Wednesday, 3/17/10 10:05 AM
The bond and mortgage markets started fractionally better this morning after a good rally in treasuries yesterday when the FOMC statement didn't change as far as how long the Fed will keep the FF rate at the present levels. Some, including ourselves, were looking for some change in the language to give the Fed a little more wiggle room on when it will begin to move rates higher. The statement continued to use the "extended period" of time for how long rates would stay at present levels. The statement also confirmed the Fed isn't worried about inflation. The market reaction boosted treasuries and to a lesser extent mortgage prices. We have repeatedly commented that any concerns about an increase in inflation is unwarranted now or in the next year at least. High unemployment will continue throughout this year and businesses have no pricing power as consumers will remain cautious in spending.
By 8:45 treasury and mortgage prices had given up all the early gains; the 10 yr +1/32 after being up 5/32 at 8:00; mortgage prices at 8:45 -1/32 (.03 bp). At 8:30 Feb producer price index hit, expectations were for the overall to be down 0.2%, it fell 0.6%; when food and energy are removed PPI was up 0.1% in line with estimates. The lower overall PPI was a result of lower energy prices in Feb, but as you know energy prices are increasing in March with many areas now seeing gasoline well over $3.00/gal. Nevertheless the PPI is seen as confirming the Fed's view that inflation is well contained. Market reaction to the 8:30 report put a little pressure in the rate markets; more market noise than anything significant as rate markets continue to churn in narrow ranges. At 9:00 the 10 yr unchanged with mortgage prices down 2/32 (.06 bp); the DJIA +20 points. At 9:30 the DJIA opened +28, 10 yr note +3/32 and mortgages generally unchanged.
Earlier this morning (7:00) the weekly MBA mortgage applications. The Market Composite Index, a measure of mortgage loan application volume, decreased 1.9% on a seasonally adjusted basis from one week earlier. The Refinance Index decreased 1.7% from the previous week and the seasonally adjusted Purchase Index decreased 2.3% from one week earlier.
The four week moving average for the seasonally adjusted Market Index is up 0.8%. The refinance share of mortgage activity increased to 67.3% of total applications from 67.2% the previous week. The adjustable-rate mortgage (ARM) share of activity decreased to 4.6% from 5.1% of total applications from the previous week. The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.91% from 5.01%, with points increasing to 1.30 from 0.82 (including the origination fee) for 80% loans. This is the lowest 30-year fixed-rate observed in the survey since mid-December of 2009, yet the effective rate was unchanged from last week due to the significant increase in points. The average contract interest rate for 15-year fixed-rate mortgages decreased to 4.24% from 4.32%, with points increasing to 1.47 from 0.88 (including the origination fee) for 80% loans. This is the second time in the last three weeks that the contract 15-year fixed-rate has reached a record low in the survey. However, the increase in points led to an increase in the effective rate from last week. The average contract interest rate for one-year ARMs decreased to 6.75% from 6.80%, with points remaining unchanged at 0.30 (including the origination fee) for 80% loans.
Later this afternoon Ben Bernanke will be speaking before the Committee on Financial Services, U.S. House of Representatives on "Banking Supervision". His prepared remarks are out; "In summary, the Federal Reserve's wide range of expertise makes it uniquely suited to supervise large, complex financial institutions and to help identify risks to the financial system as a whole. Moreover, the insights provided by our role in supervising a range of banks, including community banks, significantly increases our effectiveness in making monetary policy and fostering financial stability. While we await enactment of comprehensive financial reform legislation, we have undertaken an intensive self-examination of our regulatory and supervisory performance. We are strengthening regulation and overhauling our supervisory framework to improve consolidated supervision as well as our ability to identify potential threats to the stability of the financial system. And we are taking steps to strengthen the oversight and effectiveness of our supervisory activities." Congress is intent on financial regulatory reform. CNBC is reporting this morning that the Volcker rule, limiting banks from proprietary trading and being involved with hedge funds and other investments, is dead in the Senate.
Crude oil has been moving higher recently causing some to think about the consumer impact (if any) on climbing gasoline prices. Will consumers cut back on discretionary spending and put a kink in the economic recovery if gasoline increases to $3.50 on average? We know $3.50 already exists in some areas but not across the nation as a whole. This morning crude is up another $0.75 to $82.50. Oil speculators are pushing prices higher; recent studies suggest that a barrel of crude is traded 27 times before it is actually delivered, driven by speculators.
Nothing left today but Bernanke's testimony this afternoon and watching the equity markets. So far this morning the rate markets are quiet with little changes.
PRICES @ 10:00 AM
10 yr note: 99.26 +1/32 3.65% unch
5 yr note: 100.01 -1/32 2.36% +1 BP
2 Yr note: 99.29 unch 0.92% unch
30 yr bond: 100.25 +7/32 4.58% -1 BP
Libor Rates: 1 mo 2.37%: 3 mo 0.266%; 6 mo 0.401%; 1 yr 0.859%
30 yr FNMA 4.5 Apr: @9:30 101.02 -1/32 (.03 bp) (+5/32 (.15 bp) frm 9:30 yesterday)
15 yr FNMA 4.0 Apr: @9:30 101.30 -1/32 (.03 bp) (+2/32 (.06 bp) frm 9:30 yesterday)
30 yr GNMA 4.5 Apr: @9:30 101.20 unch (+4/32 (.12 bp) frm 9:30 yesterday)
15 yr GNMA 4.0 Apr: @9:30 102.19 -2/32 (.06 bp) (+1/32 (.03 bp) frm 9:30 yesterday)
Dollar/Yen: 90.51 +0.30 yen
Dollar/Euro: $1.3748 -$0.0025 (dollar better)
Gold Apr: $1126.00 +$3.50
Crude Oil Apr: $82.61 +$0.91
Goldman-Sachs
Commodity Index: 530.21 +4.64
DJIA: 10728.38 +42.40
NASDAQ: 2389.91 +11.86
S&P 500: 1165.76 +6.30