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Thursday, May 1, 2008 11:02am ET Current Price of FNMA 5.5% Bond: $100.72, +6bp During the recent easing cycle, the Fed cut rates six times prior to yesterday. Each time the media got it wrong by saying it was good for rates, but your advice to clients and referral sources was right on the money. Congratulations for knowing that Bond prices would react negatively on inflation fears from rate cuts. Then yesterday, CNBC's Diana Olick and many others thought they finally had it figured out and said the impact of this 7th Fed cut will cause home loan rates to worsen and move higher. Unfortunately for the media listeners and viewers, they went 0 for 7, as they again incorrectly analyzed the impact of yesterday's .25% cut to the Fed Funds Rate. Although the Fed cut rates once again, our update and your advice said "There is speculation that the Fed may signal the present cutting cycle is nearing an end, especially in light of renewed concerns over inflation. If this is indeed the case, we may actually see Mortgage Bonds improve on the news". You should go back to your clients and congratulate them on acting on your advice to float into yesterday's Fed Meeting. The cut to the Fed Funds Rate bringing it to 2% was not a unanimous decision. The vote was 8-2 in favor with Dallas Fed President Richard "Loose Lips" Fisher and Philadelphia's "Three Swing" Charlie Plosser, dissenting and preferring no cut. This is part of the message that the Fed is now in a "pause" mode instead of an "easing" one. Both Loose Lips and Three Swing Charlie had dissented at the last meeting as well. But that was in regards to not cutting as deeply - this time, they wanted no cut at all. Additionally, the Fed statement was very clear that they will "monitor" the situation, as they used that word twice in their carefully crafted short statement. This tells us that the Fed is done with cuts, unless something really ugly happens. The headline Personal Consumption Expenditure Index (PCE) was reported at 3.2% on a year over year basis, slightly improved from last month's 3.4% reading. The Core PCE, the Fed's favorite inflation gauge, was slightly higher in March. PCE was up 0.2%, which was hotter than expectations of 0.1%. This brought the important year-over-year Core PCE to 2.1% and just above the Fed's desired range of 1 to 2%. Personal Income was reported at 0.3%, a bit higher than expectations of 0.4%. Personal Spending was reported at 0.4%, twice as hot as expectations of 0.2% and may show how rising food and commodity prices in March have negatively affected consumers. Initial Jobless Claims were reported at 380,000, much worse than expectations of 360,000. This left the four week moving average of continuing claims at the worst level since early 2004. Jobs Report Strategy Expectations are for a loss of 75,000 jobs. Think about that. The US economy needs to produce about 150,000 new jobs a month just to keep up with population growth. So a loss of 75,000 jobs is pretty bad. But because of the way numbers are reported, we may actually see a slightly better number...even though it will be incorrect. Let me explain. You may recall from previous Jobs Report Strategy sections, that there is something called the "Birth Death Ratio" that is used to create the monthly jobs number. This is the ratio of new businesses to those that are gone. Of course, this has a large impact on jobs created and lost. This data is provided by the Bureau of Labor Statistics, and it uses historical averages for the past several years. In other words, they don't actually count each person that was hired. They use a lot of averaging, historical data and a lot of assumptions. Here we are on May 1st and the BLS has to provide Jobs created for the month that just ended yesterday by 8:30am ET tomorrow. Not an easy task. So they use lots of historical averages. This invariably leads to huge revisions later, as the numbers are more correctly reconciled. So let's think about this one. Using averages when things are level is probably ok. But when the job market turns sharply worse, as it has of late, using averages from better economic times will skew the report higher. We saw this happen in reverse during the rebound in 2002, when many uninformed and so-called experts said the recovery was a "jobless" one. Of course big upward revisions came later. So here's the deal - the Job market is bad. But the report will likely paint a better picture than actually exists...until the downward revisions come later. And we should see downward revisions tomorrow from the past two month's reports. We see a Job creations number that is reported for April to be pretty close to flat. That headline will be better than expected. So Bonds will likely have a knee-jerk lower. But the revisions should bring prices back some. It will be a rough ride. Eventually the market will smarten up, but it may not happen tomorrow. What to do - Lock ahead of the number if you are closing or need to lock within the week. If you have more time AND have the stomach for a turbulent period, float carefully, as prices should come back. We do have good technical support levels below. Monday, April 28, 2008 9:40am ET Current Trend Direction: Sideways
Risks favor: Carefully Floating
Current Price of FNMA 5.5% Bond:$99.88, +6bp
With no economic news on the calendar today, action is slow as Traders gear up for what is expected to be a week filled with some of the biggest economic events of the month.
