Mortgage Market Update

Forwarded exclusively by:	Anthony Hood Equity Investment Capital Office: 949-891-0067 Email: tony@equityinvestmentcapital.com website: www.equityinvestmentcapital.com
Building Strong, Lasting Relationships; One Client at a Time.
Thursday, November 04, 2010
Markets opened substantially better this morning after a very volatile trade yesterday afternoon on the FOMC statement and the details on what the Fed will do on the QE. $600B of additional treasury purchases and $250B to $300B more from the pay down of principle from the $1.25T of MBSs bought over the past 18 months (ended last March) over the next six to eight months. The long end of the yield curve crumbled, the 30 yr bond yield increased 12 basis points in rate to 4.06%, the 10 yr yield by the end of the session was down 1 basis point in rate to 2.58%, the 5 yr note yield declined 5 basis points to 1.11%. Mortgages took an initial hit but rebounded by the end of the session to close better in price by .15 bp), but still slightly weaker than at 9:30 yesterday. The DJIA opened at 9:30 +80 points, the 1`0 yr note +21/32 at 2.50% and mortgage prices +17/32 (.53 bp). The Fed's easing is steepening the yield curve, rates lower at the short end and higher at the long end of the curve. This morning the rate markets are improving and settling down somewhat from the initial confusion yesterday on how the easing may impact interest rates. At 9:30 the 10- yr note price up 23/32, its yield 2.50% -8 basis points, mortgage prices at 9:30 +18/32 (.56 bp) on 30s. +18/32 (.56 bp) on 30 yr FHAs and +12/32 (.37 bp) on 15s. The Fed will likely buy treasuries at the belly of the curve, 5 yr and 7 yr notes. The plan apparently, drive down short term rates to motivate borrowing by businesses that hopefully then will start hiring. At 8:30 this morning weekly jobless claims were higher than forecasts, up 20K back over 450K to 457K, continuing claims did decline to 4.34 mil from 4.382 mil last week. The 4 wk average for claims at 456K. The increase in claims provided a boost for the rate markets. Also at 8:30 Q3 productivity expected up 0.9% was up 1.9% after falling 1.8% in Q2. Unit labor costs down 0.1% after increasing 1.3% in Q2. The opinions about the Fed's easing are all over the map. There are many that believe the easing is a mistake and won't help much to increase the speed of the recovery; while many others fear that the Fed may be successful in increasing the inflation rate as the Fed has said it wants for many months now. While the Fed won't make a point of it, they want the dollar to weaken, and that is happening. A weaker dollar is inflationary, not what investors want at the long end of the curve----the 30 yr bond got ripped apart yesterday and is weaker again this morning. The Fed's plan is to drive investors out of the safe treasury market and into equities and higher yielding bonds such as MBSs and high grade corporates. Attempting to force investors away from safety and into other investments that provide better returns is supposed to change the economic outlook to more optimistic. Expect markets to remain edgy through today and into the employment report tomorrow. So far so good after the volatility yesterday, the 10 yr and mortgages are improving; however traders remain unsure about what the actual impact will be for mortgage rates and the key 10 yr note.
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Mortgage Market Snapshot

Forwarded exclusively by:	Anthony Hood Equity Investment Capital Office: 949-891-0067 Email: tony@equityinvestmentcapital.com website: www.equityinvestmentcapital.com
Building Strong, Lasting Relationships; One Client at a Time.
