Mortgage Industry News

Current Trend Direction: Sideways to lower

Risks favor: Locking Bias

Current Price of FNMA 4.5% Bond: $100.88, -9bp

Hints of inflation being on the rise in China have applied pressure on Bonds around the globe.  This morning, China reported that their consumer prices rose 2.7% year-over-year, hotter than .5% rise expected.  The country aims to keep inflation below 3%, which is already higher than the 2% benchmark that the US and many other countries around the globe target.  China will need to take measures to curb inflation, which will include monetary policy tightening.  And assuming rate hikes are part of their monetary tightening, their currency, the Yuan, should rise as a result.  One way to allow their currency to rise against the Dollar would be for China to purchase a little less of our Bonds.  The economic world is very interconnected, and this is why this story bears watching.

Yesterday we talked about the parade of Fed members who see inflation as a concern here in the US, and on today’s news out of China, the Federal Funds Futures are now pricing in a 80% probability of the Fed raising the benchmark Fed Funds Rate to 0.5% at the November FOMC meeting.  The next Fed Meeting is March 16th and the statement released will garner intense scrutiny, as markets watch for the “extended period of time” language to be modified at some point.  All this will have a major impact on the carry trade – for more information on the carry trade and what you need to know and communicate, listen to the most recent conference call on this topic, found in the “New Releases” section of the home page.

In today’s economic report news, Initial Jobless Claims were reported at 462,000, just above the 460,000 that were expected.  Continuing Claims rose 37,000 to 4.6M, and the states reported 5.6M persons claiming EUC (Emergency Unemployment Compensation) benefits.  This report shows no improvement in the labor situation.

At 1:00pm ET the results from the $13B 30-Year Bond offering will be released.  The auctions this week have gone over fairly well with reasonably good demand, but it hasn’t yet been enough to push Mortgage Bond prices higher.

Mortgage Bonds are trading off their worst levels, and are presently battling to regain their ground above support at the 25 and 100-day Moving Averages.  For now, we will continue to keep our bias towards Locking.

Keep your dreams big ad your worries small.

Current Trend Direction: Sideways

Risks favor: Locking Bias

Current Price of FNMA 4.5% Bond: $100.78, -22bp

Reminder:  Yesterday after the close of trading, Mortgage Bonds had their monthly coupon rollover. The effect of the rollover was -34bp points for the 4.5% coupon.  Every month the coupon “rolls over”.  When this happens, this month’s coupon is closed out and all new loans are placed into next month’s coupon.  There is no effect on rate sheets or pricing.  Additionally any candle chart patterns that arise from the rollover must be taken with a grain of salt.

Bonds are starting the day lower.  With no economic reports set for release, the markets are looking ahead to the whopping $21B 10-Year Note auction results at 1pm ET.  Yesterday’s 3-Year Note auction showed good results, so it will be interesting to see if the markets easily absorb the longer duration of the 10-Year Note paper today.  The time frame of the Notes, 10 years, does carry more inflation risk.

Yesterday a $149B spending bill of tax breaks, unemployment aid and extended health benefits cleared a procedural hurdle and will now go to the House and Senate for passage, and then onto the President to be signed into law.  The tax breaks are meant to spur small businesses into hiring.  Unfortunately, we think this is not going to be very productive.  Think about it if you are not going to hire an employee that costs $50K per year, would you really think that employee would suddenly be hired if your company were given a $2K tax break?  Of course not.  It appears that common business sense is lacking – and much worse yet is that those companies who would have hired an employee now get a windfall of this tax break.  Bottom line – this is simply throwing money away, and creating absolutely zero incentive to actually hire.  However, what this really is about is that every politician supporting this bill will take credit down the road for any new hires where this tax credit was issued.

There’s an old saying “There’s never only one cockroach”, and it could now perhaps be changed to “There’s never only one dissenter.”  Right now the list of Fed Members dissenting against the language to keep rates low “for an extended period”  is growing.  Kansas City Fed President, Thomas “BBQ” Hoenig, first dissented at the Jan 27th Fed meeting and voted against the language to keep rates low “for an extended period”.  Now the parade seems to be on, as in recent weeks, Dallas Fed President Richard “Loose Lips” Fisher, St. Louis Fed President James “Raging” Bullard, Philadelphia Fed President Charles “Three-Swing Charlie” Plosser and Chicago Fed President Charles “Chuckwagon” Evans have all expressed their concern about keeping rates low for too long.  The main reason for their concern?  Inflation.