On Wednesday, the Fed will release their Policy Statement and interest rate decision. At the moment, the Fed Fund Futures are pricing a 75% probability of a .25% cut to the Fed Funds Rate. We also see a .25% cut, but of far more importance will be the Fed's Policy Statement. As you know, Bond prices have reacted very poorly after Fed Rate cuts, due to the expectation that the cut will spur on inflation. But if the wording of the Policy Statement leads Traders to believe this may be the final cut, it might just have the opposite effect, helping Bonds actually move higher with the reduced prospect of the Fed spurring future inflation.
Right on the heels of the Fed decision and statement, Thursday will bring the Fed's most favored gauge of consumer inflation, the Core Personal Consumption Expenditure Index (PCE). Especially since it will come after Fed day, it will be interesting to see the inflation read in light of the Fed's decision. And as if this weren't excitement enough for the week, Friday will bring the important Jobs Report, where early estimates are for a loss of 80,000 jobs.
With Bonds currently trading between overhead resistance at the 50-day Moving Average and support at the 200-day Moving Average, Bonds will likely take their cues from action in the Stock market today. For now, we will Carefully Float - but as usual, keep your transactions ready to lock, as we have seen many dramatic intra-day reversals of late.
Update - Wednesday, April 23, 2008 10:00am ET Current Trend Direction: Choppy
Risks favor: Carefully Floating as long as the Bond remains above support at 50 and 100-day Moving Averages
Current Price of FNMA 5.5% Bond: $100.38, -25bp
"Go on, take the money and run"...Steve Miller. This morning, Bond prices ran up and touched a ceiling of resistance at the 25-day Moving Average. But then Traders quickly sold Bonds, took some money by grabbing the profits gained and ran to the sidelines. We literally saw Bond prices drop 38bp in a 15 minute time span. But this is becoming a very common occurrence, as huge intra-day price swings and rapid directional changes are now the norm.
On a day like today, when there isn't any economic news to feed off, the markets are more reliant on technical signals like resistance and support. As long as the Bond remains above both the 50 and 100-day MA, prices may once again attempt to move higher and break above resistance at the 25-day MA, hence we are floating very carefully. However, should prices break below this close layer of support, we will quickly switch to a locking bias.
Tuesday, April 22, 2008 10:30am ET Current Trend Direction: Jerky Risks favor: Temporarily Floating Current Price of FNMA 5.5% Bond: $100.41, Unchanged The volatility continues this morning, on the heels of yesterday's incredibly wild session. Yesterday, Bonds were so volatile that the price differentials from just one half hour to the next in the windows on the Bond pricing grid put lenders in a position to re-price for better and worse at the same time depending on when pricing was distributed. This clearly provides additional challenges for all of us attempting to navigate through these wild times, which include both enormous price swings as well as rapid directional changes in the market. Please check the pricing window that most closely approximates the lender's rate sheet you receive. And the reason for yesterday's sudden rally in Mortgage Bonds was an announcement from The Bank of England, allowing Banks to swap Mortgage Bonds for government bonds, which creates greater value and stability for mortgage backed securities. Since this announcement did not effect Treasuries, they did not participate in the rally. This further illustrates the pitfalls of watching incorrect indicators like the 10-year Treasury Note - be sure to use this information against your competition. Existing Home Sales for March was reported at 4.93 Million, meeting expectations. The inventory of unsold homes rose to a 9.9 month level from February's 9.6 month reading. The median home price was $200,700. All in all, this was not a great report but it was not worse than the market had expected. |
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