Mortgage Market Update

Once again, I am getting this update out Sunday night instead of the usual Monday morning.  A lot of things happened this week, some good and some bad, but mortgage rates hardly moved, though they did tick just a notch lower by week’s end.

The week was off to a good start with mortgage backed securities having their best day of the week.  With no economic data released, the headlines were what got mortgage bonds rising.  As the data flowed, there was a mixed bag of news, fueling confusion more than fears.  As the week went on, mortgage bonds managed to inch higher every day, with their momentum dwindling by week’s end.

News during the week that played against bonds started with Consumer Confidence beating expectations.  Then came the ADP report showing a better than expected jobs front.  Chicago PMI beat expectations and the ECI was in line, both of which put pressure on bonds.  The week ended with the Jobs Jamboree and non-farm payrolls beating expectations, helping bonds to flatline on Friday.

But the news favoring bonds won the week, and that encompassed speeches and even the signing of HR 3221, the “Housing and Economic Recovery Act of 2008.”   As far as data goes, the mixed bag presented more economic issues, such as a disappointing GDP and the highest inflation rate in 4 years.  Another jobless claims increase certainly helped as well.

Once again, mortgage bonds managed an uptick, but they again failed to mount a solid enough rally to break the long term trend.  As we head into this week, we are going to load up with market shaking data right from the get go with the Fed’s favorite gauge on inflation, the PCE report.  And let’s not forget it is Fed day again on Tuesday and the question will be whether or not the Fed has the balls to raise rates finally.  Consensus is they will hold again, with more “talk” of raising rates later this year.

Here is the breakdown of the week’s data flow:

• Monday:  PCE (8:30), Personal Income (8:30), Personal Spending (8:30)
• Tuesday:  ISM Services Index (10:00), FOMC Meeting (2:15)
• Wednesday:  Crude Inventories (10:30)
• Thursday:  Initial Jobless Claims (8:30)
• Friday:  No Data

Certainly we will see if bonds can break the trend and start a long term rate movement lower.  Looking at the charts, there are obstacles they will need to overcome, though.  Stochastic indications are in the middle with what appears to be a negative crossover occurring.  Adding to that, bonds have failed to break through their 50-day moving average for the second time in the last few weeks.  Moreover, the long term trend remains pointed towards lower prices, leading to higher mortgage rates.

As the week starts, I am holding that locking stance, at least until bonds can “break free.”

I am writing this week’s update Sunday since I will be a little busy tomorrow.  A lot of things happened this last week, some good, and much bad, starting with the whole housing bill that is going to be crammed down our throats.  More in that later this week, if I can find the time.  I mentioned that bonds needed a “correction” and we may have just gotten all we are going to get.

As for last week, we saw many big name lending institutions coming forth with huge losses and CEOs claiming “adequate capital”.  That alone should scare you because that is what Bear Stearns, IndyMac Bancorp, Fannie Mae and Freddie Mac all said and we know where they are today.  So, Wachovia, which announced its exit from wholesaling, along with Washington Mutual, are worth keeping a close eye on.  Add the fact the the FDIC took over two more banks Friday, exactly two weeks after IndyMac’s takeover, and things look a little dicey.

Despite all of the institutional news, bonds had a very up and down week controlled by economic data, again sending mixed signals.  First off, we had Plosser talking up inflation, but also said the Fed should act sooner, rather than later, to raise rates (hurrah, Plosser!).  Homes data was mixed with Existing Home Sales worse than expectations, but New Home Sales were better.  When you look at housing on a local scale, some that have been beat down, like South Florida, are showing signs of improvement, but are too early to tell if we reached bottom.

Along came Initial Jobless Claims much higher than expected, but Friday beat bonds back down with a better than expected Durable Goods Orders release and better than expected Consumer Sentiment.  Data is rather skewed again in some arenas, but the data did move mortgage bonds nonetheless and they ended the week slightly higher and mortgage rates notched down a bit.

This week will be a major player in the direction mortgage backed securities move with the week ending with a bang, the Jobs Jamboree.  We have several other big players in the week, bringing most of the attention onto “recession” (or not), which may be a boost to bonds.  here is the break down:

• Monday:  No data
• Tuesday:  Consumer Confidence (10:00)
• Wednesday:  ADP Report (8:15), Crude Inventories (10:30)
• Thursday:  Initial Jobless Claims (8:30), Chicago PMI (8:30), Employment Cost Index (8:30), GDP (8:30), Chain Deflator (8:30)
• Friday:  Nonfarm Payrolls (8:30), Unemployment Rate (8:30), Hourly Earnings (8:30), Average Work Week (8:30), ISM Index (10:00)

As you can see, there will be plenty of “action” to move bonds, with the only question being…in what direction?  Looking at the technical side of things, bonds are still very much locked in the downtrend.  With a 50% retracement having taken place last week, they may very well keep going down, but with some weak economic news, they could buck the trend, at least near term.  Stochastics lean more towards oversold, but are not truly there again yet.

As we move through this week, locking is most likely the better choice, at least as the week starts.  If enough data comes in negative regarding the economy, you may want to switch stances, but watch out for volatility and “the big picture”, as they both could bite you.

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.