Right now, the Fed has a tough job in deciding when to remove this accommodative language and when to actually hike rates.  If the Fed hikes rates too soon we could see our fragile economy dip into another recession, thereby flushing all that stimulus plan money down the toilet.  But if the Fed remains accommodative too long, ie: leaving rates too low for too long it could spark inflation.  It is very likely that the Fed will err on the side of holding rates too low for too long, and will undoubtedly get some political pressure to do so, which would have a damaging effect on the economy via inflation if they are not careful.  The complacent attitude we see from many on the threat of inflation does concern us.  History has shown that inflation can build very quickly from very low levels.

We are going to keep our Locking stance as prices are now trading beneath both the 25 and 100-day Moving Averages.  The next clear floor for prices is the 50-day Moving Average, another 12bp beneath current levels.

Keep your dreams big and your worries small.

Mortgage bonds had their monthly coupon rollover after the close of trading today.  The effect of this rollover was minus 34bp points for the 4.5% coupon. Therefore, while the bond quote for today shows minus 19bp, the minus 34bp rollover adjustment must be accounted for.  This means that pricing actually closed up 15bp on the day.

What is a Bond Coupon Rollover?

Every month the coupon “rolls over”.  In this case, this month’s coupon is closed out and all new loans are placed into next month’s coupon.  There is no effect on rate sheets or pricing.

Think of it as the time they mature.  The recently closed issue, loans that are satisfied 30 years from now, are packaged and sold.  Because the seller or wholesale lender now has an additional 30-days, it is like having a 30-day extension on their rate lock.

Keeping your dreams big and your industry confusing.

Current Trend Direction: Sideways

Risks favor: Carefully Floating

Current Price of FNMA 4.5% Bond: $101.31, +12bp

Today is a bit of a slow news day so far, with no economic reports in store although Cisco will be making an announcement later this morning that they say will change the internet forever, so it will be exciting to see what they have up their sleeve.

In the meantime  it is an interesting day to take a look back to just one year ago  as today marks the 1 year anniversary of the recent bottom in the Stock market.  Back on March 9th, 2009 the Dow was at 6,547, and has risen 62% since then.  You may remember that we called this bottom in the Daily Update on the morning of March 10^th 2009:

The previous Stock market crash, which lasted from March 2000 through October of 2002, ended on October 9th 2002.  On that very day, the headline on the front page of USA Today read “No End In Sight to Stock Market’s Decline.”  Yesterday, the headline in the Wall Street Journal read “Dow 5000?”  Could this represent a major turning point?  We think there is reason to believe so.

That same day, we again discussed our ongoing analysis of the mark to market accounting issues right before the Congressional hearing to fix the problem, which is what ultimately drove the Stock market rally:

Federal Reserve Chairman Ben Bernanke spoke in front of the Council on Foreign Relations in Washington this morning It’s great to see that the mark-to-market issue is finally getting the attention it needs…Mr. Bernanke stated that mark-to-market needs to be addressed and that there has been evidence that present accounting rules have indeed made the current crisis much worse.  While he does not support suspending mark-to-market, he does feel that it needs to be modified expeditiously.  As you know, this issue has been a strong rallying cry on our part for several months now, and Mr. Bernanke’s statements today are exactly in line with the position we have had.

It was the Congressional hearing later that week, and the eventual modification to mark to market accounting rules on April 1^st that helped right the Stock market and put the financial recovery on course.

When talking to prospects and potential home buyers, remind them that we saw the bottom in Stocks when the headlines turned overly negative, fear had risen and it seemed no one wanted to buy Stocks.  Right now we are seeing a similar sentiment in the home purchase market.  When something is out of popular favor, its exactly when smart people should be buying.  In fact, legendary investor Warren Buffet has this timeless rule, “Be greedy when others are fearful and fearful when others are greedy”.  Another legend, Dean of Investing Sir John Templeton similarly said You want to be a buyer on the most pessimistic day, and a seller on the most optimistic day.  As we enter Spring and the snow seems finally behind us in many parts of the country, remind people of the incredible opportunity in housing, and exactly how fearful Stock investors may have felt one year ago today right before Stocks bottomed and turned higher.

