Wednesday, January 26, 2011
Like clock work! Yesterday the 10 yr note rallied taking the yield to 3.31% intraday and closing at 3.33%, the yield fell to its key resistance area (again); this morning the 10 yr yield at 9:00 back up to 3.37%. You can almost guarantee any rally taking the 10 yr note back to 3.00%-3.28% will fail the following day; equally it is almost 100% sure that when the rate climbs to the 3.45%-3.50% it will also fail to climb higher. Mortgage rates follow; yesterday mortgage prices increased 10/32 (.31 bp) this morning at 9:00 -10/32 (.31 bp)—-running on a tread mill.
Last night the President had an opportunity to take a huge step toward setting the agenda this year on cutting federal spending. He could have laid out his ideas and strategy to address the exploding budget deficit that if left unchanged will eventually send interest rates a lot higher and drag the economy down. He didn’t; he spoke eloquently as always but most of his speech was shallow on specifics, lots of platitudes and lots of feel good comments but he left with no details. Pres Obama is caught in the cross hairs of his political party; liberal Democrats do not want smaller government and less spending, they want more; the President knows he has to move more to the center. He knows the federal deficit has to be reigned in, he realizes he has to work with Republicans toward that end. His speech last night seemed designed to not alienate the far Left in his party while also trying to appear conservative and tough on spending. He failed to take up the challenge.
The MBA released its Weekly Mortgage Applications Survey for the week ending January 21, 2011. The Market Composite Index, a measure of mortgage loan application volume, decreased 12.9% on a seasonally adjusted basis from one week earlier. The Refinance Index decreased 15.3% from the previous week and reached its lowest level since January 2010. The seasonally adjusted Purchase Index decreased 8.7% from one week earlier. The Purchase Index is at its lowest level since October 2010. The unadjusted Purchase Index decreased 3.1 percent compared with the previous week and was 20.8% lower than the same week one year ago. The four week moving average for the seasonally adjusted Market Index is down 1.0%. The four week moving average is down 3.7% for the seasonally adjusted Purchase Index, while this average is down 0.1% for the Refinance Index. The refinance share of mortgage activity decreased to 70.3% of total applications from 73.0% the previous week. The adjustable-rate mortgage (ARM) share of activity increased to 5.2% from 5.0% of total applications from the previous week. The average contract interest rate for 30-year fixed-rate mortgages increased to 4.8% from 4.77%, with points decreasing to 1.19 from 1.20 (including the origination fee) for 80% loans. This week the increase in the rate followed three consecutive weekly decreases. The average contract interest rate for 15-year fixed-rate mortgages decreased to 4.12% from 4.16%, with points increasing to 1.26 from 0.90 (including the origination fee) for 80% loans.
At 10:00, a few minutes ago, Dec new home sales expected up 3.4%, increased 17.5%, just like last week’s existing home sales spiked 12.3%. The headline looks good, the guts were less so. In the west sales increased 71.9%?, 2010 sales declined 14.4%, and it still leaves a 6.9 month supply. In Dec rates increased and may have contributed to better sales as buyers made their moves before rates moved even higher. The initial reaction to the report added more selling in the treasury markets, mortgage prices slipped a little so far but not as much as the 10 yr note fell on the report.
At 1:00 Treasury auction $35B of 5 yr notes, the second of three auctions this week raising $99B. Yesterday the 2 yr auction was not met with very strong demand.
At 2:15 the FOMC meeting will conclude with the short policy statement. The Fed will not increase interest rates, will sound supportive on the economy, say it wants inflation levels a little higher. Essentially about the same as the statement after the Dec 15th meeting.