This past week the stock market rallied during a Christmas holiday-shortened week usually characterized by lower trading volumes.  A sudden rebound in crude oil prices from 11-year lows encouraged investors to buy stocks while reducing demand for safe-haven assets such as bonds.

 

Crude oil for February delivery jumped from under $35 per barrel to just over $38 per barrel after the Energy Information Administration reported crude oil inventories fell 5.877 million barrels in the week ended December 18.  The sudden gains in crude oil prices, which just this past Monday reached their lowest level since 2009, pressured Treasuries lower while sending their yields higher.

 

There were several economic reports released during the week that were, for the most part, favorable for the stock market.  First, the U.S. Commerce Department reported revised data for Gross Domestic Product (GDP).  The third estimate for third quarter GDP showed there was 2% growth, which equaled the consensus forecast.  Also matching the consensus forecast was the third estimate for third quarter GDP Deflator coming at 1.3%.

 

In housing, the Federal Housing Finance Agency (FHFA) reported U.S. home prices increased 0.5% month-over-month in October.  The consensus forecast for October had called for an increase of 0.4%.  Compared to October 2014, the FHFA Housing Price Index has gained 6.1%.  The prior Index reading of a 0.8% gain for September was revised lower to 0.7%.

 

Also, the National Association of Realtors reported Existing Home Sales fell 10.5% to a seasonally-adjusted annual rate of 4.76 million homes in November following a 3.4% decline in October.  The consensus estimate was for a seasonally-adjusted annual rate of 5.30 million homes.  At first glance, the data appears worse than it probably is, as the underlying business may not be as weak as the headline number suggests.

 

New regulations (TILA-RESPA Integrated Disclosure rule – “Know Before You Owe” rule) designed to give borrowers three business days to review loan documents before the mortgage closes have extended the time that it takes buyers to close on their purchase, going from an average of 36 days to 41.  Consequently, a large percentage of November’s sales were driven into December.  Also on a positive note, buyer foot traffic is higher and properties are generally spending less time on the market.  Housing inventory remains low and has declined 1.9% year-over-year with 2.04 million homes currently for sale.

#1!12282015

 

Furthermore, the Commerce Department reported November New Homes Sales climbed 4.3% to a seasonally adjusted annual rate of 490,000 and by 9.1% on a year-to-year basis.  This helped to soothe investors concerned over the disappointing Existing Home Sales data for November released yesterday.  The housing market is clearly on the rise and should solidly support GDP in 2016.

 

The Census Bureau also reported the median sales price for new homes sold in November increased by more than $23,000 from $281,500 in October to $305,000 with the average sales price climbing almost $9,000 to $374,900.  The number of new homes for sale totaled 232,000 representing a 5.7 month supply at the current sales rate.

 

The Mortgage Bankers Association released their latest Mortgage Application Data for the week ending December 18 showing the overall Market Composite Index increased 7.3%.  The seasonally adjusted Purchase Index increased 4.0% from a week earlier while the Refinance Index increased 11.0% from the prior week.  Overall, the refinance portion of mortgage activity increased to 62.8% of total applications from 60.7%.  The adjustable-rate mortgage segment of activity increased to 6.1% of total applications from 6.0% the prior week.  The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balance increased from 4.14% to 4.16%.

 

For the week, the FNMA 3.5% coupon bond lost 29.7 basis points to end at $102.95 while the 10-year Treasury yield increased 3.9 basis points to end at 2.24%.  Stocks ended the week with the Dow Jones Industrial Average rising 423.62 points to end at 17,552.17.  The NASDAQ Composite Index gained 125.41 points to close at 5,048.49, and the S&P 500 Index added 55.44 points to close at 2,060.99.

 

Year to date, and exclusive of any dividends, the Dow Jones Industrial Average has lost 1.54%, the NASDAQ Composite Index has gained 6.19%, and the S&P 500 Index has added 0.10%.  This past week, the national average 30-year mortgage rate increased to 4.10% from 4.02% while the 15-year mortgage rate rose to 3.30% from 3.25%.  The 5/1 ARM mortgage rate increased to 3.00% from 2.97%.  FHA 30-year rates remained unchanged at 3.75% while Jumbo 30-year rates increased to 3.93% from 3.84%.

 

Mortgage Rate Forecast with Chart

 

For the week, the FNMA 30-year 3.5% coupon bond ($102.95, -29.7 bp) traded within a narrower 64 basis point range between a weekly intraday high of 103.42 and a weekly intraday low of $102.78 before closing at $102.95 on Thursday.

 

Last Monday, the bond traded into resistance at the 25-day moving average and subsequently moved lower through support at the 38.2% Fibonacci retracement level at $103.16, which now reverts to technical resistance.  Technical support is now found at $102.78.  Thursday, the bond traded to complete a small two-day “Engulfing Lines” candlestick pattern – a buy signal.  The slow stochastic oscillator remains “oversold” following a negative crossover sell signal from Wednesday suggesting the bond will turn higher in the near future.  Should this happen, mortgage rates could improve slightly.

 

Chart:  FNMA 30-Year 3.5% Coupon Bond

 #2!12282015

 

 

 

 

Economic Calendar – for the Week of December 28

 

The economic calendar lightens up ahead of this week’s New Year’s holiday.  Economic reports having the greatest potential impact on the financial markets are highlighted in bold.

