Premier Mortgage Group

RATES FLAT DESPITE TREASURY DEBT AUCTIONS

STRAIGHT STATS

Mortgage interest rates were mostly flat on the week despite supply pressures from the Treasury auctioning $116 billion in new debt. Intra-week volatility was high, though. Economic data was mixed. Reports better than expected included the August Case/Shiller Home Price Index, Q3 Advance GDP, the Chicago Purchasing Managers Index, and the University of Michigan Consumer Sentiment Index. Reports weaker than expected included October Consumer Confidence, September New Home Sales, and weekly jobless claims. September Durable Goods Orders and September Personal Income and Spending were in line with expectations.

COMMENTARY

There has been an argument since spring about the vigor of recovery ahead, and that discussion is entering a new phase. We finally got a positive GDP number, but the actual, Main Street, sidewalk data stream says the economy is not going anywhere at all. Hence, especially today, you see stocks unable to hold high prices and bonds unable to hold low prices (high rates). The short-term key will be next Friday, November 6, and payrolls for October. The consensus forecast calls for the best number in more than a year, losing only 75,000 jobs; if instead we get a loss in the 150-200,000 range we will that day revisit the September mortgage low.
The Fed’s post-meeting commentary Wednesday will bear watching, but is more likely to help than to hurt: economic optimists expect a hint at rate increase (modifying the “extended period” of low rates), but the Fed if anything is likely to seem less happy than at its September meeting.

by Lou Barnes

Many people today are worried that inflation will be the inevitable consequence of the Fed’s money-printing rescue of the economy, the decline of the dollar in world markets, or the extraordinary Federal deficit.

Of all of the worries that I run through in 3:00AM conversations with my ceiling, inflation is the least. Here’s why.

1. There are three basic kinds of inflation. The easiest to deal with is a temporary “cost-pushed” affair, just like the one caused ’07-’08 by the run in oil to $150, now completely reversed. Inflation in 2009 has been slightly negative. These episodes become dangerous only if they are allowed to turn into one of the other two kinds of inflation.

2. The second, much more dangerous kind is “demand-pulled” inflation, the sort that the Baby Boomers grew up with, the 20-year run from negligible in 1960 to 12% in 1980 and back to negligible in 2000 — a “wage-price spiral.” When labor demands higher income to pay higher prices, and succeeds, and prices rise more, then there is still only one solution: throw several million people out of work until demand falls and undercuts prices.

Throwing millions of people out of work is not popular among politicians. So, we leave the job to the Fed, which pretends that most recessions happen by accident rather than intentional inflation control. Then we hope the Fed gets it right (see #3, below). Internally, the Fed is still deeply embarrassed at how badly it did its job in the ’70s.

Today a powerful market force makes a wage-price spiral impossible: foreign wage competition.  In the ‘60s and ‘70s, the US had no competition; today perhaps the worst problem facing our economy is wages undercut by low-wage exporters, and the off-shoring of previously high-wage jobs.

3. The third kind of inflation is a version of demand-pulled: the Weimar and Zimbabwe print-yourself-to-ruin. One simple solution: don’t do it. Insist that your central bank print only enough money and allow enough credit to maintain low inflation. Worries about today’s Fed are misplaced: it is “printing” only bank reserves, not greenbacks (if you see bales of cash appearing on street corners, then worry). We are in a most peculiar moment, in which the rate of turnover of money has collapsed (“velocity” has crashed with credit), and it is the Fed’s job to make up in quantity that which was lost in speed. Very easily reversed, by the way. For the moment, the Fed’s new money is locked up in a banking system that still cannot function.

4. Money-printing can get your currency in trouble, but the dollar’s value — like all currencies — is relative to other currencies. There is NO SIGN of runaway loss in dollar value. In fact, the buck is losing value only to currencies that we should hope it will. Japan is still in the grip of terrible deflation, consumer prices down 2.5% last year; the last thing we should want is to follow the yen into deflation. The same is true to a lesser degree of the euro.

5. The deficit. Unsustainable at this level, but today there is no way to inflate our way out of it. We could in the ‘70s, when we didn’t owe much. Try it today, and rates would soar. We are in an odd kind of debtors’ prison in which lenders to us insist that we must not inflate. And so, we won’t.

RATES FLAT WITHOUT MUCH NEW ECONOMIC DATA

Mortgage interest rates were mostly flat on the week without much new economic data for the markets to digest.  Economic data of note included the September Producer Price Index (PPI), a measure of prices at the wholesale level.  The overall index fell 0.6% on expectations that it would increase 0.1%.  Excluding the food and energy components, core PPI fell 0.1% on expectations that it would increase 0.1%.  Weaker inflation data is good for longer term interest rates.  September Housing Starts and Building Permits were weaker than expected.  Weekly jobless claims increased more than expected and September Existing Home Sales were stronger than expected.

The Dow Jones Industrial Average is currently at 9,947, down about 50 points on the week.  Crude oil spot prices are currently at $80.18 per barrel, up almost $2 per barrel on the week.  The Dollar has improved versus the Yen and weakened versus the Euro on the week.

