Mortgage Market Update – Al Hensing

This morning the 10 yr opened slightly weaker with the yield at 1.85% down 1 bp frm Friday’s short session; MBS prices early today down 3 bps frm Friday. It was an unusual trading session with the key March employment report released with most markets closed for Good Friday. Employment at 8:30, stock index futures traded for 45 minutes to 9:15 am. The bond and mortgage markets traded until 12:00.

Employment in March was not good; non-farm jobs were thought to be up by 247K, as reported +126K. Private jobs were expected up 240K, as released +129K. The unemployment rate at 5.5%, unchanged frm Feb was expected. Average hourly earnings a little better, up 0.3% with consensus at +0.2%. The U-6, those working part time or at jobs beneath their skill levels at 10.9% but it was the lowest reading since 2008. The labor participation rate at 62.7%, about what was expected. Overall a mixed picture but another report that suggests the US economy has slowed in Q1 and adds more credibility that Q2 is likely to be weaker than Q1, Q4 2014 and Q3 2014. In the 45 minutes stock indexes traded all were lower.

At 9:30 the DJIA opened -108, a little better than the initial trading Friday morning. NASDAQ opened -32, S&P -10. The 10 yr at 1.85% +1 bp; 30 yr MBS price unchanged frm Friday’s close and -3 bps frm 9:30 Friday morning. By 9:45 the indexes recovered and were trading better, for some investors the weak employment report is seen as a delay from the Fed in increasing interest rates.

The only data today; at 10:00 the March ISM services sector index, expected at 56.7 frm 56.9; as released 56.5, new orders component 56.6 frm 56.4, new orders at 56.7 frm 57.8. Last Wednesday the ISM manufacturing sector index was slightly weaker than in Feb; 51.5 frm 52.9, the lowest index reading since May 2014. The employment component dropped frm 56.4 to 50—right on the cusp between contraction and expansion.

The dollar is weaker this morning pushing crude oil and gold prices higher. Crude markets focusing on the Iran sanctions and negotiations that are supposed to limit any additional developments for a nuclear bomb. There is no deal yet, the negotiations will re-start in June. Why is it important? Because lifting of economic sanctions that are part of the talks will allow Iran to sell its oil. Oil markets very touchy at these levels around $50.00/barrel.

Mohamad El Erian, former co-CEO at PIMCO: in an interview with a California newspaper said most all of his money is now in cash. The reason is simple he commented: pretty much everything else has gotten too elevated. Asked about a bubble forming, he said “Go back to central banks. Central banks look at growth, at employment, at wages. They are too low. They don’t have the instruments they need, but they feel obliged to do something. So they artificially lift asset prices by maintaining zero interest rates and by using their balance sheet to buy assets…… Why? “Because they hope that they will trigger what’s called the wealth effect. That you will open your 401k, see it has gone up in price, and you’ll spend. And that companies will see their shares are going up and they will be more willing to invest. But there is a massive gap right now between asset prices and fundamentals”.

Fed NY Fed President Wm. Dudley speaking this morning; said the pace of interest-rate increases is likely to be “shallow” once the Fed starts to tighten, and recent weakness in the economy was largely the result of temporary conditions. “It will be important to monitor developments to determine whether the softness in the March labor market report evident on Friday foreshadows a more substantial slowing in the labor market than I currently anticipate.” The timing of the first interest-rate increase since 2006 “will be data dependent and remains uncertain because the future evolution of the economy cannot be fully anticipated,” Dudley said. “I anticipate that the path will be relatively shallow” as “headwinds in the aftermath of the financial crisis are still in evidence.” It is becoming more evident that the Fed is as unsure about what to do as economists are about the economic outlook. Richmond Fed President Jeffrey Lacker said Friday in a statement to Bloomberg that the report doesn’t alter his view on policy. Lacker, who votes on policy this year, said in a March 31 speech that the case for raising rates will remain “strong” at the June meeting unless economic reports diverge “substantially” from projections. If we lined up all of the FOMC voters, very likely there would be conflicting comments; a clear sign the Fed is worried and uncertain.

This week is thin for key economic measurements as the calendar below attests. Treasury will auction $58B of notes and bonds this week. The 10 and 30 auctions will be closely monitored for demand, two weeks ago Treasury auctioned 2s, 5s and 7s, all three were weak in terms of aggressive bidding.

This Week’s Calendar:

This morning at 10:00 am the March ISM services sector index (expected at 56.7 frm 56.9; as reported 56.5)
10:00 am Feb JOLTS (N/A)
1:00 pm $24B 3 yr note auction
3:00 pm Feb consumer credit (+$14.0B frm +$11.6B in Jan
7:00 am weekly MBA mortgage applications
1:00 pm $21B 10 yr note auction
2:00 pm FMC minutes frm March 18th meeting
8:30 am weekly jobless claims (+17K to 285K)
10:00 am Feb wholesale inventories (+0.2%)
1:00 pm $13B 30 yr bond auction
8:30 am March import and export prices (imports -0.3%, exports -0.2%)
2:00 pm March Treasury budget (-$43B)

PRICES @ 10:10 AM

10 yr note: -3/32 (9 bp) 1.85% +1 bp

5 yr note: -1/32 (3 bp) 1.26% +1 bp

2 Yr note: unch 0.48% unch

30 yr bond: -19/32 (59 bp) 2.51% +3 bp

Libor Rates: 1 mo 0.179%; 3 mo 0.273%; 6 mo 0.401%; 1 yr 0.692%

30 yr FNMA 3.0 Apr: @9:30 102.64 unch (-3 bp frm 9:30 Friday)

15 yr FNMA 3.0 Apr: @9:30 105.01 unch (-3 bp frm 9:30 Friday)

30 yr GNMA 3.0 Apr: @9:30 103.30 +5 bp (-9 bp frm 9:30 Friday)

Dollar/Yen: 118.97 yen unchanged

Dollar/Euro: $1.1024 +$0.0055

Gold: $1221.00 +$20.10

Crude Oil: $50.50 +$1.36

DJIA: 17,774.92 +11.68

NASDAQ: 4889.68 +2.74

S&P 500: 2069.75 +2.79

Al Hensing is with United Mortgage in Costa Mesa CaliforniaScreen Shot 2014-07-29 at 8.10.59 AM


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