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Monday, January 23, 2006

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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