robert

This time, I am in Washington, DC, another appropriate place for this week’s update (no, I don’t plan this ahead of time).  With the government’s own actions being one of the chief causes for mortgage rates climbing, we can expect more of the same on the way.

Inflation is the bigger fear these days and that is partly due to lower rates.  It is also due to the continued devaluation of the dollar and the promise to keep “creating money” to bail out Freddie Mac and Fannie Mae, all the government’s doing.  The Federal Reserve issued new rules regarding Truth in Lending (Reg. Z), and managed to harm the consumer through consumer protection, but that is another story.

Last week saw the pattern in the bond market turn extremely ugly, and fast.  The week started off nicely as I mentioned it would, with the bail out plans for Fannie and Freddie, but then reality set in.  If you remember, I stated the data was skewed due to tax rebates, and Retail Sales wreaked of that, coming in below forecasts.  That story could not overcome the PPI data, which rose at the highest year over year rate since 1981.

Then came more confirmation that reality sucks.  The CPI report was released showing its year over year rise was the highest since 1991, coming in at 5%.  You couldn’t get around these “feelings” by hiding in the “core” reports as they were higher than expected also.  So, as inflation is letting itself be known, bonds are falling with the aerodynamics of a greased brick.

Looking to this week, more of the same can be expected unless we can quench inflationary fears.  Bonds have fallen below their lows of last October 17, so the downtrend is firmly in place.  There will likely be a correction of sorts during this week as bonds are oversold at this point.  Here is the breakdown of economic reports…

• Monday:  LEI (10:00)
• Tuesday:  Nothing
• Wednesday:  Crude Inventories (10:30), Beige Book (2:00)
• Thursday:  Initial Jobless Claims (8:30), Existing Home Sales (10:00)
• Friday:  Durable Goods Orders (8:30), Consumer Sentiment (10:00), New Home Sales (10:00)

The only “big” report is the Fed’s Beige Book, but that doesn’t mean the others will not play an increased role this week.  I haven’t looked at all of the Fed speak scheduled yet, but I imagine they will be out moving markets as well, in their attempts to calm the markets.

According to the charts, bonds are of need for a correction, or a “dead cat bounce”, so there may be a brief time for floating this week, but locking will be in order for most of it.  Consumer Sentiment will likely push bonds higher as I am guessing no one “feels good” right now.  So, this week will be loaded with more action and entertainment for those of you following quotes in real time, maybe even spurring more “false” float (and lock) alerts from your sources.

Take heed, as education is the best tool and reliance on others can prove costly.  With that in mind, I am writing a book that can help you analyze the markets better and will provide more details once I have a publishing date set up (next month?).  Until then, feel free to check out my own market analysis at Florida Mortgage Daily.

If things are broke, fix it.  That is the story of my trip this morning as the aircraft is broke in Philadelphia and that is the story happening in the mortgage market with Fannie Mae and Freddie Mac.  More on that in a bit.

Last week saw a wonderful looking pattern fall to pieces and the longer term downtrend remains in place.  Mortgage backed securities started the week off on fire, fueled by Bernanke’s speech.  Middle East tensions also lit a fire under mortgage bonds as tensions create a “flight to quality” which sends money from stocks into bonds.  As the week came to an end, despite Paulson’s talk up of Fannie and Freddie, their liquidity issues overwhelmed the markets and both stocks and mortgage bonds plummeted on Friday.

How this week begins will be depending on a number of factors.  With the Federal Reserve set to bail out both Fannie Mae and Freddie Mac, things will probably start off the week nicely, meaning bonds may yet be able to break the downtrend.  With no economic data slated for Monday, bonds will likely see a favorable move, but the week will see more data coming out that can prove either beneficial or destructive.

Here is the breakdown of scheduled data:

• Tuesday:  Retail Sales (8:30), PPI (8:30), Empire State Index (8:30)
• Wednesday:  CPI (8:30), Industrial Production (9:15), Capacity Utilization (9:15), Crude Inventories (10:30), FOMC Minutes (2:00)
• Thursday:  Building Permits (8:30), Housing Starts (8:30), Initial Jobless Claims (8:30), Philadelphia Fed Index (10:00)

As you can see, there are some “biggies” slated this week, so expect more volatility and a definitive pattern before the week is done.  With no data to start and no data to end, headlines and technical factors will play an increased role those days.