 

Date Time

ET

Event /Report /Statistic For Market Expects Prior
Dec 29 09:00 Case-Shiller 20-city Index Oct 5.4% 5.5%
Dec 29 10:00 Consumer Confidence Index Dec 93.5 90.4
Dec 30 07:00 MBA Mortgage Purchase Index 12/26 NA 7.3%
Dec 30 10:00 Pending Home Sales Nov 0.5% 0.2%
Dec 30 10:30 Crude Oil Inventories 12/26 NA -5.877M
Dec 31 08:30 Initial Jobless Claims 12/26 270,000 267,000
Dec 31 08:30 Continuing Jobless Claims 12/19 2,213K 2,195K
Dec 31 09:45 Chicago Purchase Managers Index Dec 50.1 48.7

 

 

 

Upcoming Federal Reserve FOMC Meeting Schedule & Rate Hike Probability **

January 2016 26-27, (Tuesday-Wednesday) 10% Chance
March 2016 15-16, (Tuesday-Wednesday)* 55% Chance
April 2016 26-27, (Tuesday-Wednesday) 62% Chance
June 2016 14-15, (Tuesday-Wednesday)* 76% Chance
July 2016 26-27, (Tuesday-Wednesday) 82% Chance
September 2016 20-21, (Tuesday-Wednesday) * 87% Chance
November 2016 1-2, (Tuesday-Wednesday) 90% Chance
December 2016 20-21 (Tuesday-Wednesday)* 92% Chance

 

* Meeting associated with a Summary of Economic Projections and a press conference by the Chairman.

** Probability generated from the CME Group FedWatch tool based on the 30-day Fed Funds futures prices.

 

 

source:  mbshighway

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The crude oil market was the underlying force driving the financial markets this past week. West Texas Intermediate crude oil prices declined throughout the week moving from close to $40 per barrel to almost $35 a barrel for the first time since 2009. The selling in crude oil was especially brutal on Friday after the International Energy Agency (IEA) forecast a further decline in oil prices during 2016 on over-supply concerns. About 20 percent of the stock market is directly tied to crude oil prices so this precipitous fall in oil prices drove the stock market lower while providing a modest boost for the bond market.

 

Oil prices have now plummeted over 65% since the middle of last year to create considerable turmoil within the energy sector. Other industries within the commodities arena are also in financial trouble as prices for raw materials like copper, iron ore, aluminum, and platinum have recently plunged to crisis levels.

 

When the world economy was booming, many energy, mining and metals companies financed their expanding operations with debt from the “junk bond market.” Now, Standard & Poor’s rating service is saying 72% of these bonds are “distressed” and this high level of distressed bonds is an indicator that a greater number of corporate defaults are on the near horizon.

 

The junk bond market environment has been “terrible” lately, and for good reason. About $180 billion of debt is classified as distressed, the highest such level since the end of the Great Recession and much of it is in energy companies. Corporate defaults recently surpassed the 100 level for the year with about one-third coming from oil, gas or energy companies. Below is a chart of West Texas Intermediate crude since November of this year showing the sharp decline in oil prices.

 

12142015chart1

 

In housing, CoreLogic reported foreclosure inventory fell 21.5% in October and completed foreclosures were down 27.1% compared with a year ago. Approximately 463,000 homes made up the national foreclosure inventory in October representing 1.2% of all mortgaged homes. The percentage of mortgages in serious delinquency including those in foreclosure or owned by lenders, hit an almost eight-year low of 3.4%.

 

In the world of mortgages, the Mortgage Bankers Association released their latest Mortgage Application Data for the week ending December 4 showing the overall Market Composite Index increased 1.2%. The seasonally adjusted Purchase Index increased 0.04% from a week earlier while the Refinance Index increased 4.0% from the prior week. Overall, the refinance portion of mortgage activity increased to 58.7% of total applications from 56.6%. The adjustable-rate mortgage segment of activity increased to 6.2% of total applications from 6.1% the prior week. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balance increased to 4.14% from 4.12%.

 

For the week, the FNMA 3.5% coupon bond gained 12.5 basis points to end at $103.50 while the 10-year Treasury yield decreased 14.1 basis points to end at 2.13%. Stocks ended the week with the NASDAQ Composite losing 208.80 points to close at 4,933.47. The Dow Jones Industrial Average fell 582.42 points to end at 17,265.21, and the S&P 500 lost 79.32 points to close at 2,012.37.

 

Year to date, and exclusive of any dividends, the NASDAQ Composite has gained 4.00%, the Dow Jones Industrial Average has lost 3.231%, and the S&P 500 has declined 2.31%. This past week, the national average 30-year mortgage rate decreased to 3.98% from 4.03% while the 15-year mortgage rate fell to 3.23% from 3.25%. The 5/1 ARM mortgage rate increased to 3.02% from 2.98%. FHA 30-year rates fell from 3.72% to 3.65% while Jumbo 30-year rates decreased to 3.82% from 3.85%.

 

Mortgage Rate Forecast with Chart

 

For the week, the FNMA 30-year 3.5% coupon bond ($103.50, +12.5 bp) traded within a 61 basis point range between a weekly intraday high of 103.69 and a weekly intraday low of $103.08 before closing at $103.50 on Friday.

 

The bond reversed course on Friday as the stock market sold off to move above technical resistance from the 25-day moving average at $103.34. The fast stochastic oscillator is showing a positive crossover buy signal while the slow stochastic oscillator is making a turn higher and looks to provide a confirming buy signal in the next session or two. The next higher resistance level is found at the 100-day moving average at $103.76. With Friday’s strong upward reversal, we could see interest rates improve slightly by the end of the week.

 

12142015chart2

 

 

 

The economic calendar picks up some steam this week with reports on inflation, manufacturing, housing, and the latest Federal Reserve monetary policy decision. Economic reports having the greatest potential impact on the financial markets are highlighted in bold.