Mortgage Bonds are trading higher, but at 1pm ET, a $40B offering of 3-Year Notes kicks off another round of auctions.

We can continue to Carefully Float for now  but be mindful that should prices move lower, the next floor of support lies at the 100-day Moving Average, about 30bp beneath current levels.

Note:  Today after the close of trading, Mortgage Bonds will undergo their Monthly Bond Rollover.  The Rollover doesn’t affect pricing on your rate sheet, but you must factor its negative impact on the price of the Bond, as well as the appearance of the Japanese Candle on the Bond Page.

Keep your dreams big and your worries small.

Over the past couple weeks, Mortgage Bonds have been able to remain above a nice floor of support at the 100-day Moving Average.

During that time, fears over Greece defaulting on their debts have left investors feeling uneasy, and many of them looked to the safe haven of US Bonds. But with the situation in Greece appearing less dire, investor appetite for risk may increase.

For now, I recommend floating. But be prepared to lock if Stocks gain more momentum at the expense of Bonds. I will keep you posted on any major developments.

Current Trend Direction: Sideways

Risks favor: Start Day Carefully Floating

Current Price of FNMA 4.5% Bond: $101.06, -12bp

Financial troubles in Greece have been a major part of the headlines lately.  Fears over Greece defaulting on their debts have left investors feeling uneasy, and wondering if this problem would spread to other countries.  The European Union (EU) has been trying to come up with a way to address this problem, and Greece has already begun taking austerity measures.  It now appears that the EU will bail out Greece, although they aren’t crazy about the idea of it.

During recent weeks, when it was less than clear if the EU would come to the rescue, many investors looked to the safer haven of the US for their Bond holdings.  This had certainly helped the overall Bond market, including Mortgage Bonds.  But with the situation in Greece appearing less dire, investor appetite for risk may increase.  This would provide a bit of a headwind for Mortgage Bonds.

This week, the Bond Market will get hit with another salvo of Bond supply, starting with a massive $40B in 3-Year Notes tomorrow, $21B in 10-Years on Wednesday and $13B in 30-Years on Thursday.

There are no economic reports set for release today and the calendar is light until Thursday’s Initial Jobless Claims and Friday’s Retail Sales.  This means we need to pay very close attention to the technical picture and over the past couple of weeks, Mortgage Bonds have been able to remain above a nice floor of support at the 100-day Moving Average – which at the moment is just beneath current levels.

Mortgage Bonds have been very resilient of late, being able to bounce back higher from the lows of the session.  This can clearly be seen by the long lower “wicks” on the candles for the past few days.  We will start the day by Floating, but be mindful that should Stocks gain more momentum at the expense of Bonds – you will be hearing from us with an Alert to Lock.

By The Number$

1.   BETTER THAN AVERAGE – Tomorrow is the 1-year anniversary of the 2009 bear market low for the S&P 500.  On 3/09/09, the S&P 500 stock index closed at 677.  Through last Friday’s close (3/05/10) when the S&P 500 closed at 1139, the index had gained +68.3% (change of the raw index not counting the impact of reinvested dividends).  In the 8 previous bear markets since 1960, the S&P 500 has gained an average of +36.5% over the 1-year period following a bear market closing low.  The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the US stock market (source: BTN Research).

2.   AFTER A DOWNER – The S&P 500 lost 0.3% (total return) during the decade of the 1930s, its 2nd worst decade ever behind the 10-years ending 12/31/09.  The S&P 500 gained +140% during the subsequent decade of the 1940s, an average return of +9.2% per year (source: BTN Research).

3.   UNDERVALUED – One recent estimate of the true value of the Chinese yuan puts its worth at nearly 21 cents or +41% greater than its current value of 14.65 cents (source: Peterson Institute of International Economics).

4.   WHAT ALAN WATCHES – The yield on the 10-year Treasury note closed at 3.62% at the end of February 2010, down 0.22% from its 3.84% level on 12/31/09.  Because of the close connection between the yield on the 10-year Treasury note and mortgage interest rates, former Fed Chairman Alan Greenspan said in a speech on 2/23/10 that the 10-year Treasury yield is the �one statistic that I watch every morning and every afternoon (source: Credit Union National Association conference).

