Wednesday

1/07/2009

At 9:00 this morning treasuries were trading weaker, mortgage prices were down 4/32 frm Tuesday's close. The stock index futures markets were lower pointing to a soft open at 9:30. Some perspective; from 9:00 yesterday to 9:00 this morning mortgage prices were up 21/32. Yesterday mortgages improved 35/32 frm the close on Monday. A good day no matter what time frame you use. By 10:00 mortgage prices are about unchanged on the day. (see below for 10:00 prices).

The ADP Dec employment report was out at 8:15 this morning, a shocker; ADP estimates are non-farm jobs declined by 693K in the month. ADP includes only private employment and does not take into account hiring by government agencies, which is included in the monthly payroll report issued by the Bureau of Labor Statistics that will hit on Friday. The estimates from economists for the BLS report is a loss of 500K jobs when government payrolls are added in. ADP data has been revised to more closely reflect the BLS data, we'll see on Friday. No matter the number, the job losses will be severe. Employers are cutting jobs rapidly as the recession deepens and expectations increase that the recession will last longer and more severe than earlier thought. The ADP data is sending stock indexes lower this morning.

The FOMC minutes released yesterday indicated the Fed has increased its length on the recession to well into 2010. As noted in the 4:30 report yesterday, the Fed is also beginning to be concerned that deflationary pressures may be increasing as consumers and businesses continue to resist spending, sending all prices (except oil) lower. Deflation in prices, if continued, keep consumers and businesses from spending on the perception next month prices will be better----and it goes on and on. The Fed wants some inflation and the economic recovery needs it; the Fed's target is a 1.0% annual inflation rate. Fed officials discussed providing “a more explicit indication of their views on what longer-run rate of inflation would best promote their goals of maximum employment and price stability,” the minutes said. Such a target may “help forestall the development of expectations that inflation would decline below desired levels, and hence keep real interest rates low.”

The latest weekly MBA mortgage applications fell -8.2% with the purchase index increasing +7.3% while the refinancing index declined -12.3%. The 30-year fixed mortgage rate in the latest week (the week ended Dec 25) fell another 5 BP to a new record low of 5.14%. That is down by 132 BP from the 4-month high of 6.46% posted as recently as the end of October. US mortgage rates have fallen sharply in the past two months following the Fed’s announcement of a $600 billion program to buy mortgage securities to help grease the pipeline of mortgage funding and also to buy the debt of Fannie Mae and Freddie Mac to reduce their financing costs.

Next up; at 1:00 this afternoon Treasury will auction a record $30B of 3 yr notes. With $16B of 10 yr notes hitting tomorrow markets will be focused on the demand for the 3 yr. While we don't draw direct conclusions comparing short rates to longer dated maturities, nevertheless markets will take note of today's demand measuring investors' continuing concerns on safe haven desires.

Volatility remains high for treasuries and mortgage prices and rates. Although we continue to expect lower mortgage rates, we also remain somewhat skeptical that 30 yr fixed rates will fall to 4.5%. The concern is that if longer term treasury rates continue to increase the pull against lower mortgage rates may keep investors away from mortgage rates that fall much below 5.00%. On the other side of it however, if the Fed increases its buying of MBSs from the agencies (more than the $500B already announced) mortgage rates would likely decline, possibly to that 4.5% level that has become the anticipated target consumers are expecting.

Treasuries and mortgages are trading weaker in early activity this morning. Mtg prices are trading 1/32 lower this morning, but still up 23/32 frm 10:00 yesterday. Pricing of mortgages to originators is becoming difficult as wholesalers struggle with less staff and fears of volatile markets. With many lenders having left the business the existing buyers of mortgages are seeing volume that they can't handle; it happened yesterday with one of the biggest wholesalers. As rates decline volume is surging forcing wild price changes that have little to do with the actual MBS trading in the markets.