 

Date Time

ET

Event /Report /Statistic For Market Expects Prior
Dec 15 08:30 Consumer Price Index (CPI) Nov 0.0% 0.2%
Dec 15 08:30 Core Consumer Price Index Nov 0.2% 0.2%
Dec 15 08:30 N.Y. Empire State Manufacturing Index Dec -5.9 -10.7
Dec 15 10:00 NAHB Housing Market Index Dec 63 62
Dec 15 16:00 Net Long-Term TIC Flows Oct NA $33.6B
Dec 16 07:00 MBA Mortgage Purchase Index 12/12 NA 1.2%
Dec 16 08:30 Building Permits Nov 1150K 1150K
Dec 16 08:30 Housing Starts Nov 1135K 1060K
Dec 16 09:15 Industrial Production Nov -0.1% -0.2%
Dec 16 09:15 Capacity Utilization Nov 77.5% 77.5%
Dec 16 10:30 Crude Oil Inventories 12/12 NA -3.568M
Dec 16 14:00 FOMC Rate Decision Dec 0.50% 0.25%
Dec 17 08:30 Initial Jobless Claims 12/12 276K 282K
Dec 17 08:30 Continuing Jobless Claims 12/12 2211K 2243K
Dec 17 08:30 Philadelphia Fed Manufacturing Index Dec 2.0 1.9
Dec 17 08:30 Current Account Balance Qtr. 3 -$114.2B -$109.7B
Dec 17 10:00 Index of Leading Economic Indicators Nov NA 0.6%

 

 

from:  MBSHighway

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Along with Wednesday’s release of the minutes from the Federal Reserve’s FOMC meeting from October 27-28, a string of noteworthy economic indicators and closely watched statements by Fed officials caused Treasury yields and bond prices to fluctuate through the week.

 

The FOMC minutes showed a clear majority of Fed officials were agreeable to a December rate hike while a dovish minority of FOMC members believed the use of the phrase “next meeting” in the policy statement could have been misinterpreted by financial markets as too strong of a signal for a rate hike.

 

Bond yields rallied early in the week, as the Consumer Price Index (CPI) increased for the first time in three months with a gain of 0.2% in October to match the consensus forecast. An additional 0.2% gain was recorded for the year-over-year headline CPI while the Core CPI reading, which excludes food and energy, was 0.2% higher on the monthly reading and was at 1.9% on the year-over-year reading for October.

 

Housing Starts declined 11% during October to a seasonally adjusted annual rate of 1.06 million units, the lowest level since March. Yet, October Starts remained above one million units for the seventh straight month, the longest consecutive monthly run since 2007. This suggests a sustainable housing market recovery remains intact.

 

Meanwhile, Building Permits, a much more forward-looking metric, increased 4.1% to a 1.150 million unit rate last month, exceeding the consensus forecast of 1.137 million. Single family building permits increased 2.4% in October to their highest level since December 2007. Multi-family building permits increased 6.8%. September’s rate of 1,105,000 permits was revised higher from 1,103,000.

 

Also, the November National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index fell 3 points from an upwardly revised reading of 65 in October to 62. Although the November reading was lower than the consensus forecast of 64.5, the revised October reading was the highest since the end of the housing boom in late 2005.

 

As for mortgages, the Mortgage Bankers Association released their latest Mortgage Application Data for the week ending November 13 showing the overall Market Composite Index increased 6.2%. The Refinance Index increased 2.0% from the prior week, while the seasonally adjusted Purchase Index increased by 12% from a week earlier. Overall, the refinance portion of mortgage activity decreased to 58.6% of total applications from 59.8%. The adjustable-rate mortgage segment of activity decreased to 6.3% of total applications from 6.6% the prior week. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balance rose from 4.12% to 4.18%, its highest level since July 2015.

 

On Friday, the bond market stalled with the yield curve flattening in anticipation of the Fed raising rates in December. Bond traders believe a rate hike within the current environment of low inflation and weakening commodity prices will push yields in shorter-term treasuries higher relative to longer-term Treasuries. This was evident when the yield gap or spread between the two and ten-year Treasuries and the yield gap between five-year and 30-year Treasuries contracted to their tightest levels since August.

 

For the week, the FNMA 3.5% coupon bond gained 12.5 basis points to end at $103.31 while the 10-year Treasury yield decreased 1.1 basis points to end at 2.26%. Stocks ended the week with the NASDAQ Composite gaining 177.04 points to close at 5,104.92. The Dow Jones Industrial Average added 578.57 points to end at 17,823.81, and the S&P 500 increased 66.13 points to close at 2,089.17.

 

Year to date, and exclusive of any dividends, the NASDAQ Composite has gained 7.23%, the Dow Jones Industrial Average has gained 0.004%, and the S&P 500 has added 1.45%. This past week, the national average 30-year mortgage rate decreased to 4.00% from 4.03% while the 15-year mortgage rate remained unchanged at 3.24%. The 5/1 ARM mortgage rate decreased to 2.97% from 3.00%. FHA 30-year rates remained unchanged at 3.75% while Jumbo 30-year rates decreased to 3.83% from 3.84%.

 

Mortgage Rate Forecast with Chart

 

For the week, the FNMA 30-year 3.5% coupon bond ($103.31, +12.5 bp) traded within a narrower 44 basis point range between a weekly intraday high of 103.52 and a weekly intraday low of $103.08 before closing at $103.31 on Friday. After trending higher Monday through Thursday, the bond reversed course on Friday in a move toward support located at the 38.2% Fibonacci retracement level at $103.16. Friday’s negative action sent the bond lower to touch its ascending lower trend line. This line is formed by connecting the intra-day lows from the low on November 10 onward to form the lower trend line. A break below this line would be considered a bearish event. The slow stochastic oscillator is showing a loss of momentum and is flattening out, suggesting the bond could subsequently trade sideways and be range-bound between support and resistance located at the 100-day moving average at $103.67. As a result, we shouldn’t see much change in rates this coming Thanksgiving holiday week that will be characterized by lower than average trading volume

 

fnma30yrmbscahrtfor11232015

 mortgage rates

from: mbshighway

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The financial markets were stunned this past week when China announced a surprise devaluation of their currency, the yuan. On Tuesday, traders woke up to overnight news that China devalued its currency by a record 1.9%. This surprising move threw a wrench into most global currency and equity markets, including ours. The currency move by China resulted in the sharpest selloff among Asian currencies in almost seven years. Meanwhile, the U.S. dollar strengthened against most other country’s currencies and there were fears that China’s devaluation could ignite a global currency war. The move by China drove stock prices lower and bond prices higher.

