic activity, believing the Fed will begin raising rates, fear of inflation with all the money printing by the Fed and always on the back burner, how foreign central banks will face buying the massive debt the US is creating.

EconomicIndicator
Analysis
3-year Treasury Note Auction
Tuesday, July 7,1:30 pm, et
None
Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates.
10-year Treasury Note Auction
Wednesday, July 8,1:30 pm, et
None
Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates.
Consumer Credit
Wednesday, July 8,3:00 pm, et
Down $7.5 billion
Low importance. A significantly large increase may lead to lower mortgage interest rates.
30-year Treasury Bond Auction
Thursday, July 9,1:30 pm, et
None
Important. Bonds will be auctioned. Strong demand may lead to lower mortgage rates.
Trade Data
Friday, July 10,8:30 am, et
$30 billion deficit
Important. Affects the value of the dollar. A falling deficit may strengthen the dollar and lead to lower rates.
U of Michigan Consumer Sentiment
Friday, July 10,10:00 am, et
71.0
Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.

Market Forecast:
After chewing on last week’s employment data the markets are re-assessing the economic outlook. Whether a change in sentiment will occur remain the question for interest rates as well as the equity markets. Even the most outrageously bullish stock traders are now looking for a correction and a decline in equities, but so far every dip in the key indexes lasts a few hours before buying overwhelms sellers. This morning stocks are being hit hard so far but trading volume is thin and will likely continue through the rest of the day with most jumping out for the long weekend. Thin trading increases volatility.

Our thinking now is for another move lower in the rate markets, including mortgage rates. There are two hurdles; the stock market and Treasury borrowing. We continue to expect stocks to make a significant correction, the longer it takes the bigger the fall in equities. We fully admit however, we have been way too early in our expectations for stock indexes to roll over so we have less confidence on when the next round of interest rate declines will occur. The other hurdle; Treasury has to borrow $170+B a month in 2 yr through 30 yr notes and bonds, that amount acts as a drag on treasuries therefore on mortgage rates. Recent demand for Treasury auctions has been solid but there will always be market concerns that rates may have to stay at these or higher levels to attract those indirect bidders (foreign investors and foreign central banks).

Of the greatest importance this week, since data is limited, are the Treasury auctions, which begin tomorrow. (We also have an $8B 10-year TIPS auction.) Tomorrow is a $35 billion 3-year note auction, Wednesday’s $19B 10-year note auction, and Thursday’s $11B 30-year bond auction. Don’t look for much change in mortgage rates until or unless there is more substantial news about the economic outlook.

Some Humor:

Why men don't write advice columns:

Dear Walter:
I hope you can help me here. The other day I set off for work leaving my husband in the house watching the TV as usual. I hadn't gone more than a mile down the road when my engine conked out and the car shuddered to a halt. I walked back home to get my husband's help. When I got home I couldn't believe my eyes. He was in the bedroom with a neighbor lady making mad passionate love to her.
I am 32, my husband is 34 and we have been married for twelve years. When I confronted him, he broke down and admitted that he'd been having an affair for the past six months. I told him to stop or I would leave him. He was let go from his job six months ago and he says he has been feeling increasingly depressed and worthless. I love him very much, but ever since I gave him the ultimatum he has become increasingly distant. I don't feel I can get through to him anymore.
Can you please help?
Sincerely, Puzzled in Poughkeepsie

Dear Puzzled:
A car stalling after being driven a short distance can be caused by a variety of faults with the engine. Start by checking that there is no debris in the fuel line. If it is clear, check the jubilee clips holding the vacuum hoses onto the intake manifold. If none of these approaches solves the problem, it could be that the fuel pump itself is faulty, causing low fuel delivery pressure to the carburetor float chamber or fuel injection system.
I hope this helps.
Walter