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Saturday, January 28, 2006

Mortgage Credit News - January 27, 2006

This has been a big week in the markets, and painful for mortgages. Next week will be bigger, and the odds favor additional discomfort. Mortgages are decisively out of the 6.00-6.125% range; now 6.25%, threatening 6.50% as early as next Friday. The headlines in the last 48 hours have been a maximum-volume garble, guaranteed to confuse clients. The bottom line beneath the noise: rates are rising because the economy is hotter than thought, the market is weary of Treasury borrowing, and the Fed is not as close to being done as hoped. The garble. 4th quarter 2005 GDP grew by a meager 1.1%, less than half the forecast. In what way is that “hotter than thought?” Sales of existing homes plunged 5.7% in December, roughly four times the forecast decline. Hot, huh? Mark Twain said of Wagner’s music: “It’s better than it sounds.” Thus, the economy. The GDP number was suppressed by a string of statistical curiosities: a vestige of Katrina, a decline in business investment not appearing in any other data (December orders for durable goods soared 1.5%), and a bookkeeping “decline” in government spending. The housing market’s overheated regions are slowing, but the link to consumer spending is more theoretical than in evidence; and, this morning’s report of sales of new homes gained 2.9% versus the 1.5% forecast decline. The soft news was suspect, but all the strong data looked real. The market gave great weight to a positive change in a job-market indicator. Each Thursday brings the count of people who filed new claims for unemployment insurance in the prior week. The series is wildly volatile and subject to calendar quirks: you can’t file a claim on a holiday, or during a hurricane, but the line is long afterwards. However, the four-week moving average is reliable, and in January has phase-shifted downward: new claims are running at the lowest level since 2000. If claims are down, layoffs are lower and hiring is stronger. In the bond market, the most-watched single economic datum is the first-Friday-of-the-month payroll report for the prior month. If these declining claims show up next Friday as a surge in January payrolls, we will have a modest explosion in all long-term interest rates. Even if the payroll number is tepid, the financing of the budget deficit will exert upward force. The Treasury does its borrowing in clumps during the year, and during the next two weeks will borrow $112 billion in new cash. Many Republicans are fond of repeating the slogan, “deficits don’t matter”, or advocate “starving the beast” of revenue, or pretend that a deficit-controlling plan is in place. I cannot describe the quiet rage at bond-trading desks (heavily populated with Republicans) when one of these official lines scrolls across screens. Then there’s the Fed. Whee. Inside the GDP report lies the definitive measure of inflation: the “core personal consumption expenditures deflator.” The 4th quarter PCE jumped from 1.4% to 2.2%, which $65 oil will do to you. Aside from all that eyewash about Mr. Bernanke having to prove how tough he is, the Fed must err on the side of fighting inflation. The only thing separating us from a very bad bout of oil flu has been globalized labor keeping wages under control. Hopes that the Fed would stop at 4.50% on Tuesday are gone, and 4.75% in March and 5.00% in May are better bets. Now the perverse part. In the traditional slowdown cycle, housing is early to fade, and employment is the last to let go. Tradition is shaping up nicely. The more resilient the economy, the tougher the Fed has to be, and the more likely and deep the slowdown ahead -- and a downward reversal in long-term rates. Later... later. There is a chance that the Treasury’s borrowing is the strongest force in play right now, and will abate during the concluding week, about February 8. In the meantime, duck.

© Boulder West Financial Services, Inc.