 

China’s move to devalue its currency is considered a sign of economic weakness and supports China’s exporters by making the products of the rest of the world less competitive with China’s. Some market mavens believe the Chinese government’s move toward a freely-floating yuan will result in the Federal Reserve postponing an interest rate hike. A rate hike in the U.S. would make the U.S. dollar stronger than it already is against the yuan. An even stronger dollar would be a further hindrance for U.S. multinational corporations that rely on foreign sales for a significant portion of their sales and profits.

 

However, the surprise devaluation of China’s currency may have an indirect but important influence on our residential mortgage market. China’s devaluation signals growth in the world’s second largest economy is dwindling and this might be triggering a flight of capital from China. When investors see such signals, they tend to pull money out of equities and invest more in bonds and that would help to sustain lower mortgage rates. Rumors are circulating that China’s currency may be overvalued by as much as 10% and will continue to slide lower. By the end of trading on Friday, forces within international currency markets pushed China’s currency three percent lower for the week.

 

In housing news, CoreLogic reported that 472,000 homes were in some form of foreclosure compared to 664,000 last year, a decline of 28.9%. The seriously delinquent rate is 3.5%, the lowest level since January 2008.

 

Mortgage news included the Mortgage Bankers Association release of their Mortgage Application Data for the week ending August 7, 2015. Overall the Index increased +0.1%. The Refinance Index increased 3.0% from the prior week to its highest level since May, while the seasonally adjusted Purchase Index fell by 4.0% from a week earlier and is now 20% higher year-over-year.

 

Overall, the refinance portion of mortgage activity rose to 53.1% of total applications from 51.3% the previous week and was the highest the refinancing share has been since April. The adjustable-rate mortgage segment of activity increased to 6.8% of total applications and was unchanged from the prior week. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balance remained unchanged 4.13%.

 

A couple of Treasury auctions on Wednesday and Thursday helped to drive bond prices lower. On Wednesday, the Treasury conducted a $24 billion 10-year note auction that was met with very weak demand as indicated by a bid-to-cover ratio of 2.40, the lowest such ratio since March 2009. CNBC’s Rick Santelli graded the 10-year Treasury note auction a “D”. As a result of the weak demand, the Treasury complex sold off with the 10-year note yield moving higher from 2.0857% to 2.1445%.

 

On Thursday, the Treasury conducted a $16 billion 30-year Treasury bond auction that, like Wednesday’s 10-year note auction, was met with lower demand with a bid-to-cover ratio below the low end of the average range. The bid-to-cover ratio was a rather paltry 2.26 versus the prior 12-auction average of 2.39. CNBC’s Rick Santelli graded the 30-year bond auction a “D+”. Bond prices fell after the auction results were released.

 

Also Thursday, the Commerce Department reported Retail Sales rose 0.6% in July following an upwardly revised flat reading for June. Robust back to school sales provided an overall boost to sales. Excluding auto sales, Retail Sales increased 0.4% for the month. Over the trailing 12 month period, Retail Sales have increased 2.4% while the average hourly wage growth has grown by just 2.1%, an indication that consumers are beginning to open their pocketbooks a little wider after a prolonged period of caution during uncertain economic times. Although consumer spending accounts for 70% of the economy, Retail Sales account for only about 33% of spending.

 

On Friday, the economic news was supportive for the stock market. Specifically, the Producer Price Index (PPI) edged 0.2% higher during July, which slightly surpassed the consensus forecast of 0.1%. The Core PPI, which excludes food and energy prices, also moved a little higher at 0.3% versus the consensus estimate of 0.1%. However, these figures are still quite mild, and do not suggest inflationary pressures, at least at the wholesale level, are becoming a problem. We will get a better view of inflation at the consumer level on Wednesday when the consumer price index will be reported.

 

Meanwhile, Industrial Production increased 0.6% in July, which was better than the consensus forecast of 0.3%. The gain was partly due to strong automobile production during the month. Elsewhere, the University of Michigan’s Consumer Sentiment Index showed a preliminary reading of 92.9 for August, which was down slightly from July’s reading of 93.1, and just short of the consensus expectation of 93.7.

 

For the week, the FNMA 3.5% coupon bond lost 42.2 basis points to end at $103.34 while the 10-year Treasury yield gained 2.5 basis points to end at 2.20%. Stocks ended the week with the NASDAQ Composite adding 4.70 points to close at 5,048.24. The Dow Jones Industrial Average gained 104.02 points to end at 17,477.40, and the S&P 500 rose 13.97 points to close at 2,091.54.

 

To date for 2015, and exclusive of any dividends, the NASDAQ Composite has gained 6.18%, the Dow Jones Industrial Average has lost 1.98%, and the S&P 500 has increased 1.56%. The national average 30-year mortgage rate moved to 4.00% from 3.98% while the 15-year mortgage rate increased to 3.25% from 3.23%. The 5/1 ARM mortgage rate fell to 2.97% from 3.00%. FHA 30-year rates also held steady at 3.75% while Jumbo 30-year rates rose to 3.80% from 3.77%.

 

For the week, the FNMA 30-year 3.5% coupon bond ($103.34, -42.2 bp) traded within an 85 basis point range between a weekly intraday high of 104.13 and a weekly intraday low of $103.28 before closing at $103.34 on Friday. After a down day last Monday, the bond popped higher on Tuesday only to give way to some selling from Wednesday through Friday. There was a new sell signal on Wednesday from a negative stochastic crossover and the bond’s price continued lower on Thursday and Friday.