On the technical side, you can see the long term downtrend in place but there is still a shorter uptrend in place as well, so bonds could still break the downtrend.  The week will start off good with the bailouts hitting the headlines, but the data will takeover starting on Tuesday which will be the real determinant of where bonds go from here.

I will be starting the week off in a floating stance, but my finger will be itching to lock if things breakdown again.  Hopefully the data will be bond friendly and we can start saying lower rates ahead, but I remain rather skeptical.

Last week was a shortened week, but certainly not full of surprises, ending the week with bonds lower, rates slightly higher.  Looking back, we can clearly see bonds are faltering yet again.

The week had plenty of data to get the markets moving, but the shortened trading week brings lower volume and sometimes “mood swings.”  Chicago PMI beat expectations and oil was climbing yet again, but bonds ended the day in with a doji, basically right where they opened.  Things were looking up, given their strength despite the news.  Tuesday brought the ISM Index and bonds started their descent.  Every day, bonds ticked lower and ended the week dropping in the face of some favorable news and the picture turned ugly again.

Remember that last week was a shortened trading week so must be taken lightly.  This week’s movements will be more of a determinant in the direction bonds head, but technical factors cannot be ruled out as a picture rarely lies.

Looking at trend lines, the larger down trend remains to be broken, but the shorter up trend may remain.  In a nutshell, bonds can still go either way based on trends.  Stochastics don’t provide a clear picture as they are right in the middle.  A quick glance at the charts for the last quarter though favor lower bond pricing as the bigger picture presents a long term down trend still in play and fundamentals do not appear favorable at the moment.

This week has very little in the way of data and none of the releases this week are typically major players.  Of course, expect news headlines to sway the herds, so “mood swings” can be expected.  Here is a breakdown of what data is slated for release…

• Wednesday:  Crude Inventories (10:30)
• Thursday:  Initial Jobless Claims (8:30)
• Friday:  Balance of Trade (8:30), Consumer Sentiment (10:00)

This week will be a player in the overall trend, but data will not likely be the catalyst that sets things up.  You can expect recessionary fears to be of prime concern as the data rolls out as none really points towards the inflation spectrum.  Use caution as you move through this week, but I would start in a locking stance until bonds can show a solid movement higher.

Blogging from the Big D this week (Dallas, TX that is), actually I am about to get on a flight heading back to Miami to get at least a half day in the office today.  The story of how I got to Dallas yesterday is rather fitting for this week’s post.  Here is a brief look at what happened…

My original schedule was to fly to San Juan then over to Santo Domingo, DR, retracing my steps the next day.  However, upon arrival in San Juan, I was then sent to Dallas followed by a flight home this morning.  The point being that I was redirected “midstream” and without fully knowing what happened.  Only after investigating further did I begin to see the bigger picture.

Mortgage backed securities last week reacted very similarly.  Of the two main events, neither presented a clear picture of what lies ahead.

First, the Fed decided to leave rates unchanged despite warning of the increased inflationary expectations.  Friday’s PCE and other data showed inflation to not be of much concern, or was it?  Data was rather skewed as the economy was flooded with the stimulus checks, so the outlook may not be as rosy as it appeared, but only time can prove that.

Nevertheless, in the battle for the trader’s dollars, bonds won the week and sent mortgage rates lower.  This could be either a winning or deadly combination.  And there won’t be much delay for the data to be pouring in as you can see below, with the end of the week sparking its own fireworks with the Jobs Jamboree.

• Monday:  Chicago PMI (9:45)
• Tuesday:  ISM Index (10:00)
• Wednesday:  ADP Employment Report (8:15), Crude Inventories (10:00)
• Thursday:  Non-Farm Payrolls (8:30), Unemployment Rate (8:30), Initial Jobless Claims (8:30), Average Work Week (8:30), Hourly Earnings (8:30), ISM Services Index (8:30)

This week will be a pivotal one for bonds on both the fundamental and technical sides.  Bonds have been pushing higher over the last two weeks and have broken through their 25-day moving average.  They are up against this level and the downward trend line right now, so if they can hold their own this week, we can say that trend has been broken and rates will be heading lower once again.  If not, well, get ready for the next freefall.