Wednesday, November 03, 2010
Today is the day the world awaited (since 9/21); at 2:15 the FOMC statement will come and finally markets will know for sure what the Fed is about to do on the QE 2 easing move. Going in to it, there is widespread belief that the treasury buying will total $500B and accomplished over a six month period. The Fed is always concerned not to shock financial markets so it is unlikely that whatever their plan it won't rattle markets with something well off target. The election results are about what was expected; the House to Republicans, the Senate stays with the Democrats. No noticeable market reaction to the results as they were widely expected. Treasuries and mortgages opened better this morning; at 8:15 the Oct ADP non-farm private jobs report hit, expectations were for an increase of 23K jobs as reported ADP said private jobs increased 43K. In Sept ADP reported private jobs were down 39K, today it was revised to -2K. Better than expected but still no real new hiring; there was no reaction to the report in either the stock or bond markets. At 9:30 the DJIA opened +10, the 10 yr note +12/32 at 2.55% -4 bp and mortgage prices much better; +12/32 (.37 bp) on 30s and +7/32 (.22 bp) on 15s. At 10:00 Sept factory orders were expected up 1.7%; orders increased 2.1% and Aug orders were revised to unch frm -0.5% originally reported. Also at 10:00 the Oct ISM services sector index, expected at 53.5 frm 53.2 in Sept, was better at 54.3. The new orders components increased to 56.7 frm 54.9, employment component at 50.9 frm 50.2 in Sept and price index at 68.3 frm 61.1. There was no initial reaction to the data; although stronger with the FOMC statement later today markets are storing the data but not reacting yet. Waiting now for the FOMC policy statement this afternoon. How the Fed will do the so-called easing, how much, when and comments about the economic outlook should be included in the normally short statement that concludes the meeting. It is uncertain how traders will take the easing move, how the dollar trade will occur, and what the market expectations will be on any direct benefits of an easing move. As noted previously, the Fed appears determined to increase the inflation rate by weakening the dollar with the QE. Fixed income investments in US treasuries at the current low levels may be a hard sell to investors if markets believe the Fed will be successful in bringing up the inflation rate back to their perceived target range of 2.0% to 2.5%. A quantative easing will bring interest rates down as long as economic data points are weak, however recent data has been fractionally better than estimates on some of the key data. The markets may not react much on the FOMC statement with Oct employment scheduled Friday. Present estimates after the ADP report this morning are being revised better than prior to the ADP, from estimates of 60K non-farm private job gains to 80K to 100K, still very weak but may bother traders with inflation concerns resting right under the surface. No rally in the bond market and mortgage market if inflation fears increase. The MBA today released its Weekly Mortgage Applications Survey for the week ending October 29, 2010 at 7:00 am. The Market Composite Index, a measure of mortgage loan application volume, decreased 5.0%. The Refinance Index decreased 6.4% from the previous week. This is the third straight week the Refinance Index has decreased. The seasonally adjusted Purchase Index increased 1.4% from one week earlier. The four week moving average for the seasonally adjusted Market Index is up 0.1%. The four week moving average is down 2.7% for the seasonally adjusted Purchase Index, while this average is up 0.8% for the Refinance Index. The refinance share of mortgage activity decreased to 81.3% of total applications from 82.3% the previous week. The average contract interest rate for 30-year fixed-rate mortgages increased to 4.28% from 4.25%, with points increasing to 1.07 from 1.00 (including the origination fee) for 80% loans. The average contract interest rate for 15-year fixed-rate mortgages decreased to 3.64% from 3.67%, with points increasing to 1.08 from 0.96 (including the origination fee) for 80% loans. Treasury announced the details for next week's quarterly refunding; $32B of 3 yr notes on Monday, $24B of 10 yr notes on Tuesday, and $16B of 30 yr bonds on Wednesday. Not looking for much movement now until 2:15 with the FOMC policy statement release.
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Mortgage Market Snapshot

Forwarded exclusively by:	Anthony Hood Equity Investment Capital Office: 949-891-0067 Email: tony@equityinvestmentcapital.com website: www.equityinvestmentcapital.com
Building Strong, Lasting Relationships; One Client at a Time.
Tuesday, November 02, 2010
Nothing on the calendar today, no economic releases and the FOMC meeting starts. Election day, later this evening markets will have one issue resolved; whether Republicans gain the Senate or not. The House is being conceded to Republicans, voters upset over the debt, the lack of job growth, health care, and financial regs that have not saved consumers a dime. Actually the regs passed by Sen. Dodd and Barney Frank have increased the cost of acquiring a mortgage by $400.00 just to mention one of the negative impacts coming from the financial reform regs. All attention now is on the Fed and how we get more stimulus, and most importantly will interest rates decline? Based on the way rate markets are trading over the past two weeks the present view is interest rates won't fall much if at all. The majority are expecting a $500B purchase of US treasuries over a six month timeframe and yet interest rates are increasing. The missing element in the debate is that recent economic data has overall been slightly better than economists' forecasts. With the Fed printing money for the easing move and possibly better economic outlook it is a formula for potential inflation, it is what the Fed is aiming for with the easing. From the markets perspective, if the economic outlook improves while the Fed is adding more to its balance sheet with the easing move that is expected, it is not likely interest rates will decline much. Although a slightly more improved economic outlook; it is a very tenuous belief. Unemployment is high and even the most bullish concede jobs won't improve through next year with the unemployment rate remaining over 9.0% for most of the year. The housing sector is not rebounding, even with historic low rates as long as valuations continue to decline there is no motivation to rush to purchase; consumers still deleveraging. The Fed wants inflation levels to increase to the 2.0%/2.5% level from 1.0% presently; the Fed won't be unhappy if the dollar continues to decline as a response to more money printing. The Fed isn't as concerned about the level of interest rates as much as bumping up inflation, and inflation increases are anathema to the long end of the yield curve and mortgage rates. The mortgage markets are opening better this morning after strong selling yesterday. Treasuries a little better and the stock market opened higher. Should be generally quiet today with no data points, the election and tomorrow's announcement from the Fed on the QE move. Yesterday we were expecting a flat day but the rate markets were anything but flat, rates increased; especially mortgage rates that face the hurdle of all the foreclosure problems that are keeping MBS investors away.