 

On Friday, the bond was pressured lower from the open and subsequently embarked on a test of support at the 25-day moving average at $103.29 before pulling up from the day’s low price. The day’s negative performance resulted in a bearish engulfing lines candlestick pattern, typically a sell signal.

 

However, there are a couple of additional technical support levels lying just below the 25-day moving average that may prevent a follow-through decline this week. The 61.8% Fibonacci retracement level at $103.16 and the 50-day moving average at $103.09 should provide a solid secondary layer of support. Overhead resistance continues at the 100-day moving average at $103.85.

 

This coming week we could see the bond’s price continue to move a little lower to test the previously mentioned support levels. We should see a test of support with a subsequent bounce higher. If we can get a bounce higher from this triple layer of support, we should continue to see stable mortgage rates during the week.

from MBSHighway

 

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Mortgage rate update

Jul 7, 2014
Mortgage rates ended last week worse by about a half a discount point than they started.

 

What’s on the agenda for this week?

Quiet today after the holiday; there is not much this week in terms of economic reports. Treasury will auction $61B of notes and bonds this week, 3 yrs, 10 yrs and 30 yr bond. Markets should have time to digest the June employment report that looked very good on the headlines but still not as good as the headlines would suggest. Businesses added 288K jobs in June, better than what had been expected, the unemployment rate fell to 6.1%, getting close to what some economists see as full employment. The labor participation rate didn’t change, at 62.8%, meaning about 38% of the possible employment sector have simply quit looking. The U-6 number continued to show about 24% of the work force are employed part-time but want a full time job. Overall employment is increasing but the dollars earned in many of the jobs are not enough to increase discretionary spending.

 

The well-worn adage that characterizes investing, “climbing a wall of worry”, is definitely alive and well in this run-up of equity market prices. The stock market continues to increase and as the indexes continue to make new highs, the worry factor seems to increase. Yet no matter the debate about wages too low, housing markets struggling, and health care costs taking away potential consumer spending; it is onward and upward for stocks. As you know, we have been one of those questioning the drive higher in stocks, but still we have stayed fully vested in stock indexes (personally). Never try to trade against the trend no matter how worrisome it is. Relax; looks like the stock market will continue to increase as long as the Fed forces investors into it. Low interest rates leave little choice other than stocks. Not throwing in the towel, just recognizing the momentary reality.

 

There are no normal economic reports today, and not much this week. The weekly claims on Thursday, May consumer credit tomorrow, the FOMC minutes on Wednesday and Treasury auctions is about it. At 9:30 this morning the DJIA -65, NASDAQ -11, S&P -6; 10 yr note 2.63% -1 bps. 30 yr MBS price unchanged.

 

Gallup US consumer spending measure declined in June; Americans’ self-reports of daily spending fell back slightly in June, averaging $91 for the month. This is down slightly from a six-year high of $98 in May, but is similar to the $90 average found in June 2013. This $91 figure for June suggests a mixed bag for the economy. While it represents a much higher level of consumer spending than the $60 to $70 averages found for much of 2009 to 2012, it also represents the first decline in the monthly average since January of this year.

 

This Week’s Calendar:

 

Tuesday,

10:00 am May JOLTS job openings report (4.4 mil frm 4.455 mil in April)

1:00 pm $27B 3 yr note auction

3:00 PM May consumer credit (+$17.5B frm +$26.8B in April)

Wednesday,

7:00 am weekly MBA mortgage applications

1:00 pm $21B 10 yr auction (re-open frm May’s 10 yr)

2:00 pm FOMC minutes frm 6/18 meeting

Thursday,

8:30 weekly jobless claims (315K unch)

10:00 am May wholesale inventories (+0.6%)

1:00 pm $13B 30 yr bond auction (re-open frm May’s 30 yr bond)

Friday,

2:00 pm June Treasury budget (+$86.5B frm -$130B in April)

 

So far this morning the bond and mortgage markets are flat with little change frm last Thursday; the 10 -1 bp at 2.63% but MBS prices unchanged. Technically, bearish; as long as the stock market is in favor it is unlikely interest rates will decline. The bellwether 10 yr is managing to hold below its 100 day average on its yield.

 

 

 

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Mortgage rates improved last week. Here is the week’s review of the news that affected the financial markets during this past week.

 

Monday… It was another one of those rollercoaster days with market volatility. The major equity indexes began trading to the upside only to fade lower before recovering during the last 90 minutes to close near the intraday session highs. The Dow Jones Industrial Average underwent a more than 180-point swing during the day while the NASDAQ experienced a 78 point swing. A mixture of good and bad news created the volatile trading environment. Traders were pleased with better-than-expected Pending Home Sales news and merger and acquisition news of Pfizer’s offer to acquire AstraZeneca. This news was offset by fears of intensifying geopolitical turmoil in Ukraine and the potential negative economic impact additional economic sanctions imposed on Russia by the U.S. and Western Europe could have on world financial and equities markets. Pending Home Sales for March were reported at a much higher 3.4% vs. expectations of 1.0%, and far above February’s reading of -0.5%.

05052014#1

On the day, the Dow Jones Industrial Average added 87.28 points to close at 16,448.74; the S&P 500 rose 6.03 points to finish at 1,869.43; and the Nasdaq Composite Index fell 1.16 points to close at 4,074.40. In the bond market, interest rates edged higher with the yield on the 10-year Treasury rising by 4.4 basis points to close at 2.708% while the FNMA 30-year 4% coupon bond fell by 14.06 basis points to close at $104.39.