Monday, January 23, 2006

Mortgage Credit News - January 20, 2006

Mortgage rates are still in the same narrow band they’ve been in since the holidays: 6.125%, plus or minus a debate about closing costs, but no points and no origination fee. This narrow range should not be confused with stability. In the last two days, concerns about Iran have overwhelmed everything; but, before laying out the market implications of that one, everything else first. At the top of the list of standard economics is the standoff between the bet on economic slowdown and the one that all is well. In late December, bond yields fell in growing belief that that a slowdown was inevitable, the Fed was not merely going to stop its campaign but would have to reverse, and the only question for 2006 would be how steep the slowdown. Everybody else -- economists, stock-market heroes, small-business execs -- disagrees. The bond (and hence, mortgage) market is stuck, waiting for data to show who is right. On the good news side, December industrial production rose .6%, on target, and capacity in use rose to 80.7%, the best figure since 2000. New claims for unemployment insurance fell a surprise 36,000 to 271,000, also the best number since 2000. The slowdown side expects an abrupt cooling in the housing market, and the newest data supports a cool-off: December housing starts fell twice as far as the already-weak forecast, down 8.9%, and new permits fell 4.4%. On net, the week’s good-news, bad-news data were a standoff. The next economic item adding to the appearance of stability is the trading-desk toe-tapping, knuckle-drumming, pencil-rolling, spitball-shooting wait for Ben Bernanke. The Fed’s next meeting is his deal, and nobody wants to place a big bet in advance of his first post-meeting statement, to be released after lunch on Feb 1. The Friday following brings a ton of January data, and then more anxious waiting: no sooner does Bernanke take the chair than he has to show up in Congress on February 15th to describe monetary policy for the coming year. Be on the lookout for perverse outcomes! If Bernanke signals inflation concern, the economy running unsustainably hot, more rate-hikes to come -- that’s the bond market’s dream of Christmas, because it increases the chance of a tough-side Fed error, a recession in which bond owners would make a ton of money. On the other hand, if Mr. Bernanke gives us a benign lot of stuff -- inflation okay, no more rate hikes -- the bond market will lose its hope of Fed-overdoing and recession, and move to it’s standard opinion of Fed chiefs: timid until proven otherwise. Iran. How can you tell that a geopolitical flyer like that has taken charge of markets? There isn’t any new economic data today. However, oil has spiked above $66, some buying clearly self-protective in case of supply interruption. A game of boycott chicken is at hand: whether the West took action to choke Iran’s oil exports, or Iran cut off the West in counter-‘cott response to sanctions, the world would be short about 3.5myn/bbl/day. Hello, three-digit oil. How close could such an event be? Pretty good quality information today has Iran pulling financial assets out of Europe, to prevent their being frozen by sanctions. Fridays tend to see action like this, as nobody wants to be exposed over a weekend. Part of gold’s pop above $550 is Iran-related. The Dow is in a 150-point crater today, partly earnings worries, mostly Iran and oil. The last tip-off is the trade that is not happening. Any geopolitical crisis pushes money to safety in bonds... except one. We have managed to tolerate sixty-buck oil without going into inflation; a hundred bucks plus, and there is no stopping it. Frightened money today went to plain, old, cash.

© Boulder West Financial Services, Inc.

Mortgage Credit News - January 13, 2006

After a mid-week pop-up in long-term rates, they are back down, mortgages again approaching 6.00%. The pop-up was a form of boredom: after three weeks near 4.35%, unable to move lower, the 10-year T-note wandered upward. The threat of breaking out of the top of a sub-4.50% range reversed today on three forces, in approximate order of importance: good inflation news, suspiciously weak-side economic data, and money moving to Treasurys for safety (Iran...). This morning’s producer price data were terrific: the December core rate rose only .1%, year-over-year only 1.7%, and in a declining trend. There are some healthy data: new claims for unemployment insurance are holding low, the job market overall in its best shape since 2000. And, mortgage applications have recovered from a holiday slowdown. However, the preponderance of other data is moving toward the slowdown side. December retail sales came in slightly below the .9% overall forecast at .7%, but ex-auto sales (inflated by desperate Detroit giveaways) the remainder was a slim .2% gain. Many analysts point to energy costs -- the first hit from spectacular heating bills -- but the huge cumulative rate hike from the Fed may be more important. Two more indications of slowdown ahead are lagging reports from last fall -- some stuff takes forever to gather and collate. To a bond trader, “last fall” is as important as the French Revolution; however, the significance of consumer credit and home-equity-line-of-credit (HELOC) usage trump delay. We learned this week that consumer credit contracted in October and November in the first back-to-back decline since 1992 (a recession then-about). We also learned that new HELOC volume dropped in the July-September quarter, and the only significant increase was in the “finance company” category, the typical provider to lower-credit borrowers. It’s early, and the slip in consumer credit demand last year may be Hurricane-related, gasoline-related, or some other transient event. However, it was also the interval in which Fed hikes began to bite, taking HELOCs above 7%. The slowdown-indicating “inversion” over the holidays dissolved last week, but is back in different form this week. In order, 2-, 3-, 5-, and 10-year T-note yields today are: 4.34%, 4.29%, 4.29%, and 4.36%. A “dish” like that in the middle of the yield curve is just as indicative of slowdown ahead as 10s under 2s. Iraq has been a slow-motion corrosive, not moving markets since the invasion in ’03. Developments around Iran before this long weekend are pushing some money to Treasurys for safety. Iran is coiling to jump the nuclear fence, and several long-term unknowns are now short-term. Will Russia and China join the US and Europe to bring pressure to bear? If so, will it work? If not, might Israel pre-empt (with or without new leadership)? What if the US and Europe are on their own? Two weeks ago Russia choked-off Europe’s gas tap, a point lost on no one. China was last active in world affairs 500 years ago; though it does appear to have put the kibosh on North Korea, next door, it seems to see the rest of the world as no more than unruly customers and suppliers (Iran!). Mutual trade is the route to mutual riches, as Holland, England, Spain and Portugal discovered at the same time that China withdrew inward. Global trade cannot be conducted without security, the absolute pre-requisite, and I hope that Mr. Putin and the collective in Beijing are giving that concept a thought. Taking pleasure by flexing muscles of empires past, and at the sight of Europe in decline, and at America bogged down and over-extended... that is one thing. The stability of a trading system, and the world, is another.

© Boulder West Financial Services, Inc.



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