5.   RESULTS BY STATE – The average home in the USA has appreciated +1.7% (in aggregate, not per year) over the last 5 years (i.e., 2005-09).  Homes in Wyoming have performed the best, gaining +26.7% on average.  Homes in Nevada have fared the worst, losing 40.4% of their value (source: Federal Housing Finance Agency).

6.   A REAL PROBLEM – The number of insured banks on the governments problem list reached 702 as of 12/31/09, almost 3 times the 252 banks on the list as of 12/31/08, but equal to just half of the more than 1,400 problem banks from 12/31/91.  Historically, 13% of banks on the problem list fail (source: Federal Deposit Insurance Corporation).

7.   DEJA VU – An article in Fortune magazine written by reporter Shawn Tully began with the statement: Growing deficits.  Out-of-control federal spending.  Rising debt.  With the budget suddenly an election issue, it is time for some straight talk.  The date of the article was 3/08/04 or 6 years ago today (source: Fortune).

8.   BEFORE – Our nation’s projected $1.56 trillion deficit for fiscal year 2010 (i.e., the 12 months ending 9/30/10) is 10.6% of the size of our economy (source: White House).

9.   AFTER – President Obama’s 18-member fiscal commission has a goal to bring our nation’s deficit in fiscal year 2015 (i.e., the 12 months ending 9/30/15) down to 3% of the size of our economy (source: White House).

10.       A WAYS TO GO – As of 2/28/10, 138.6 million Americans had jobs.  As of 12/31/07 (i.e., the beginning of our country’s latest recession), 146.2 million Americans had jobs.  If employers nationwide began hiring 29,000 workers every week as of 3/01/10, we would be back to 146.2 million employed Americans in 5 years (source: Department of Labor).

11.       USED PREVIOUSLY – The legislative process of reconciliation has been utilized in the Senate 22 times in the last 30 years, including its usage in both 2001 and 2003 to pass tax-cutting legislation (source: Senate).

12.       OUR PART – Out-of-pocket medical spending by Americans (i.e., deductibles, coinsurance and co-payments but not including monthly health insurance premiums) totaled $284 billion last year, 11% of our nation’s aggregate 2009 health care spending of $2.5 trillion (source: Centers for Medicare and Medicaid Services).

13.       HEALTH CARE – 15% of Americans (46.8 million people) are on Medicaid today (source: Washington Post, Census Bureau).

14.       AT THE MOVIES – Americans spent an average of $29 million a day on movie tickets in 2009, an all-time box office record (source: Hollywood.com).

15.       BETTER THAN WE THOUGHT – The 2/08/10 issue of Sports Illustrated predicted that the top 3 medal winning countries at the 2010 Vancouver Winter Olympic Games would be Germany (35 medals), Canada (30) and the USA (27).  Actual medal results were the USA (37), Germany (30) and Canada (26).  The 37 medals won by the USA were the most number of medals won by Americans ever in any Winter Olympics (source: Olympics).

Keep your dreams big and your worries small.

Current Trend Direction: Lower
Risks favor: Locking Bias
Current Price of FNMA 4.5% Bond: $100.62, -9bp

Reminder: Yesterday after the close of trading, Mortgage Bonds had their monthly coupon rollover. The effect of the rollover was -38bp points for the 4.5% coupon. Every month the coupon “rolls over”. When this happens, this month’s coupon is closed out and all new loans are placed into next month’s coupon. There is no effect on rate sheets or pricing. Additionally any candle chart patterns that arise from the rollover must be taken with a grain of salt.

The text of Ben Bernanke’s testimony, which was to be delivered before the House Financial Service Committee, but was cancelled due to weather, hit the wires a short while ago. There’s a lot of important information, much of it impacting the mortgage market, so let’s break it down.

As you know from reading our blog, there is significant importance in understanding the Fed’s exit strategy from their current accommodative policy. The markets were listening closely for clues as to when this would happen.

Big Ben played his cards close to the vest, and mentioned that the now famous “extended period” comment is still presently warranted, but did not offer any insights as to how long it would remain in place. Let’s remember – these are Bernanke’s views, and not necessarily those of all the other Fed members. As we already know, there have been recent grumblings from other members of the Fed, including those who have voting rights, who disagree that the continued “extended period” language is still warranted. And once this extended period comment is removed, it will signal the beginning of the unwinding of the Carry Trade, which is certain to have an adverse impact on Bonds and mortgage pricing.

