Mortgage Rates

Mortgage Rates Anthony Hood Equity Investment Capital Office: 949-891-0067 Email: tony@equityinvestmentcapital.com website: www.equityinvestmentcapital.com A tough day for the MBS market yesterday; at one point at mid-afternoon the 30 yr MBS price was down 34 bp frm 9:30. Mortgage markets opened strong but lost ground rapidly when the stock market moved higher to close +175 on the DJIA; in two sessions the DJIA gained 291 points and more than recovered the decline on Tuesday on news Italy’s elections didn’t get a coalition adding new fears of EU troubles and less growth. Yesterday the 10 yr yield increased just 1 bp as treasuries held well in the face of the strong equity markets. The DJIA ended yesterday just 89 points from its all-time high (14,164). In testimony yesterday Bernanke said the Fed was discussing various plans about how it will eventually end the QE, buying $85B a month of MBSs and treasuries. He added with emphasis that presently there is no plan to end the QE as employment is still weak and the economy tenuous but improving. Bernanke assured markets the QEs will continue for a lot longer; most analysts are forecasting any reduction of the QEs won’t start until well into 2014. Bernanke made it abundantly clear yesterday that when the Fed is ready to back away there will ample warning signs for markets well ahead of actual reductions. His commitment of forward transparency relaxed markets; so far no signals being telegraphed and with assurance there will be plenty of time to act ahead of any cuts in buying, the equity markets charged ahead. This morning at 8:30 weekly jobless claims were expected to have declined 2K, as reported claims fell 22K to 344K. The 340K level seems the new benchmark for claims after hovering at the 370K level in 2012, recent claims have been edging lower in the last few months. Q4 GDP preliminary report was expected to show growth of 0.5% in the quarter; the advance report last month was a decline of 0.1%. Commerce said this morning GDP increased 0.1% well below what markets were expecting. Not much reaction to either 8:30 reports; although Q4 was weak the consensus is that Q1 2013 will grow at about a 0.7% rate with estimates as high as +1.3%. The automatic spending cuts known as sequester will begin tomorrow. Cuts across the board are mandated by a bill passed in August 2011 and signed by the president. The cuts mandated were so draconian that neither Republicans or Democrats expected they would actually happen. More brinksmanship from both sides assures the cuts will start, the President is all over the country whipping up support that would drive Republicans to capitulate. Republicans holding firm, betting the cuts will be blamed on Obama. The Administration will use the sequester to cut spending where it will hurt the most; rather than cutting fat the cuts will be designed to inflict pain where it has the most impact on citizens. It won’t be shock and awe though; implementing the cuts will take months before the full impact would be felt, meantime we expect Congress and the White House will come to an agreement that will not send the economy back into decline. Markets believe it; if not the stock indexes would be falling instead of running to new all-time highs. At 9:30 the DJIA opened -6, NASDAQ +1 and S&P unch; the 10 yr note yield at 1.90% unchanged and 30 yr MBSs +12 bp. 9:45 the Feb Chicago purchasing mgrs. index, expected at 55.0 frm 55.6. The index increased to 56.8 the highest the index has been in 11 months. The new orders component also increased from last month, to 60.2 up 2, the employment index however did decline from 58 in Jan to 55.7. Any reading over 50 is considered expansion, the higher the better. After the strong rally in rate markets on Monday we noted there would be an increase in volatility in the bond and mortgage markets. Since Monday the interday volatility has increased substantially compared to trading over the previous five weeks. Yesterday 30 yr MBSs opened better right on the key resistance level at 103.62, unable to break through the price fell through the rest of the day to close at 103.38. The 10 also failed to move below 1.85% and increased to 1.90%. The wider outlook is still constructive, however the DJIA is not likely to fall back until at least it makes a new all-time high, just 89 points higher than yesterday’s close. We stand on our outlook that interest rates are not likely to fall much frm recent high yields unless there is a severe change in sentiment on the future of the economic outlook.