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Another better start this morning but by 10:00 mortgage prices have fallen back from earlier better levels; the 10 yr at 9:00 +19/32 at 2.75% -8 bp, mortgages up 10/32 (.31 bp). Europe’s sovereign debt problems continue to dominate, the impact mostly seen in the currency markets with the dollar continuing to increase. Europe’s bank stocks being hit hard as it is increasingly evident that the EU isn’t yet ready to face the debt problems head on, letting each country move to the edge before acting. What is lacking is a wider solution to deal with the problems faced by countries in the EU that are close to defaulting. The dollar benefits sending stock indexes lower and safe haven moves into US treasuries. After Ireland Portugal and Spain are now the next two that need a bailout. The US stock market opened weaker, as the dollar increases equity markets fear weaker exports.

At 9:00 the Case/Shiller home price index was expected to show a slight increase in prices, the index fell 0.7% strongly suggesting the housing markets may be headed to a double dip. Q3 home prices fell 1.5% yr/yr and -2.0% from Q2. The report added to selling in stock indexes ahead of the open. It also limited the improvement seen earlier in MBS trading. The gauge fell 0.8% in September from the prior month after adjusting for seasonal variations, the biggest drop since April 2009, following an August decrease of 0.5%. Unadjusted prices fell 0.7% from the prior month. The 20 city index of property values climbed 0.6% from September 2009, the smallest gain since January, the last time prices declined year over year.

The DJIA opened -88 at 9:30; the housing data and Europe’s problems setting the early tone. Mortgage prices held gains but were well off the best levels prior to the 9:00 C/S report.

At 9:45 the Nov Chicago purchasing mgrs index, expected at 59.8, jumped to 62.5 frm Oct’s 60.6. All sub components were also better; new orders at 67.2 frm 65.0, prices pd at 70.7 frm 68.9 and employment at 56.3 from 54.6 (any index read over 50 is considered expansion, under 50 contraction). The report sent mortgage prices down, from +7/32 to +3/32; the 10 yr note also lost a few clicks and the stock market gained a few points frm down 90 to -70.

At 10:00 the Nov consumer confidence index from the Conference Board; the index was expected at 52.0 frm 50.2 in Oct; it hit at 54.1 and Oct was revised to 49.9; the expectations index also increased, to 74.2 frm 67.5. The confidence index is the best since last June. Not much initial reaction to the better consumer read but mortgage prices slipped once again.

Later this morning the NY Fed will do another QE buy of treasuries; it will not have any direct impact on rate markets however.

The mortgage market remains solidly bearish, the action so far this morning is not encouraging, MBSs opened strong but have been losing ground since. After the 9:45 Chicago purchasing mgrs report 30 yr MBSs fell back to just slightly better on the session. The near term support is coming from the safe haven moves into US treasuries grudgingly dragging prices up.

Treasuries and mortgages opened better this morning; this is employment week with Sept employment data out on Friday. Almost as important, the QE 2 easing that the Fed is expected to launch when the FOMC meets on Nov 2 and 3. In the meantime a few key data points to deal with. Outside of Friday’s employment report there are three data points we will be looking at closely; the ISM services sector index, weekly jobless claims and August consumer credit.
 
At 9:00 this morning the 10 yr note +4/32 at 2.2.50% -2 bp; mortgage prices +2/32 (.06 bp) and the DJIA futures -33. At 9:30 the DJIA opened -2; 10 yr note +4/32 and mortgages +2/32 (.06 bp).
 
Market overall consensus is that the Fed will start QE 2 at the beginning of next month. While that is the consensus, we are uncertain about how the bond and mortgage markets will take it; we are not as bullish about a big decline in rates. The bond market has already discounted a lot of the move an easing announcement would have; at best the 10 yr may fall another 15 to 20 basis points and mortgage rates down just 5 to 7 basis points from present levels. Not much bang for the buck. Treasuries were little changed Friday even though New York Fed President Wm. Dudley said the outlook for job growth and inflation is “unacceptable,” and that more monetary easing is probably needed to spur growth and avert deflation. We are left with the thought and question; will lower interest rate do anything to jump start economic growth? So far the current historic low rates have not fueled much recovery; housing is still soft (and that is a kind description), consumers are paying off bills, and businesses are not hiring; lower interest rates may not help much.
 
Based on what the Fed bought in 2009, yields are trading as if it has already acquired an additional $315B to $670B of securities, according to Deutsche Bank AG, one of the 18 primary dealers that trade with the central bank. Policy makers will announce plans buy $100B to $1T in Treasuries before the year is out, a survey of 12 of the 18 dealers show. Based on what happened when the Fed began purchasing $1.725T of government debt and mortgage securities in 2009, lower yields are not a foregone conclusion. Treasuries lost 3.72% last year as a drop in bond prices drove the yield on the 10-year note to 3.84% from 2.22%.
 
TARP ended at the end of Sept. One of the most controversial programs in decades. According to present estimates the cost to tax payers is between $50B and $100B; it will take a year or two for the final cost to be determined however. ON the margin, given the panic that ensued in 2008 the program was not that bad.
 
