Mortgage Market Review - 10/26/09

This Morning…Monday, October 26, 2009:
Markets started unchanged this morning with no data or anything else of consequence. At 8:30 the DJIA opened +30 and mortgage rates were slightly higher. There are no economic releases today; Treasury will auction 5 yr notes at 1:00 this afternoon, likely to see decent demand and not generally much interest to traders. After today however the calendar is loaded and Treasury will auction an additional $116B of notes.

Last Week:
Mortgage bond prices ended the week nearly unchanged despite considerable market volatility. Trading was up and down all week. Rates improved the first portion of the week as stocks fell below key psychological levels. Unfortunately a reversal the middle portion of the week eroded the earlier improvements. Data was mixed with tame inflation readings but generally stronger than expected economic activity. For the week, interest rates were near unchanged.
The big news was Existing Home Sales on Friday which looked pretty impressive and was better than forecast. Those forecasts already included the tax credit for first-time home buyers. Sales were up almost 25% from the low in January, and 9% higher than a year ago.

This Week:
This is the last week of the months and will be filled with economic news. Today there is zip, but tomorrow we have Durable Goods for September, the Case-Shiller Index which never seems to go up, and Consumer Confidence, which seems to be holding this economy up. This report is important as markets have laid heavy bets that the economy is on the highway of recovery, but so far there is no significant improvement in consumer patterns of increased spending. These numbers are expected to be up. On Wednesday we have New Homes Sales, Thursday we have Jobless Claims and the Gross Domestic Product results. GDP expectations are for a growth rate of 3.2% for the quarter. Then on Friday comes Personal Income and Consumption, the Michigan Consumer survey, and the Chicago PMI. A big week ahead that is a huge hill to climb for the bond and mortgage markets.

EconomicIndicator
Durable Goods Orders
Tuesday, Oct. 27, 8:30 am, et
Up 0.7%
Important. An indication of the demand for "big ticket" items. Weakness may lead to lower rates.
Consumer Confidence
Tuesday, Oct. 27, 10:00 am, et
54.0
Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.
2-year Treasury Note Auction
Tuesday, Oct. 27,1:30 pm, et
None
Important. $44 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates.
New Home Sales
Wednesday, Oct. 28, 10:00 am, et
Up 2.6%
Important. An indication of economic strength and credit demand. Weakness may lead to lower rates.
5-year Treasury Note Auction
Wednesday, Oct. 28,1:30 pm, et
None
Important. $41 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates.
Q3 Advance GDP
Thursday, Oct. 29,8:30 am, et
Up 3.1%
Very important. The aggregate measure of US economic production. Weakness may lead to lower rates.
7-year Treasury Note Auction
Thursday, Oct. 29,1:30 pm, et
None
Important. $31 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates.
Personal Income and Outlays
Friday, Oct. 30,8:30 am, et
Unchanged,Down 0.4%
Important. A measure of consumers’ ability to spend. Weakness may lead to lower mortgage rates.
Q3 Employment Cost Index
Friday, Oct. 30,8:30 am, et
Up 0.5%
Very important. A measure of wage inflation. Weakness may lead to lower rates.
U of Michigan Consumer Sentiment
Friday, Oct. 30,10:00 am, et
70.0
Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.

Market Forecast:
Supply and expected better economic releases this week are taking their toll at the moment and over the long term the path for rates is not looking particularly good. In the short haul, the Treasury auctions will take center stage again this week. If there is strong foreign demand it will likely spill over to the mortgage bond market. Weak auctions will likely result in mortgage interest rate increases. Employment cost index data will also be carefully watched.

Some Humor:
It's late fall and the Indians on a remote reservation in South Dakota asked their new chief if the coming winter was going to be cold or mild. Since he was a chief in a modern society, he had never been taught the old secrets. When he looked at the sky, he couldn't tell what the winter was going to be like. Nevertheless, to be on the safe side, he told his tribe that the winter was indeed going to be cold and that the members of the village should collect firewood to be prepared.
But, being a practical leader, after several days, he got an idea. He went to the phone booth, called the National Weather Service and asked, “Is the coming winter going to be cold?”
“It looks like this winter is going to be quite cold,” the meteorologist at the weather service responded.
So the chief went back to his people and told them to collect even more firewood in order to be prepared.
A week later, he called the National Weather Service again. “Does it still look like it is going to be a very cold winter?"
“Yes,” the man at National Weather Service again replied, “it's going to be a very cold winter.”
The chief again went back to his people and ordered them to collect every scrap of firewood they could find.
Two weeks later, the chief called the National Weather Service again. “Are you absolutely sure that the winter is going to be very cold?”
“Absolutely,” the man replied. “It's looking more and more like it is going to be one of the coldest winters we've ever seen.”
“How can you be so sure?” the chief asked.
The weatherman replied, “The Indians are collecting firewood like crazy.”


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