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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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.
Friday, October 29, 2010
8:30 Q3 GDP was right on at +2.0% besting Q2 at +1.7%. Although a better Q3 it is still very weak; the Q3 employment cost index up 0.4%, forecasts +0.5%. Final sales in Q3 up 0.6% compared to +0.9% in Q2. The reaction to the data sent treasuries rallying and mortgage prices increasing. Even with the improvement in Q3 there is increasing questioning that the gains are insufficient to cut into the unemployment rate, and adds to the idea that the Fed needs to ease and inflation fears are overdone----at least that is the momentary thought, it swings almost daily. At 9:00 the 10 yr note +11/32 at 2.62% -4 BP and mortgage prices up 8/32 (.25 bp) frm yesterday's close. The DJIA traded weaker prior to the 9:30 open; at 9:30 the DJIA opened -20, 10 yr note +9/32 at 2.64% -2 bp and mortgage prices mixed with 30 yr +7/32 (.22 bp) and FHAs +4/32 (.12 bp). More data; at 9:45 the Oct Chicago purchasing mgrs index, expected at 57.6, it was better at 60.6 frm 60.4 in Sept. The components were also better than Sept; new orders index at 65.0 frm 61.4, employment index at 54.6 frm 53.4 and prices pd at 68.9 frm 55.0 in Sept, mostly up on energy costs. The was not much reaction in the bond markets to the better report but the stock indexes did manage a little bounce. The final data point this week, the U. of Michigan consumer sentiment index was expected at 68.0 frm 67.9, was weaker at 67.7 the lowest sentiment reading since Nov 2009. The 12 month outlook fell to 67 frm 70 two weeks ago; the 12 month inflation outlook at 2.7%. No real immediate reaction to the report. Moving toward next Wednesday's FOMC meeting and the Fed's announcement of the QE that has been the focal point for traders and investors since the 9/21 meeting when the Fed said it was "prepared" to ease further if necessary. Since that statement it sent rate markets first rallying, then retreating back to levels prior to the comment. There is no doubt in the markets that the Fed will ease by buying treasuries; the concerns are on how much and how quickly the Fed will buy and what the impact may be on the economic recovery and the outlook for inflation. The Fed wants inflation to increase a little to crush out deflation potential, the long end of the yield curve (5s, 10s and 30s) however worry over inflation increasing. And then the dollar; along with attempting to stimulate recovery, the Fed and Treasury want the dollar to decline (although Treasury would never admit it); in the global context it is somewhat of a currency war with central banks trying to weaken their currency to increase exports. Printing money as the Fed will do with the easing has the effect of weakening the dollar as long as it a substantial easing move. The initial reaction to easing sent rates lower, then on concerns of inflation that easing might generate rates swung back. The take away----there is no certainty about the amount of easing, the impact of it on the dollar, on the impact for the economic recovery, or how it will . Gallons of ink and a lot of talk about the easing, yet in the end here we sit right where interest rates were prior to the 9/21 FOMC statement. Some say $500B, some say $1T, some believe $110B a month for six months, a few still hold out for a shock and awe amount; no one wants to bet much on any of the forecasts.
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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.
Thursday, October 28, 2010
After 5 days of selling in the rate markets, this morning a little improvement. Prior to 8:30 the 10 yr note held a 12/32 price gain and mortgages up 7/32 (.22 bp); at 8:30 weekly jobless claims were better halting any additional improvement. Claims for last week were expected to be up 3K to 455K, as reported claims fell 21K to 434K, the lowest in weeks. Continuing claims fell to 4.35. mil frm 4.80 mil last week. Treasuries and mortgages dropped back a touch but still managing to hold a little improvement. At 9:00 the 10 yr note +7/32 at 2.71% -2 bp and mortgages +5/32 (.15 bp) frm yesterday's close. Not much, but any gain is welcome after the bond market flipped on the QE outlook. When the FOMC announced the Fed was prepared to ease further at the conclusion of the 9/21 meeting it set off a huge run lower in rates on the belief the Fed was intent on driving long term rates lower. The 10 yr note yield fell 45 basis points and mortgage rates declined 24 basis points. The dollar declined and the equity markets rallied. Recently though the outlook for a strong easing move from the Fed has faded and the rate markets are now back to levels prior to the FOMC meeting. The read on the easing initially was that the Fed would buy significant amounts of treasuries to drive long term rates lower, bust the dollar and ignite more interest in the housing sector. Over the last 10 days the sentiment has changed; presently the consensus is that the Fed will launch an easing move but that it will be at a slower pace than the initial expectations. The stock market opened better this morning on the weak dollar; after a couple of days of improvement the dollar is under pressure again today. China’s yuan fell to its weakest level this month after the central bank set a lower reference rate for a third day, spurring speculation the government is limiting appreciation. The People’s Bank of China set the reference rate 0.11% weaker at 6.6986 against the greenback. The yuan has weakened 0.5% since policy makers from the Group of 20 nations said on Oct. 23 they would refrain from “competitive devaluation” before the Nov. 11-12 leaders’ summit. The Dollar Index, which tracks the greenback against currencies of six major U.S. trading partners, declined 0.6% to 77.698. The gauge has fluctuated between gains and losses this month as speculation additional credit-easing measures from the Fed will weaken the currency were offset by bets the central bank will buy a smaller amount of bonds than some analysts predicted. At 1:00 Treasury will auction $29B of 7 yr notes; yesterday's 5 yr note was met with OK demand but not nearly as strong as past auctions. The 7 yr today will be more difficult to get strong demand. The Fed is about to turn on the printing press to print more dollars. That is what QE is all about. The Fed however talks about helping revive the economy with the easing while the real emphasis is to drive down the dollar to improve exports and improve the economy. Lower interest rates, while helping, is only a method to beat down the dollar. The problem is however, that every country is trying to do the same. With the Fed about to "ease", the effect will be that other central banks will be forced to do the same. The recent jump back in rates has likely run its course but we are left with the question, how much lower will rates fall when the Fed actually announces its easing policy, and will the Fed lay out the entire plan being formulated? Flying blind, throwing it against the wall to seer what sticks. Unemployment isn't going to fall much, consumers still deleveraging and the housing sector shows no real signs of stabilizing. Lower interest rates are just a by-product of the Fed printing more money to bring the dollar down.
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