Next week look toward Tuesday’s Consumer Confidence, Wednesday’s Durable Goods Orders and New Home Sales, Thursday’s first look at Q3 GDP, and Friday’s Personal Income and Outlays as potential market moving events.  Also, the Treasury will auction $116 billion in new debt next week.

RATES UP SLIGHTLY AGAIN AS STOCKS CONTINUE TO RALLY

Mortgage interest rates increased slightly again this past week as the stock market continued to improve on generally better than expected earnings and economic data.  The Dow Jones Industrial Average is currently at 9,952, up almost 300 points on the week.  The Dow actually closed above 10,000 on both Wednesday and Thursday.  Economic reports stronger than expected included September Retail Sales, weekly jobless claims, the New York Empire State Manufacturing Index, September Industrial Production, and September Capacity Utilization.  Also, the minutes from the FOMC meeting indicated that the Fed may need to tighten sooner rather than later based upon an improving economic picture.  The September Consumer Price Index, CPI, increased 0.2% on expectations that it would increase 0.1%.  Core CPI, excluding the food and energy components, also increased 0.2% on expectations that it would increase 0.1%.  On a negative note, though, the University of Michigan Consumer Sentiment Index was weaker than expected.

Crude oil spot prices are currently trading at $77.65 per barrel, up over $5 per barrel on the week.  The Dollar improved versus the Yen and weakened versus the Euro on the week.

Next week look toward Tuesday’s Housing Starts and Producer Price Index (PPI), Thursday’s weekly jobless claims, and Friday’s Existing Home Sales as potential market moving events.

RATES UP SLIGHTLY ON STOCK GAINS, TREASURY DEBT AUCTIONS

STRAIGHT STATS

Mortgage interest rates increased slightly this past week, pressured by gains in the stock market and $71 billion of Treasury debt auctions. The Dow Jones Industrial Average is currently at 9,814, up over 300 points on the week. The Treasury auctioned off $39 billion of 3 Year Notes, $20 billion of 10 Year Notes, and $12 billion of 30 Year Bonds. The 3 Year and 10 Year Note Auctions were relatively strong and the 30 Year Bond Auction was weak. There was not much new economic data for the markets to digest. Of note, the September ISM Services Sector Index was slightly better than expected. Weekly jobless claims fell more than expected and continuing claims fell slightly. August Consumer Credit fell $11.98 billion on expectations that it would fall $9.5 billion. This is the seventh month in a row that Consumer Credit has fallen. Also of note, the 2009 fiscal deficit came in at $1.4 Trillion, lower than expected. The deficit was 9.9% of total GDP, the highest level since 1945. The US economy contracted 3.8% for the year ending June 30, the worst slump since the 1930′s.

COMMENTARY

Today’s Treasury blow-out is hard to figure. Two weeks ago we dropped below 3.28% on the 10-year T-note, a resistance level that had held since May, and stayed happily in a new range 3.16-3.24% — then today’s rocket to 3.38%. Normally this move would mean good-bye to that new range for quite a while. However, the move feels funny. There was no economic news to trigger the jump, only a lot of silly jaw-jaw about the Fed soon to tighten (not), and tireder and tireder insistence on dollar-gold-inflation heebee-jeebees. Once rates began to move up on a thin pre-holiday weekend, the mortgage world had to reverse its rates-falling hedges to rates rising, and that involved tail-chasing sales of Treasurys pushing rates higher. The defining mechanism likely to push rates lower is unchanged: more weak economic data lies ahead.

This week the City of Boulder finally approved controversial house-size regulations that have been in discussion for over a year. You can read highlights at the Daily Camera’s website, or view the detailed regulations at the City of Boulder’s Compatible Development website.

RATES IMPROVE ON STOCK AND JOB LOSSES

STRAIGHT STATS

Mortgage interest rates improved this past week as stocks gave up ground and employment data was weaker than expected. Today’s employment report for September showed job losses of 263,000 on expectations of 180,000 jobs lost. The unemployment rate increased to 9.8% and average hourly earnings were up just 0.1%. Yesterday, weekly jobless claims also increased more than expected. Other economic data of note worse than expected included September Consumer Confidence, the September Chicago Purchasing Managers Index, the ISM Manufacturing Index, and August Factory Orders. Economic data better than expected included the July Case Shiller Housing Price Index, the final read on Q2 GDP, August Personal Income and Spending, August Construction Spending, and August Pending Home Sales.

COMMENTARY

As mortgage rates slide back under 5.00% for the first time since spring, we’re right back in the same decision quandary as then: take the best of this? Or wait for lower? This time, everything says “Proceed!” Rates are actually a hair better now: during most of the spring it required a loan fee to get here, but not now. Also, in the spring everyone who waited for 4.50% lost the game. We could still go that low, but it’s awfully close to mortgage absolute zero: at 4.50%, net of servicing cost, an investor earns only 4.00%, and that can be had in a lot of other bonds with shorter-term risk. Last, the chance for lower is always bi-lateral: the economy could stay sour, but could also recover, and that prospect put us at 5.75% last summer. Waiting anyway? The best shot for lower will come next Wednesday or Thursday, after the Treasury auctions its next load of bonds.