Market commentary

Negative economic data has bonds in rally mode this morning pushing the yield on the 10 year note down to 2.85%. Mortgage prices are improving as well; however, we would be seeing more of a follow-through in mortgages if the potential downgrade of U.S. debt had not widened credit spreads.

This morning it was reported that 2nd quarter GDP came in short of expectations at 1.3%. This was not completely unexpected, but what came in as a surprise was the revision of the 1st quarter GPD to just 0.4% from 1.9%. That kind of revision is much unexpected. The 1st quarter was revised down to reflect a worse trade deficit, due to higher oil imports, and inventories, which add to GDP, were revised down. The drop in auto production, due to the Japanese disruption, caused a huge dip as well. Personal Consumption rose just 0.1%, well below the 0.8% anticipated, as the consumer reined in spending amid a tirade of economic negatives. In addition, higher cost figures pushed the Employment Cost Index up to 0.7% from 0.6%, while expectations were for 0.5%. All in all, this was a pretty negative report.

Following the weak GDP announcement, the Institute for Supply Management-Chicago Inc. said today its business barometer fell to 58.8 in July from 61.1 the prior month with the employment measure declining to 51.5 from 58.7, indicating less hiring.

And finally, the Thomson Reuters/University of Michigan final index of consumer sentiment fell to 63.7 from 71.5 in June, the weakest since March 2009, from 71.5 in June.

In summary, lots a negative economic data this morning has investors seeking the safety and liquity of the U.S. Treasury market in spite of the seeming impasse regarding any deficit reduction and increase in the debt ceiling.

Market commentary

On the data front weekly jobless claims fell below the 400,000 mark for the first time since early April. It will be nice to see the number continue to fall as higher employment will be the main driver of a recovery in housing. Regarding housing, the number of contracts to purchase previously owned U.S. home rose 2.4% in June as buyers tried to take advantage of lower prices and borrowing costs.

Wednesday’s 5 year note auction did not go as well as Tuesday’s 2 year auction and we saw bonds take a hit, especially mortgages which ended the day almost 50 basis points lower in price. This morning the bond market has recovered much of Wednesday’s losses, however, we still have the 7 year note auction scheduled for later today.

And of course, the main focus continues to be the drama surrounding an agreement on raising the U.S. borrowing capacity while trying to reign in uncontrolled spending. No deal is expected today, so bonds will most likely trade on the results of the 10 year note auction. If you need to lock your loan today, consider locking it early.

Market commentary

This morning we learned that durable goods orders for the month of June fell 2.1%, driven mostly by orders (or the lack thereof) for transportation equipment. Ex-transportation, orders rose but at a weak 0.1%. While this report is disappointing, it has not moved the markets which are firmly focused on the deficit/debt ceiling debate in Washington right now. Do not forget, however, the sovereign debt crisis in Europe remains, so if U.S. debt is downgraded where do investors go? The U.S. Treasury market is the largest and most liquid market in the world. In light of this, the Swiss franc and gold continue to make daily highs.

Later this morning the U.S. Treasury will auction 5 year notes, and this afternoon the Fed will release its Beige book, which will give us a region by region look at business activity in the U.S.

Bond prices are flat from the market close on Tuesday while stocks are decidedly lower.

Market commentary

On the data front, the S & P Case Shiller Home Price Index slipped 0.05% in May, but April was revised to a gain of 0.44% from a loss of 0.09%. Therefore, the overall index of 138.87 was actually higher than the 139.80 projected. Year over year, however, the price of homes are down 4.5% from May of last year in the top 20 cities.

Again today the focus will continue to be the debt ceiling discussions. Keep in mind there is also a $35 billion auction of 2-year notes which should be watched closely. Last month’s auction was poorly received and given the dysfunction in Washington, demand is a concern.

Monday the bond market closed weaker with the yield on the 10 year note closing 3.01%. This morning we are seeing a slight improvement in bond prices as stock markets are trending lower.

Market commentary

The only news that matters today and the rest of this week are the deficit reduction and debt ceiling negotiations. I do find it interesting that news outlets focus on raising the debt ceiling as the only alternative. Ron Paul has a rather interesting, common sense solution. The largest holder of U.S. Treasury debt, approximately $1.6 trillion, is the Federal Reserve. So in effect the government is borrowing from itself, and we are paying interest to ourselves. Why not have the Fed cancel the debt?

