Mortgage Rates

Anthony Hood
Equity Investment Capital
Office: 949-891-0067
Email: tony@equityinvestmentcapital.com
website: http://www.equityinvestmentcapital.com/


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Friday, January 28, 2011

Two very key economic releases at 8:30 this morning. Q4 GDP was expected to be up to 3.6% frm +2.6% growth in Q3 2010, the advance report showed growth at 3.2%; the miss occasioned by the biggest drag from inventories in two decades. Q4 employment cost index was at +0.4% as expected. Those were the headlines but the details revealed better comparisons. Final sales in the fourth quarter increased 7.1%, the best showing in sales since 1984. The employment cost index for all of 2010 at +2.0%, was the second lowest on record at 2.0%, in 2009 the employment cost annual index was up 1.4%. GDP growth in 2010 at +2.9% was the strongest in five years. Household purchases, about 70% of the economy, rose at a 4.4% pace, the most since the first quarter of 2006. Retailers’ holiday sales jumped 5.5% for the best performance in five years. The report this morning is the first of three that will be released over the next two months before the final GDP hits in March, nevertheless there is little doubt that the economy is recovering at a pace better than what we were expecting, still however, we want to see retail sales data for Jan and Feb  for confirmation. That may be a problem though in that Jan will be negatively impacted by many snow storms through the month.

Treasuries and mortgage markets were soft into the 8:30 releases, initially weakened more before settling down by 9:00; at 9:00 the 10 yr note -11/32 at 3.43% +4 bp, mortgage prices down 7/32 (.22 bp). (see below for 10:00 levels). The economic improvement is increasing the possibility that the six week trading range for the 10 yr and mortgages is going break to higher rates soon. There are two factors that are still holding rates stable; inflation is low and there is nothing out there that suggests it is about to increase, and there is a potential for the equity markets are due for a correction after the huge improvement over the past six months.

The stock indexes opened better at 9:30; DJIA +4 points. The indexes are struggling recently; although improving the equity markets are showing some signs of exhaustion after the very strong rally over the past six months. Most of the optimism that drove stocks higher have now been about completely discounted; the economic rebound has essentially met market expectations. To take the market higher now it will need an infusion of new news and data. Many analysts that remain bullish in the long run are talking about a correction, a few are looking for as much as 10%. If (when) a correction begins it will support the rate markets on safety moves.

The 10 yr note still is holding in its 25 basis point yield range; mortgages following along. This week so far the 10 yr note and mortgages are unchanged from last Friday's closes. So far there isn't enough momentum to drive the 10 yr note above 3.50%, however recent action is less optimistic. Rallies have been weaker than days when prices fall and yields increase. The rest of the session for the bond and mortgage markets will depend on how stock indexes trade.

The final economic data point this week; at 9:55 the U. of Michigan consumer sentiment index, expected at 73.0 frm 72.7. Sentiment came at 74.2; the current conditions index at 81.8 frm 79.8 and the 12 month out expectations unchanged at 87.0. No noticeable initial reaction to the report as it was in line with investors' forecasts. The stock indexes did back off a little but not much.