 

Tuesday… The major U.S. equity indexes were able to continue yesterday’s late-day rally with a combination of better-than-expected quarterly earnings reports and reassuring news out of Eastern Europe that somewhat eased investor concerns. In housing news, the Case Shiller Home Price Index for February was reported at a decent 12.9% year-over-year pace. Before considering seasonal adjustments, the 20-city index was unchanged. After seasonal adjustments, the report was up 0.8% or 9.6% higher on an annualized basis.

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In other economic news, the Conference Board, a New York City-based research organization, reported Consumer Confidence for April retreated slightly from an upwardly revised rate of 83.9 in March to 82.3. Although April’s figure was a little weaker than expected, it was still relatively high and suggests the level of business activity going forward could be respectable.

For the day, the Dow Jones Industrial Average gained 86.63 points to close at 16,535.37, the S&P 500 Index added 8.90 points to close at 1,878.33, and the Nasdaq Composite Index rose 29.14 points to end at 4,103.54. The yield on the 10-year Treasury fell 1.5 basis points to 2.69% while the FNMA 30-year 4% coupon bond gained 3.1 basis points to $104.42.

 

Wednesday… The Dow and S&P 500 clawed higher and even the NASDAQ turned positive after the Federal Reserve ignored a dismal initial reading on first-quarter GDP and provided an optimistic assessment of the economy’s prospects. Bonds also had a positive day with falling yields. The Fed stuck to its recent plan of tapering by $10 billion per month leaving Fed purchases of $45 billion per month comprised of $25 billion in Treasuries and $20 billion in mortgage backed securities (MBS). The key statement by the Fed was “The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases.”

 

Overall, economic news was mixed today. The ADP Employment Report for April showed 220,000 private sector jobs created vs. expectations of 210,000, plus March’s jobs number was revised from 191,000 to a significantly higher 209,000. This positive report suggested the official Bureau of Labor Statistics jobs number on Friday would be a strong one.

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On the negative side of the news, the Advance 1st Quarter GDP was reported at a very dismal 0.1%, far weaker than the 1.2% forecast and well below the 2.6% reported for the final quarter of 2013. Although weather was being blamed as a culprit for the depressing reading, there seems to be a fundamental, underlying weakness in the U.S. economy.

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In housing news, the Mortgage Bankers Association reported their weekly Market Composite Index,a measure of mortgage loan application volume, was down 5.9% for the week ending April 25th. The Market Composite Index is now at its lowest level since December 2000. The Purchase Index fell 4% and is now 21% lower than the same week one year ago. The Refinance Index dropped 7% from the prior week to the lowest level since 2008. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances remained unchanged at 4.49%, with 0.38 points paid for 80% loan-to-value ratio loans.  The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances decreased to 4.37%, with 0.14 points paid. The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA decreased to 4.17% from 4.20%, with 0.10 points paid.

 

At the close, the Dow Jones Industrial Average added 45.47 points to reach 16,580.84; the broader S&P 500 Index gained 5.62 points to close at 1,883.95; and the NASDAQ added 11.02 points to end at 4,114.56. The yield on the 10-year Treasury fell 4.6 basis points to 2.647% while the FNMA 30-year 4% coupon bond added 35.94 basis points to close at $104.78.

 

Thursday… Stock market action was choppy and the session end “mixed” with the Dow Industrials and S&P 500 losing some steam while the NASDAQ recorded a moderate gain.

Equities could see some tough sledding in the near term as their recent rally pushes the Dow Industrials and S&P 500 toward prior market peaks where technical resistance resides. Plus, the temporary stock market boost provided by 1st quarter earnings season will soon be winding down at the same time we are entering the month of May. We will have to see whether or not the old stock market adage of “sell in May and go away” will prove true this year as it has so many times in the past.

 

Economic reports were also “mixed” today. Initial Jobless Claims for the week ending April 26 were reported at 344,000, higher than the 315,000 forecast. The four-week moving average for new claims rose only 3,000 to 320,000. A Labor Department analyst said there were no special factors influencing the data and that the jobless claims data has no bearing on Friday’s April employment report, as it falls outside the survey period.

 

Further, construction spending rose only 0.2% in March, while many analysts had been looking for a stronger 0.4% number.  On a positive note, the ISM Manufacturing Index came in at 54.9 in April, which was better than the 54.5 that had been expected. Also, Personal Income and Spending for March was reported with Personal Income rising by 0.5% while Spending increased by 0.9%. Both numbers were higher than forecasts of 0.4% and 0.9% respectively. Personal Spending was the highest number seen since 2009. The Personal Consumption Expenditure (PCE) was also included in this report and is the Fed’s favorite measure of inflation. The PCE came in at 1.1% overall with a core reading of 1.2%. The PCE conveniently does not include an “owners’ equivalent rent” component that makes up about 25% of the Consumer Price Index and this is why the PCE inflation number is much lower than the CPI inflation number.

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For the session, the Dow Jones Industrial Average closed down 21.97 points to close at 16,558.87. The S&P 500 lost 0.27 of a point to finish at 1,883.68, and the Nasdaq Composite Index added 12.89 points to end at 4,127.45. The yield on the 10-year Treasury fell 3.4 basis points to end at 2.613%. The FNMA 30-year 4% coupon bond jumped 18.75 basis points to finish at $104.95.