Well, we know that will not happen, so until a resolution is in place the markets will remain volatile with the main beneficiary being gold.
Even with the debt ceiling issue unresolved, the U.S. Treasury has a total of $99 billion in auctions scheduled for this week, consisting of 2 yr, 5yr and 7 yr notes. Bonds and stocks are both trading lower today and mortgage prices are worse by approximately .125%.

Market commentary

Thursday’s news on a European bailout package and positive growth numbers from the Philadelphia Federal Reserve manufacturing index gave stocks another boost and continued to take away the flight to safety bid in the U.S. Treasury market. The yield on the 10 year note closed at 3.01%, near the high yield of the day.

This morning we are seeing headlines of renewed concerns on the European bailout so investors are once again moving into U.S. Treasuries, pushing the 10 year yield down to 2.98%. Mortgage prices have improved by .125% to .25%.

Market commentary

Initial Jobless Claims rose to 418,000 from 408,000. The prior week was revised from 405,000. Expectations were for 410,000. We continue to see jobless claims run at too high of a pace to indicate real job growth. This is a disappointing number, but obviously taking a back seat to a reported Greek bailout deal being agreed to.

A Reuters news headline reads: “The European Central Bank is willing to let Greece slip into temporary default as part of a crisis response that would involve a bond buyback but no new tax on banks, EU sources said on Thursday.”

Stocks and the euro rallied, erasing earlier losses, after the reports that European Union officials have come up with a plan to rescue Greece and stave off the contagion in other countries. U.S. Treasuries prices are weaker on this news with the yield on the 10 year note rising to 2.99% and mortgage prices worse by another .25%.

Gridlock remains in Washington D.C. on the debt ceiling and deficit reduction talks.

Market commentary

Sales of previously owned U.S. homes unexpectedly declined in June to a seven month low as the industry struggled to overcome rising unemployment and foreclosures. According to the National Association of Realtors, purchases dropped 0.8% to a 4.77 million pace, inventories increased, and more contracts were canceled, while 30% of transactions last month were of distressed dwellings.

Mortgage applications for the week ending July 15 climbed 15.5%, led higher by applications for refinance which were up 23.1%.

Tuesday was all about the U.S. debt ceiling stalemate and a “last minute” deficit reduction proposal by a bi-partisan group of Senators that seemed to meet approval of the President. Stocks soared on the news with the DOW higher by 200 points and bonds rallied after beginning the day lower. This morning, however, this is all old news. Even The stellar earnings report from Apple is not enough to keep stocks in positive territory. The same can be said of bonds as we see yields rising, moving mortgage prices lower by .125% to .25%.

Market commentary

Bonds gave ground Monday with the 10 year yield rising from 2.88% to 2.92%. This morning the 10 year is up to 2.95%, and stocks are rebounding on strong earnings from IBM and Coca Cola. Earnings in the financial space are not so great, as Goldman Sachs missed projections and Bank of America reported a loss of $9.1 billion as B of A continues to set aside reserves for loan losses and settlements.

Housing starts for the month of June, released this morning, rose from 549,000 to 629,000 driven mostly by starts from multi-family construction which is up 30.4% month over month.

Monday, spreads on mortgages widened substantially to U.S. Treasuries, causing many lenders to worsen prices mid-day. This morning mortgage prices are lower again by .125% to .25%, bringing the two day loss to just over .50%. Traders I spoke with point to the stalled talks on the debt ceiling and the rating agencies potential downgrade of the U.S. as reasons for the price declines.

Market commentary

Debt ceiling debates, budget debates, dueling news conferences, economic data, earnings announcements and a threat from the rating agency Standard and Poor’s are all topics the markets are dealing with this morning. The threat from S&P to lower the AAA rating the U.S. now enjoys on its debt is a result of the impasse in Washington regarding the budget and debt ceiling.

On the economic front consumer prices dropped 0.2% in June, however, stripping out the volatile food and energy sectors prices rose .254%. Energy prices fell 4.4% month over month and were the largest contributor to the decline in the overall index.

Again on the consumer front, the Thomson Reuters/University of Michigan index of consumer sentiment decreased to 63.8, the weakest reading since March 2009, from 71.5 the prior month.
From the industry side of the U.S. economy the Federal Reserve announced this morning its index of Industrial Production rose 0.2% last month, reversing the 0.1% decline from the previous month.

