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Money Market Recap and Forecast for week of July 19th

July 19th, 2010

Written by Greg Frost Jr.

Last week began on the downside for U.S. Treasuries.  Monday was almost a non-day, but then came Tuesday.  Stocks went wild on better-than-expected profits from Alcoa and the rally was on.  Investors regained confidence and safe-haven buying dried up.

The yield on the 10-year note zoomed to 3.11% from Monday’s 3.05%.  Yields and prices move in opposite directions.

Weak retail sales in June ignited strong buying in bonds on Wednesday.  Sales fell for the second straight month — down 0.5%.  That afternoon the minutes of the Fed’s June 22-23 meeting showed the Committee lowered its GDP forecast for 2010 to 3% -3.5% from 3.2% – 3.7%, raising further concerns about the economy.

Treasuries continued their rise on Thursday, with four of the five reports supporting the theory of a slow economic recovery.  The day began on an up note with first-time unemployment claims dropping by 29,000 to 429,000 — a two-year low.  The four-week average also fell to 455,250.  This had some economists thinking this may be the first in a series of declines.

The rest of the reports, however, were bond-friendly.  The producer price index, which looks for signs of wholesale inflation, fell 0.5% in June, while the core index, which eliminates volatile food and energy prices, rose by an expected 0.1%.  Traders had nothing to fear on the inflation front.

Manufacturing was also hard hit.  The Philly Fed index of July manufacturing conditions fell to 5.1 from 8 in June.  The May index hit 21.4.  The July NY Empire State manufacturing index plunged to 5.1 from 19.6 in June.

Separately, nationwide industrial production rose 0.1% — weaker than May’s 1.3% increase.  Capacity utilization was unchanged at 74.1%.

These reports renewed concerns about economic growth — pushing the specter of a rebound further into the future.  Money headed back to the safe haven of bonds, and the yield on the 10-year fell below 3.0% again, closing at 2.98%.

Friday began with the consumer price index showing no signs of inflation in retail prices.  The index itself rose 0.1%, while the more closely watched core rate rose 0.2% — slightly more than the predicted 0.1% increase.  Bond prices remained flat.

The week’s final report showed consumer sentiment hitting its lowest level since August.  The University of Michigan said that its preliminary July survey slid to 66.5, down from the June reading of 76.  Buying in bonds picked up, driving the 10-year note yield down to 2.95%.

Mortgage applications continue to decline, according to the Mortgage Bankers Association.  For the week ended July 9, the refinance index fell 2.9%, while the purchase index dropped 12.7%.

The recent trend of slow week/busy week continues, with only four economic reports on this week’s docket.

With earnings season heating up, Wall Street might influence trading in the bond markets as much or more than the reports would.  Better-than-expected quarterlies from influential corporations can ignite buying in equities, and bonds will sell.  But disappointing reports would likely have the opposite effect.

On Tuesday housing starts and building permits for June are due.  Both categories came in far below estimates in May.

Starts are expected to fall to an annual rate of 563,000 from 593,000.  Building permits, which shine a light on future starts, are predicted to fall to an annual rate of 555,000 from 574,000 in May.  These two reports, however, are subject to huge revisions.

More housing data come out Thursday with the release of existing home sales in June.  They are expected to drop to an annual rate of 5.10 million units versus a May rate of 5.66 million units.

First-time jobless claims for the week ended July 17 could be watched more closely than usual.  Were analysts correct in thinking last week’s big decline in claims was the beginning of the long-awaited turn around in employment?  Another big decline would no doubt bring about selling in bonds, but an increase would usher in a sigh of relief.

The final report, the index of leading economic indicators for June, is expected to fall 0.5%.  It had been heading upward for months indicating good economic times ahead.  This would be a setback.  Although bonds would like it, this report isn’t a big mover.

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Explaining What The Federal Reserve Did In Plain English (January 28, 2009 Edition)

January 28th, 2009

Written by Greg Frost Jr.

The Federal Open Market Committee voted to leave the Fed Funds Rate unchanged today.  It remains within a target range of 0.000-0.250 percent.

In its press release, the FOMC reiterated most of the key points from its December 2008 statement, including:

• The U.S. employment outlook continues to deteriorate
• Consumers and businesses continue to cut spending
• The housing sector is still showing weakness

In addition, the FOMC addressed the “extremely tight” credit conditions for U.S. households and business, even as it said some financial markets are showing signs of improvement.

To the Fed, the latter is a precursor for the former.  For Americans needing new mortgages or other forms of credit, it may mean that getting approved gets easier sometime late this year.

Most importantly, the Fed’s press release again mentioned the policy-setting group’s intention to “employ all available tools” to promote economic growth.  This includes the open-market purchasing of mortgage-backed debt that has helped fuel the current Refi Boom. The Fed indicated a willingness to extend the program beyond the initial $500 billion, if necessary.

For each of the Fed’s interventions, though, there is a trade-off.

Buying securities costs money and the Fed — literally — comes up with the cash by printing it.  The extra supplies devalue the U.S. dollar which, if left unchecked, can cause the Fed’s plan to backfire in the form of runaway money supply-led inflation.  The Fed is aware of this risk and is pledged to monitoring it closely.

Overall, mortgage rates worsened today after the Fed’s statement.

Source
Parsing the Fed Statement
The Wall Street Journal Online
January 28, 2009
http://online.wsj.com/internal/mdc/info-fedparse0928.html

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Move-Up Homebuyers Face New Lending Challenges This Spring

January 23rd, 2009

Written by Greg Frost Jr.

When a homeowner sells his home and decides to buy a new one, there are 3 basic options for the residence — sell it, keep it, or rent it.

Unfortunately, no matter which path they choose, move-up homebuyers in need of a new conforming mortgage will find qualifying for a home loan to be more difficult this season than in the past.

Mortgage guidelines are dramatically tighter for people “carrying two mortgages”.

Among the changes this spring’s buyers face:

Selling the primary residence
If you plan to close on your new home prior to the closing of your existing home — even if it’s only by a day – both payments must be listed as monthly debts on your mortgage application. This will disqualify the majority of homebuyers.
Converting your residence to a second home
If your current home has less than 30 percent equity in it, your mortgage application for the new home will not be approved unless you can show 6 months worth of mortgage payments + taxes + insurance in reserves for the current home and new home combined.
Converting your residence to an investment property
If your current home has less than 30 percent equity in it, any rental income derived from a tenant is disallowed on your mortgage application for the new home.  You must still count the mortgage payment + taxes + insurance as a monthly debt.

In other words, being a move-up buyer isn’t as simple as it used to be.  New lending rules make buying a new home an exercise in timing and financial planning.  And the rules are expected to get tougher, too.

Therefore, if you expect to be a move-up buyer in the next 12 months, consider moving up your timeframe or — at least — planning ahead for it.

Understanding the new mortgage landscape and how they can influence your upcoming purchase may be the difference between getting approved for a home loan, and getting turned down.

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