Wednesday--the day after

11/05/2008

Not unexpected based on polls leading to the election; Barak Obama will be the next US President. His plate will be full and not an easy one to chew. The US economy is in shambles, unemployment is increasing, the housing crisis continues, and the federal budget deficit will approach $1 trillion dollars in the current fiscal year. Most political analysts expect Obama to start quickly, before his inauguration, to push for a stimulus package that Bush can agree with. Beyond job creation and big investments in public works, Obama intends to shift the tax burden back toward the wealthy, roll back a quarter-century of deregulation, extend health-care coverage to all Americans and reassess the U.S. government's pursuit of free-trade deals. Sen. Obama will have all the tools with both houses of Congress with Democrat majorities. Given the voter turn out and the margin of victory, America is demanding big changes. Obama will have his work cut out as he tackles the worst economic decline since the Depression. Bush spent his time fighting wars; Obama will get back to the economy as his mandate, while also having to confront America's foreign policy initiatives.

What it means for the mortgage markets and interest rates in general. The key problem for expectations of substantially lower mortgage rates is the extremely high federal budget deficit. Treasury will have to fund it from borrowing from the private sector, foreign banks and foreign investors. To do so will likely keep longer term interest rates from declining much. Add that with home prices still not bottoming, would-be investors in mortgages will not likely have a big appetite for mortgages in the next six to 12 months. The 30 yr mortgage rate will likely swing in a 100 basis point range, from 6.50% to 5.50% over the next year.

We missed the call yesterday; the mortgage market is continuing to rally this morning. Didn't expect it at the end of the day yesterday after the strong move with mortgage prices jumping a full point. This morning the mortgage markets are adding to the rally yesterday; treasury prices are trailing the mortgage markets as the spread between 30 yr mtgs and the 10 yr note is narrowing. Mortgages are getting some traction on the belief there will be some sort of stimulus package coming soon from Treasury.

The number of job losses in Oct will likely be sizeable; this morning ADP stepped up with their estimates, down 157K jobs in the private sector (doesn't count government jobs as does the official BLS report coming on Friday). The estimates from economists for the non-farm jobs on Friday is a drop of 200K jobs with the unemployment rate increasing to 6.3% from 6.1% in Sept.

Oct ISM services sector index, expected at 47.0 frm 50.2 in Sept, hit at 44.4; new orders fell to 44.0 frm 50.8, prices fell to 53.4 frm 70.0 (energy and commodities), employment 41.5 frm 44.2. Any index lower than 50 is contraction.

Later today Treasury will announce the details of next week's quarterly refunding with a 10 yr note and 30 yr bond auction.

Mortgage applications were the worst in 8 yrs last week. The weekly MBA mortgage applications index plunged 20.3% last week with refis down 27.8% and purchasing applications down 13.9%. The fixed 30-yr mortgage rate rose to 6.47% (+21 basis points) while the 15-yr popped to 6.14% (+13 bps) and the 1-yr adjustable rate mortgages dipped to 6.86% (-4 bps).
Early trade in the stock market is driving the treasury and mortgage markets today. Interest rates are better, especially in the mortgage area. Yesterday the technical's turned more positive with the 10 yr note yield now trading below its 40 day moving average and all the momentum oscillators have turned slightly bullish. Rate markets in the short term are now looking to the employment report on Friday that is expected to reveal a big decline in non-farm jobs (200K); the stock market is also thinking about it this morning with the DJIA down about 200 points in the first 30 minutes after the open.