Strong earnings from Google and Citibank initially powered the stock markets; however, the weak consumer confidence data put the brakes on the early rally. As of this writing stock indices and bonds are flat from Thursday’s close. Bonds closed weaker on Thursday so mortgage prices are worse by .125%.

Market commentary

U.S. Treasuries opened weaker this morning, as investors seem torn between the debt crisis in Europe, the stalled budget/debt ceiling talks in the U.S., and economic reports. Jobless claims remained above 400,000 for the 14th week but dropped from 427,000 to 405,000. Retail sales rose 0.1% in June, beating expectations that they would be unchanged.

Producer prices dropped more than expected for the month of June at the headline level, however, ex food and energy prices rose 0.3% month over month, slightly above expectations for 0.2% growth. The drop in the headline number was driven mainly by the drop in energy prices.

After improving Wednesday afternoon, mortgage prices are worse by .125% to .25%.

Market commentary

“As the obtusely vague, yet accurate, mentality goes; the markets will go up until they don’t. " This quote comes from an analyst this morning describing the U.S. Treasury market, as we see selling of Treasuries which pushes bond prices lower/interest rates higher. Bond prices have rallied the past few sessions which means interest rates were lower, and this morning the opposite is happening, mostly as a result of investors piling back into stocks. As of this posting the DOW is higher by 140 points.

The Fed released the minutes of their June 21 – 22 meeting Tuesday afternoon and there were few surprises. And as Fed Chairman Bernanke reiterated in his comments to Congress this morning, the Fed is ready to ease again (QE3?), if the U.S. economy continues to struggle.

Still on the calendar for today is the 10 year note auction and of course we will have news on the continuing saga of the U.S. debt ceiling and budget debates, and the worsening financial crisis in Europe.

The price of the 10 year note has fallen .625%, pushing the yield back to 2.94%, and mortgage prices are worse by .125% to .25%.

Market commentary

What is the third largest bond market in the world behind Japan and the U.S.? If you guessed France, Germany or the UK, you are incorrect; Italy ranks third. Think about that as you read sovereign debt crisis headlines coming from Europe. This quote from the Economist: “If Spain has long been considered too big to fail, then a full-blown Italian debt crisis would be cataclysmic. The country’s bond market is the third-largest in the world, after America’s and Japan’s. That has been seen as a source of a comfort: bond investors find it hard to avoid a market that big and liquid. But it is also a source of widespread financial infection.”
European Union leaders are holding an emergency summit Friday in hope of containing the widening financial crisis as spreads on Italian bonds reached near record levels.
The effect of this on U.S. markets is a continued flight to the relative safety of U.S. Treasuries, and after Monday’s steep sell off, stock markets are flat. The yield on the 10 year note fell as low as 2.89% early this morning and is currently trading at 2.91%.

With world debt markets in turmoil and U.S. leaders stalemated over deficit reductions, the U.S. Treasury begins another week of debt auctions today with $32 billion 3 year notes, followed by $21 billion 10 year notes and $13 billion 30 year bonds on Wednesday and Thursday, respectively.

Later today the Fed will release the minutes from its last FOMC meeting. Expect volatility to continue.

Market commentary

There is no U.S. economic data on the calendar today, although this will be a full week beginning Tuesday with the minutes from the last Fed meeting. The remainder of the week gives us two inflation readings, one at the producer level and the other at the consumer level, as well as reports on industrial production.

Even with the lack of data today, there is plenty of news to provide volatility in the markets.

U.S. Treasuries are higher this morning on contagion fears in Europe. First it was Greece, followed by Ireland and Portugal, and today Italy is the center of attention. Two weeks ago Friday, Italy suspended trading in its two largest banks as share prices fell dramatically. Last week shares of these banks hit lows last seen during the time Lehman Brothers filed for bankruptcy. Clearly the leaders of the European Union have tough decisions to make, as do the leaders of individual countries. Do Germany and France saddle their citizens with the debts of other countries, and do the debtor countries decide it is better to default and “start over” as it were.

The 10 year note is now trading at 2.945% and U.S. stocks are lower across the board. Mortgage prices have improved by approximately .25% to .375%.