 

Friday… The big news for the day was the Labor Department’s April 2014 Employment Situation Report (aka the “Jobs Report”). Although on the surface the headline numbers seemed strong with 288,000 jobs created vs. 210,000 jobs forecast, the unemployment rate falling to 6.3% from 6.7%, and upward job revisions for February (222K from 197K) and March (203K from 192K), in reality this was not a great employment report. Here are several observations after digging deeper into the data:

 

  • The Household Survey employment dropped by 73,000.  The civilian labor force contracted by 806,000 — yes, CONTRACTED!
  • Reverting back to where we were in December, the labor force participation rate fell by 0.4% to 62.8% and is now back to a level last seen in April 1978.
  • “Not in labor force” topped 92 million for the first time ever.
  • Full-time workers went up by 412,000; part-timers fell by 398,000.
  • The economy has added 49,000 temporary jobs in the past two months. Temporary employment continues to hit new all-time highs month after month. This month, the category accounted for 8% of all job growth, though it’s only about 2% of all employment.
  • While, the white teen unemployment rate dropped from 18.3% to 15.9%, the African-American teen rate went up from 36.1% to 36.8%.

 

Other Comments: from Americans for Limited Government – “The unemployment rate dropped by 0.4 percent, but that is owed almost entirely to 1 million people leaving the labor force. 73,000 jobs were lost, according to the Bureau’s household survey. This is not a good report. We’re not creating jobs, and the only reason the rate dropped is because so many people gave up looking for work. This coupled with weak first quarter growth calls into question continued stimulus policies by the Federal Reserve, and Obama’s regulatory stranglehold on job creators.”

 

Hot Air – “Stay tuned for the White House’s ritual spin-doctoring/end zone dancing.”

 

CNBC – “The headline rate tumbled as 806,000 people left the civilian labor force, a development one market strategist called ‘shocking.’”

 

A CNN email – “U.S. stocks get little opening lift from strong jobs report.” That’s because, overall, it wasn’t that good.

 

Zero Hedge – “in the one most important age group for jobs, those workers aged 25-54 which represent the bulk of the US labor force and are also the best and most productive group, the total number of jobs tumbled from 95,360K to 95,151K, a drop of 209K!”

05052014#6The geopolitical situation between Ukraine and Russia continues to remain tenuous at best, and the investment community does not seem to like it. Russia called for an emergency U.N. Security Council meeting on Ukraine at the same time Germany’s Chancellor Angela Merkel was in Washington to meet with President Obama to discuss possible additional sanctions on Russia. This situation deserves close monitoring as it can raise market volatility in the time it takes between a Manhattan traffic light turning green and the guy behind you honking his horn.

 

For the session, the Dow Jones Industrial Average fell 45.98 points to close at 16,512.89. The S&P 500 edged lower by 2.54 points to finish at 1,881.14, and the NASDAQ Composite Index dropped 3.55 points to end at 4,123.90. The yield on the 10-year Treasury fell 2.7 basis points and overall 7.8 basis points for the week to end at 2.586%. The FNMA 30-year 4% coupon bond added another 10.94 basis points on the day and increased 53.1 basis points on the week to finish at $105.06.

 

For the week, stocks ended with the Dow Jones Industrial Average rising 151.43 points, the S&P 500 gaining 17.74 points, and the NASDAQ Composite adding 48.34 points. Year to date for 2014, the Dow Jones Industrial Average has lost 0.38%, the S&P 500 has gained 1.77%, and the NASDAQ Composite has lost 1.26%. The national average 30-year mortgage rate fell from 4.40% to 4.24% while 15-year mortgage rates dropped from 3.47% to 3.35%. FHA 30-year rates dropped from 4.00% to 3.90% and Jumbo 30-year rates declined from 4.16% to 4.00%.

 

Mortgage Rate Forecast with Chart

 

The chart of the FNMA 30-year 4.0% Coupon Bond ($105.06) shows a four-day advance that shot above resistance at the 76.4% Fibonacci retracement level at $104.93 and this now becomes closest technical support. The next overhead resistance level now becomes the 100% Fibonacci retracement level at $105.65. The bond remains operating on a buy signal, but has become technically “overbought” and will be susceptible to a pull-back. It will probably take a correction in the stock market or a military incursion into Ukraine by Russia to trigger a flight to safety into bonds to enable the bond to continue its advance. With a quiet economic news calendar and an unwinding in corporate earnings season this week we could see stocks head lower. This would help bond prices to move higher and pressure interest rates lower, including mortgage rates.

 

Chart: FNMA 30-Year 4.0% Coupon Bond

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Economic Calendar – for the Week of May 5

The economic calendar eases considerably this week with just a couple of releases with any importance. Preliminary 1st Quarter Productivity and Unit Labor Costs will be released Wednesday followed by weekly Initial Jobless Claims on Thursday. Economic reports having the greatest potential impact on the financial markets this week are highlighted in bold.

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Mortgage rates improved last week  by a little more than 1/2 of a discount point.  Here is the week’s review of the news that affected the financial markets during this past week.

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Monday: The major equity indices ended the day with slight gains. Trading volume was feeble with many professional money managers still away from their desks from the Easter holiday. Those investors who were active were looking ahead to corporate earnings releases due later this week when 11 Dow companies and 161 of S&P 500 corporations are scheduled to release quarterly reports. So far, overall earnings for the S&P 500 companies who have reported have been better than forecast with 66% topping forecasts, according to Fact Set Research. Although it was a rather quiet day for economic news, the Conference Board reported that its index of leading economic indicators rose by 0.8% in March after climbing by 0.5% in the prior month. Analysts had forecast an advance of 0.7%. Investors appeared satisfied with the report, and viewed it as another indication that the economy is gaining traction and may ready for a more sustainable advance during the second half of the year.

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On the day, the Dow Jones Industrial Average added 40.71 points to close at 16,449.25; the S&P 500 rose 7.04 points to finish at 1,871.89; and the Nasdaq Composite Index climbed 26.03 points to close at 4,121.55. In the bond market, interest edged lower with the yield on the 10-year Treasury falling by a basis point to close at 2.715% while the FNMA 30-year 4% coupon bond rose by 6.25 basis points to close at $104.03.

