Mortgage Rates



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



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Thursday, September 15, 2011


At 8:45. Is there something different taking hold of the US bond and mortgage markets? For months interest rates have declined as various economic reports confirmed the slowing of the economy, for months the stock index would take a hit on any weak economic releases. This morning at 8:30 three data points weaker than estimates; weekly jobless claims, the NY Empire State manufacturing index, and August CPI showing increased inflation, the bond and mortgage markets didn't budge from pre 8:30 levels and actually declined in price.

Weekly claims were widely expected to decline 2K to 412K, as reported claims increased 14K to 428K. The NY Empire State manufacturing index was forecast to have declined to -3.6, up from -7.7 in August; it increased to -8.8, the new orders component at -8.0 frm -7.82, employment component at -5.43 frm +3.26 and the prices pd index at 32.61 frm 28.26 (an index lower than zero is contraction). In months prior the two reports would have supported the bond market, not so this morning. August consumer price index jumped 0.4%, twice what had been expected, the core (ex food and energy) up 0.2%; yr/yr overall CPI +3.8% and yr/yr on the core at +2.0%. The 10 yr note prior to the 8:30 reports was down 11/32, at 9:00 down 30/32 at 2.09% +10 bp, mortgages -18/32 (.56 bp). Prior to the 8:30 data the DJIA was up 65, at 9:00 +14.

Its 9:20 am. Two more reports; August industrial production and capacity utilization. Production was expected up 0.1%, capacity use at 77.5% unchanged from July; as reported production up 0.2% and capacity utilization at 77.4% frm July's revised 77.3% frm 77.5% originally reported. Treasuries and mortgages didn't move on the data but both were substantially weaker already.

At 9:30 the stock market opened strong, the DJIA up 90, the 10 yr note at 2.09% +10 bp and mortgage prices -13/32 (.41 bp). A few minutes before 9:30 mortgage prices traded down as much as 17/32 (.53 bp).

At 10:00 another very key report; the Sept Philly Fed business index, expected at -15.0 frm -30.7 in August (the lowest since March 2009) fell to -17.5; still indicating contraction but a little less than in August. The sub-components were better though; new orders at -11.3 frm -26.8, employment went positive to 5.8 frm -5.2 and prices increased to 23.2 frm 12.8. The initial reaction in the bond market was muted---already very weak, the stock indexes saw a little improvement. The increase in prices is troublesome along with the increase the overall CPI early this morning.

Higher claims, weaker NY Empire State, a little less factory use and a weak Philly Fed report along with the news out of Europe recently may be changing the outlook for interest rates near term; that said, one day isn't a trend, the next day or two traders will be quick to react with more selling unless the 10 yr can hold at 2.10%.

The overriding news this morning is a carry over from yesterday's comments on Europe that Greece would not be kicked out of the EU because of the potential default and Treasury Sec Geithner saying there is no chance that Europe's debt problems would lead to what happened when Lehman failed in 2008. Markets took the comments as a positive that Europe would dodge a crisis, one of the key components for historic low US interest rates. This morning the ECB said that, in coordination with the Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank, it will conduct three U.S. dollar liquidity-providing operations with a maturity of approximately three months. The loans are in addition to the bank’s regular seven-day dollar offerings and will be conducted as fixed-rate tenders with full allotment, the ECB said in a statement. Providing more dollars to Europe's banks and longer terms is an effort to assure the banks will stay solvent as the debt crisis continues to unfold.

The key 10 yr note at 2.10% is at our support area and must hold there; if not the 10 may run up to 2.30% if problems in Europe appear to be easing. Still a very volatile situation but if markets believe there is actual progress being made the safe haven trade into US treasuries will wane and push rates up a little. At 2.10% the 10 is slightly above its 20 day average and mortgage prices slightly below their 20 day average; markets have tested the averages recently but each time the 20 day has held. Be careful now and stay close.