Market commentary

The markets received an unexpected jolt this morning with a surprisingly weak jobs report. There is no silver lining to June’s employment reports as total payrolls for the month grew at just 18,000, including 57,000 of new private sector jobs and a loss of 39,000 government jobs. Expectations were for 105,000 total payroll growth and 132,000 private sector job growth. U.S. Treasuries rallied strongly on the weak data with the yield on the 10 year note gapping from 3.18% to 3.04%.

In the household report, the unemployment rate rose to 9.2% but the report is worse than that. Not only did the number of employed persons fall a massive 445,000, but 272,000 people completely left the labor force.

For those fiscal conservatives it is almost time to say I told you so---meaning, excessive government regulation, massive deficit spending and the printing of money does not make a sound economic recovery.

Mortgage bonds are being dragged along by treasuries, with pricing better by .375% to .50%.

Market commentary

Bond prices are falling this morning---yields rising, on a stronger than expected job report from ADP. The ADP employment report for June is projecting private payroll growth of 157,000, a substantial increase to May’s report and is well above the expectation for an increase of 70,000. Keep in mind it will take the creation of 250,000+ new jobs per month to begin to make a dent in the U.S. unemployment rolls.

Initial jobless claims for the week ending July 2 came in at 418,000, above 400,000 for the 13th consecutive week.

The European Central Bank raised its keys interest rate by 0.25% to 1.50%. There is a real contrast of approaches occurring right now between the European and American responses to very similar situations. In Europe, they are implementing fiscal austerity, a euphemism for raising taxes and cutting spending, and are again tightening monetary policy despite excessively high unemployment rates. In the U.S., politicians have yet to implement any austerity and monetary policy is remaining accommodative for an “extended period.” Remember, the U.S. government has been operating without a budget for 800 days, as Congress could only agree on passing continuing resolutions prior to the November 2010 elections.

In reaction to today’s news and data the yield on the 10 year note has risen to 3.16%, after closing at 3.11% Wednesday. Mortgage bonds sold off into the close on Wednesday and are weaker again this morning. Pricing is worse by .375% to .50%.

Market commentary

Mortgage applications for the week ending July1 fell 5.2% as refinance applications fell 9.2%, with purchase applications rising 4.8%. If you are an originator which of these markets is your focus?

In the ongoing European debt saga, Tuesday, Moody’s slashed Portugal’s debt rating from Baa1 to Ba2, a downgrade deep into junk status. This helped support the U.S. Treasury market, which is improving a few basis points again this morning.

China’s efforts to tame inflation continue with The People’s Bank of China raising interest rates this morning for the third time this year. China is experiencing its fastest pace of inflation since 2008 and is raising interest rates in spite of slowing economic growth.

Giving another boost to interest rates was a report from the Institute for Supply Management, who told us their index of non-manufacturing businesses decreased to 53.3 in June from 54.6 in May. This data suggests the U.S. economy is indeed experiencing slower growth.

Mortgage prices are improved by approximately .25% this morning.

Market commentary

This week will be fairly quiet in terms of economic data, leading up to the June employment report scheduled for release on Friday. Recall in May nonfarm payrolls grew 54,000, substantially less than forecast, and are expected to increase by 85,000 for June. The unemployment rate ticked up to 9.1% and is forecast to remain at that level.

Bond prices are improving this morning after enduring a brutal week last week. Friday the yield on the 10 year note closed at 3.185% and is currently trading at 3.135%.

Mortgage prices are improved by .25% to .375%.

Market commentary

The University of Michigan Consumer Confidence report for June was reported this morning at 71.5, almost a 3 point drop from May’s 74.3. The primary cause of the drop was a downgrade in consumers’ outlook for future economic conditions, which outlook dropped from 69.5 to 64.8.

Treasuries gave a little more ground yesterday with the 10 year closing at 3.16%, 5 bps higher than Wednesday’s close. This morning the yield on the 10 year has climbed to 3.20% as we see the unwinding of the fear trade that accompanied the Greek uncertainty continue. Should economic data in the U.S. remain weak should see bonds regain some stability.

The beneficiary of the exodus from U.S. Treasuries has been the stock market. The DOW is higher by over 100 points again this morning, breaking through 12,500.

Home Savings of America will be closed Monday, July 4, 2011 in celebration of Independence Day. Enjoy your long weekend!