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Tuesday: Equities continued their winning ways on earnings and economic news. The day’s economic data were moderately positive, with the number of existing homes sold in March falling less than feared. There have been concerns that rising home prices and higher mortgage rates are discouraging home buyers and are hampering the recovery in the housing market. However, those worries have been discounted by the reasoning that poor weather during the first quarter has accounted for some of the decline in sales. How well the real estate market performs in the spring buying season will be the deciding factor on the strength in the housing recovery.

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The Federal Housing Finance Agency (FHFA) reported a slightly stronger than forecast House Price Index of 0.6% for February. Economists had estimated 0.3%. January’s reading was revised downward from 0.5% to 0.3%. The year-over-year reading was +6.9%, down from the prior month’s number of +7.4%. Overall, this was a better report than many expected due to the extreme weather conditions experienced in January and February.

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For the day, the Dow Jones Industrial Average gained 65.12 points to close at 16,514.37, the S&P 500 Index added 7.66 points to close at 1,879.55, and the Nasdaq Composite Index rose 39.91 points to end at 4,161.46. The yield on the 10-year Treasury fell less than a basis point to 2.711% while the FNMA 30-year 4% coupon bond gained 7.8 basis points to $104.109.
Wednesday: Equities struggled following several consecutive daily advances.

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Technically, the stock market has advanced sharply over the past week and a small pause was in the cards. Investors received limited economic news with new home sales reported at 384,000 units, annualized, for the month of March. This was well short of expectations of 455,000, and was also lower than February’s 440,000.

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At the close, the Dow Jones Industrial Average fell 12.72 points to 16,501.65; the broader S&P 500 Index retreated 4.16 points to 1,875.39; and the NASDAQ dropped a more significant 34.49 points to 4,126.97. The yield on the 10-year Treasury fell 2.4 basis points to 2.687% while the FNMA 30-year 4% coupon bond added 18.75 basis points to close at $104.30.

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Thursday: It turned out to be a choppy session for stocks on mixed earnings news and a rise in hostilities in Ukraine. Russia’s Defense Minister Sergei Shoigu announced Russia had begun military drills along the border with Ukraine, and investors were concerned about the potential for escalation between Russia and Europe and the United States and the negative impact to global trade that would bring. The day’s economic news was mostly positive. While this week’s initial jobless claims rose by a sizable 24,000 to 329,000 claims, some volatility was expected around the Easter holiday. The 4-week moving average was 316,750, an increase of 4,750 from the previous week’s unrevised average of 312,000.

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More encouraging was a report issued by the Commerce Department that durable goods orders climbed by a greater-than-expected 2.6% in March. A more modest increase of 2.0% had been expected. Particularly reassuring in the data was a rise in demand across all sectors. The report confirmed recent signs of acceleration in the economy provided by the latest reports on industrial production and retail sales.

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For the session, the Dow Jones Industrial Average closed unchanged at 16,501.65. The S&P 500 gained 3.22 points to finish at 1,878.61, and the Nasdaq Composite Index added 21.37 points to end at 4,148.34. The yield on the 10-year Treasury fell 1.1 basis points to end at 2.682%. The FNMA 30-year 4% coupon bond jumped 18.75 basis points to finish at $104.422.

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Friday: Equities had a tough day after a few sour earnings reports and escalating tensions between Russia and Ukraine. The turmoil in Eastern Europe is having wide-ranging effects. For example, Visa Corporation (V, $198.93, -10.47, -5.00%) reported today that lower volumes in Russia are weighing on the company’s performance. There were reports of a deadly clash between Ukraine forces and pro-Russia supporters in Ukraine. Russia responded with new military exercises near the Ukraine border and this intimidated investors, especially in Germany. Those events were followed by commentary from the U.S. government that harsher sanctions against Russia will be announced on Monday. The negative performance in stocks in Europe and the U.S. sparked the bond market higher. For the session, the Dow Jones Industrial Average fell 140.19 points to close at 16,361.46. The S&P 500 dropped 15.21 points to finish at 1,863.40, and the NASDAQ Composite Index plunged 72.78 points to end at 4,075.56. The yield on the 10-year Treasury fell 1.8 basis points and overall 5.65 basis points for the week to end at 2.664%. The FNMA 30-year 4% coupon bond added 10.94 basis points on the day and increased 56.3 basis points on the week to finish at $104.531.

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For the week, stocks ended with the Dow Jones Industrial Average dropping 47.08 points, the S&P 500 losing 1.45 points, and the NASDAQ Composite falling 19.96 points. Year to date for 2014, the Dow Jones Industrial Average has lost 1.30%, the S&P 500 has gained 0.81%, and the NASDAQ Composite has lost 2.42%. The national average 30-year mortgage rate fell from 4.44% to 4.40% while 15-year mortgage rates dropped from 3.49% to 3.47%. FHA 30-year rates held steady at 4.00% and Jumbo 30-year rates declined from 4.20% to 4.16%.

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Mortgage Rate Forecast with Chart

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The chart of the FNMA 30-year 4.0% Coupon Bond ($104.53) shows a four-day advance after bouncing off of multiple support levels. The bond price is now above all of its major moving averages and is operating from buy signals generated last Tuesday from a positive stochastic crossover and an engulfing lines candle pattern. The good news is the bond is not yet “overbought” so there is time for further price appreciation. If stocks continue to falter this coming week, and it sure looks like they could, then bonds should move higher in price with mortgage rates sliding a little lower.

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Chart: FNMA 30-Year 4.0% Coupon Bond

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Economic Calendar – for the Week of April 28

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he economic calendar is jam-packed this week with many potentially market-moving releases. Of particular interest to investors will be first quarter GDP on Wednesday along with the Federal Reserve’s FOMC meeting and interest rate decision. Friday brings the Employment Situation (Jobs) report for April. Economic reports having the greatest potential impact on the financial markets this week are highlighted in bold.

 

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