Two reports at 10:00 this morning; August factory orders, expected -0.4%, were -0.5% but July orders were revised to +0.5% frm +0.1%. August pending home sales, contracts signed but not closed were expected up 1.0% but jumped 4.3%, the third month in a row that sales were up; compared to August 2009 however, sales are still down 20% frm a year ago. No immediate reaction to the two reports.

Oct job gains were substantially stronger than the overall consensus; non-farm payrolls were expected to increase by 60K, as reported jobs increased 151K. Not only Oct jobs out-stripped estimates, there were sizeable upward revisions in Sept and Aug; Sept non farm jobs was revised from -95K to -41K and August revised to -1K from -57K originally reported—-a total of 110K increase from what had been reported. The unemployment rate was unchanged at 9.6%. Average hourly earnings increased 0.2% and is up 1.7% since last Oct. Private hiring, which excludes government agencies, rose 159,000 in October, the biggest gain since April. Economists projected an 80,000 gain, the survey showed. Manufacturing payrolls unexpectedly decreased by 7,000 last month. Economists had projected a gain of 5,000. Government payrolls decreased by 8,000. State and local governments reduced employment by 7,000, while the federal government trimmed 1,000 jobs.

The employment report is good news for the economy, but keep it in perspective. Over the past three months based on the Oct data and revisions in Sept and August non-farm jobs increased a total of 269K, averaging 89K a month; any increases are welcome news but employment is still not gaining much. With 80K to 100K new job entrants each month it would take job increases of 300K a month to even dent the unemployment picture.

The initial reaction sent treasuries and mortgages down in price and up in yield. The 10 yr note price plunged 27/32, mortgages started -12/32 (.37 bp). By 9:00 some stability; the 10 yr -12/21 and mortgages -5/32 (.15 bp). Not much reaction in the equity markets early on after the recent strong rallies recently. The dollar is stronger this morning on the payroll data, hindering equity advances in early activity. At 9:30 the DJIA opened -17, the 10 yr -6/32 at 2.51% +2 bp, mortgages getting hit harder, down 10?32 (.31 bp) frm yesterday’s close. By 10:00 the 10 yr note back to about unchanged but mortgages still pressured.

The Fed’s QE on Wednesday pushed the 10 yr note down just 10 basis points, mortgage rates down 5 basis points. Today’s job report has momentarily taken the wind out of the sails on the QE easing. A lot of day left to work over the better report on jobs; a solid report but on the margin the reaction in the financial markets isn’t as strong as we might have expected. Comments on CNBC calling the jobs report a very strong report, and the President applauding; although any improvement is welcome, the job market remains impaired and not even meeting the increase in population increases. The dollar rallied on the data but since is slipping, the stock indexes firmed but on the open the DJIA opened weaker and is about unchanged at 10:00, the treasury market is weaker but given recent volatility, not that bad. The hit is coming most in the mortgage market so far; lenders sitting on large long positions selling mortgages.

Nothing left today but a couple for Fedsters making speeches that won’t reveal anything of substance. Next week however, adding a little more pressure on interest rates, the Nov quarterly refunding with auctions totaling $72B; less than the August refunding but auctions on 10 yr and 30 yr bonds may drag on any significant price improving until the auctions are completed. Next week’s economic calendar is very skimpy with weekly claims about it

Treasuries and mortgages opened firm this morning ahead of the Sept existing home sales at 10:00. The dollar is being hit again this morning, adding support to the stock indexes and the bond market; the finance ministers finished their meeting in South Korea with a statement that MAYBE the G-20 will think about adopting a plan to make currencies more attuned to markets and the economy rather than moving closer to a currency war that has been brewing for months; the dollar this morning is pushing into lows against the yen not seen in years. European stocks climbed after Group of 20 finance chiefs heightened speculation the Federal Reserve will announce further stimulus measures next week.

Ben Bernanke spoke early this morning (8:30) saying the central bank and other regulators are “intensively” examining financial firms’ home-foreclosure practices and expect preliminary findings next month. “We have been concerned about reported irregularities in foreclosure practices at a number of large financial institutions,” …… “We are looking intensively at the firms’ policies, procedures, and internal controls related to foreclosures and seeking to determine whether systematic weaknesses are leading to improper foreclosures.” He didn’t comment on the outlook for the economy or monetary policy, eight days before the Fed meets to decide on what economists and investors expect will be a plan to boost growth by restarting large-scale securities purchases. After discussing foreclosures, he devoted much of his remarks to the Fed’s housing-market efforts, such as studies, conferences and events serving troubled borrowers.

The DJIA opened +50; 10 yr at 9:30 +14/32 2.51% -6 bp and mortgage prices +7/32 (.22 bp) on 30s and +5/32 (.15 bp) on 15s.

At 10:00, the only data today, Sept existing home sales, expected up 2.9%, increased 10.0% to 4.53 mil annualized. A big jump but not what the headlines would suggest; most closings were part of the tax credit, 35% of the sales were distressed sales and now with the foreclosure issues sales in Oct won’t do so well. The median home price $171,700.00 with a 10.7 month supply on the markets, inventory levels did decline 1.9% but still leaves a huge overhang, especially when the foreclosure moratorium ends. There was no reaction to the better report in the bond or mortgage markets on the report.