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Mortgage market Snapshot

Forwarded exclusively by:	Anthony Hood Equity Investment Capital Office: 949-891-0067 Email: tony@equityinvestmentcapital.com website: www.equityinvestmentcapital.com
Building Strong, Lasting Relationships; One Client at a Time.
Monday, November 01, 2010
Treasuries and mortgage markets opened better this morning and the equity markets also better. Nothing significant, elections tomorrow not a huge market deal but on Wednesday the event of the week when the FOMC announces its QE details. So far after all the hoopla six weeks ago when the Fed said it was prepared to ease the bond and mortgage markets are right about where they were trading when the 9/21 FOMC policy statement was released. A big rally in the rate markets, then a big sell-off took interest rate rates at the long end of the yield curve gave the markets a ride with no changes. At 8:30 this morning Sept personal income and spending; income declined 0.1% against expectations of +0.2, spending increased 0.2% against estimates of increasing 0.4%. The weak income and spending didn't move markets although from the perspective of recovery the data was not good. At 10:00 Sept construction spending was expected to have declined 0.7%, spending increased 0.5%. The data point of the day; at 10:00 the Oct ISM manufacturing index, expected at 54.0 frm 54.4 reported in Sept, was stronger at 56.9; new orders at 58.9 frm 51.1, employment at 57.7 frm 56.5 and prices pd at 70.5 frm 71.0. The report stronger in every category, any index over 50 is considered expansion. The initial reaction took treasury prices down from their best levels, mortgage prices also came off levels at 9:30; +2/32 frm +4/32. The stock market exploded with the DJIA up 124 points at 10:05 am. The report will weigh on the rate markets but we don't look for any substantial price declines. This Week's Economic Calendar: Tuesday; (no data) Wednesday; 7:00 am MBA weekly mortgage applications 8:15 am Oct ADP private jobs (+23K) 10:00 am ISM services sector index (53.4 frm 53.2 in Sept) Sept factory orders (+1.7%) 2:00 pm Oct auto and truck sales (autos 3.8 mil, trucks 5.1 mil) 2:15 pm FOMC policy statement Thursday; 8:30 am weekly jobless claims (+11K back to 445K) Q3 advance Q3 productivity (+0.9%, Q2 -1.8%) Q3 unit labor costs (+1.0%) Friday; 8:30 am Oct employment report (non-farm private jobs +60K; overall non-farm jobs +60K; unemployment rate unchanged at 9.6%) Markets still uncertain about what the Fed intends with the easing move on Wednesday. The Fed is going to begin buying treasuries, that is baked in the cake. How much and when is question one; question two is how the bond and mortgage markets will take it? Will more easing increase concerns that inflation will increase, the fixed income markets are fearful easing may actually improve economic recovery and ignite a move higher in the inflation rate. The Fed has made it very clear it wants the level of inflation to increase to quell deflation and possibly motivate consumers; fixed income investors worry over inflation increases. The tug of war since the 9/21 FOMC meeting, sending rates lower, then driving rates back higher to levels when the QE statement was released implies no certainty either way. We expect the bond and mortgage markets will improve on the initial reaction to Wednesday's easing announcement but we are not yet in the camp that is expecting the bellwether 10 yr, driver for mortgage rates, to fall to 2.25% as some believe. Overall we still question that another QE is necessary and have concerns it won't help revive the economy. Lower rates, if we get them, are not likely to stimulate the depressed housing sector, consumer spending or job growth; the Fed may be pushing on the string. Talk of a weakening dollar resulting from the Fed money printing being the catalyst for an increase in exports is too optimistic, may help but not enough to increase economic growth much.
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