Well last week picked up nicely with an abundance of pre approvals for both FHA and Fannie Mae Homepath financing. Congrats to all the agent that sent in contracts resulting from working your data base on all the renters over the years. This is proof that if you think outside the box and are willing to put in the time, money can and will be made.

Homepath Renovation financing is a great alternative to FHA financing for the agents out there that are just tuning in. Up to $35,000 above the purchase price for a new roof, new kitchen, air conditioning etc…
No mortgage insurance and only 3% down payment.

Interest rates spiking higher this morning, the stock indexes jumping; both moves huge. The August employment report has nailed the bond and mortgage markets that had already looked very weak this week. Early this morning the 30 yr FNMA Sept coupon is trading below its key 20 day moving average, the first time we have seen that since last April. The 10 yr note yield at 9:00 this morning up 13 more basis points at 2.76%, mortgage prices down 18/32 (.56 bp) from yesterday’s closing levels. At 9:30 the DJIA opened +95, the 10 yr -32/32 at 2.74% +11 bp, mtg prices at 9:30 -13/32 (.41 bp) on 30 yr mtgs.
 
The August unemployment rate at 9.6% was right on, up 0.1% from July; non-farm payrolls declined just 54K against general estimates of -100K, private job payrolls reported up 67K against estimates of +20K. The BLS reported revisions to June and July; the original totals for the two months was a decline of 351K jobs, revised to -229K. While employment remains a serious impediment to economic growth, the surprising improvements in the data released this morning are sending interest rate higher and stock indexes opening strong. The take away on the data is that while the economy is struggling, it isn’t going off the cliff.
 
Some better news on the housing sector yesterday, July pending home sales were up 5.2% while estimates were for a slight decline. Pending home sales, contracts signed but not yet closed. While better, the housing sector remains in depression.
 
Yesterday afternoon in a surprise announcement the White House announced the President would make a statement at 10:00 this morning. Markets expecting some announcement on tax reductions for small businesses, as this is being delivered he hasn’t begun his remarks.
 
At 10:00 the August ISM services sector report; the estimates for the overall index was a read of 53 frm 54.3, it fell to 51.5 the second lowest index reading this year. The employment component fell to 48.2 frm 50.9, new orders slipped to 52.4 frm 56.7 and prices 60.3 frm 52.7. The weaker data stopped the selling in treasuries and mortgages and took some wind out of the buying in equities. (Any index over 50 is considered expansion, under 50 contraction).
 
We have been warning for over a week that the interest rate markets were softening, after the employment report today the 10 yr note yield had jumped 20 basis points in rates since the close on Wednesday, mortgage rates on 30s up 7 basis points. Trading over the past two weeks implied investors were becoming less interested in treasuries as safety moves with the rates so low it had changed the risk equation between hiding in treasuries and accepting a little more risk in equities. While rates are increasing it is unlikely they will increase too much more; the worst we can expect for the 10 yr is another 25 basis points higher to test 3.00% and mortgage rates up another 15 basis points on 30s. We continue to expect high levels of trading volatility; we suggest taking advantage of any rallies in the bond market, it is very likely we have seen the lows now for mortgages and treasury rates. While the news today (and this week) was stronger than expected, it was not really great news, but the Treasury market seemed to be priced to a worst case scenario.

On August 12, 2010, the President signed into law, Public Law 111-229, which provides the
Secretary of Housing and Urban Development (HUD) with additional flexibility regarding the
amount of the premiums charged for Federal Housing Administration (FHA) single family housing
mortgage insurance programs. Specifically, the new law permits HUD to increase the amount of
the annual mortgage insurance premium that HUD is authorized to charge. For mortgages
involving an original principal obligation of less than or equal to 95 percent of the appraised value
of the property, the amount of the authorized annual premium is increased to 1.5 percent (from .50
percent) of the remaining insured principal balance. For mortgages involving an original principal
obligation that is greater than 95 percent of the appraised value of the property, the amount of the
authorized annual premium is increased to 1.55 percent (from 0.55 percent) of the remaining
insured principal balance. Although the law authorized HUD to go up to these amounts, HUD is
not doing so at this time, as described below. The Act authorizes HUD to adjust the amount of the
annual mortgage insurance premiums through Federal Register Notice or Mortgagee Letter.
HUD has decided to raise the annual premium and correspondingly lower the upfront
premium, except for Home Equity Conversion Mortgages (HECM), so that FHA is in a better
position to address the increased demands of the marketplace and return the Mutual Mortgage
Insurance (MMI) fund to congressionally mandated levels without disruption to the housing market.
Based on the new authority, effective for FHA loans for which the case number is assigned on or
after October 4, 2010, FHA will lower its upfront mortgage insurance premium (except for
HECMs) simultaneously with an increase to the annual premium which is collected on a monthly
basis. This policy change will decrease upfront premiums for purchase money and refinance
transactions, including FHA-to-FHA credit-qualifying and non-credit qualifying streamlined
refinance transactions.