The Fed attempted to calm the mortgage markets to some extent by first stating the obvious, which is that the Fed has the option to sell Mortgage Backed Securities to reduce its balance sheet – but then followed up with a comment that this is not something that they currently intend to do at the present time, and when they do decide to sell any MBS, it will be a gradual process.
Another important point was that the spread between the Fed Funds Rate and the Discount Rate would widen back to normal levels. This means that the Discount Rate would likely rise about .75%. Bernanke tells us that this should not be viewed as a change toward tightening in the monetary policy outlook.

As you might remember, during the early stages of the mortgage meltdown, the Fed had an emergency meeting. Many mortgage lenders were unable to secure warehouse lines to provide mortgage funding. As a measure of last resort, many of those lenders could go to the Discount Window at the Fed. But because costs were prohibitive, and more importantly, the repayment of those funds had to be made within 28 days, lenders were unable to use this tool. During the Fed’s emergency meeting, they slashed the Discount Rate, and extended the repayment period to 90 days, which allowed for the Discount Window to be used as a method to help curb the severity of the mortgage meltdown. Today’s Fed announcement reverses those emergency measures, and so long as warehouse lines remain functional, this announcement should not adversely affect our industry.

Perhaps the most important piece of the announcement was that the Fed would be switching its benchmark away from the Fed Funds Rate, which is what we have all come to monitor, to a new benchmark of interest paid on excess reserves.
Banks are required to keep money on reserve with the Fed – and may from time to time have excess reserves. At the present time, there is no interest paid on those excess reserves – so banks who are looking to increase profitability wind up looking for a way to lend out that money, and realize that any rate they can get is better than nothing. And the banks may lend out this money at substantially lower levels than the Fed Funds Rate…but remember, the Fed Funds Rate is only a “target rate.” The Fed can set a target, but it is up to the banks to set their own negotiated rate.

Oftentimes, near the end of the trading day, banks have been lending their excess reserves out overnight for anything they can get, which is better than zero if left at the Fed. This undermines the Fed’s ability to set a reliable benchmark target. The Fed wants to fix this by paying interest to the banks on those excess reserves. The interest rate paid on excess reserves would be just below the Fed Funds target. Therefore, banks would not lend out these excess reserves unless they were in line with where the Fed wants rates to be, because they’d be better off just leaving them at the Fed.

So what does this mean? First, while the Fed says that this is the new benchmark, we see this as a way to enforce the Fed Funds Rate as remaining the benchmark. Give the media a few days or weeks, and they will figure this out too.
This move also should help profitability for banks with excess reserves. But the big takeaway is that the Fed is getting their “ducks in a row” for pushing rates higher. When they do increase rates, the Fed does not want any obstacles that may undermine their plan.
We have a Locking Bias today – and prices may drop a bit further toward the 200-day Moving Average. We’ll have to see if that level holds.

Economic Calendar for February 08 – February 12

Current Trend Direction: Sideways

Risks favor:  Locking Bias

Current Price of FNMA 4.5% Bond: $100.97, +3bp

It’s Groundhog Day, and Punxsutawney Phil did indeed see his shadow – and as the legend goes, it means there will be six more weeks of Winter.  But it also means that there will be just eight more weeks of Fed buying, leading to higher rates down the road.

It’s Groundhog Day, and Punxsutawney Phil did indeed see his shadow – and as the legend goes…just kidding.  Those of you who are fans of the movie “Groundhog Day” will know what we mean.

As you can see on the Bond Page, prices have moved sideways since January 15, between a floor of support at the 200-day Moving Average and a dual layered ceiling of resistance formed by both the 50 and 100-day Moving Averages.  There was only one day during this time that prices had not hit either the ceiling or the floor…and when prices get trapped within a tight trading range as they have been of late, it’s like a spring being wound tighter and tighter, so the eventual breakout in either direction becomes exacerbated.

And this week, Friday’s highly important Jobs Report will likely be the catalyst that breaks Bond prices out of this trading range.  But we will get an early look at the labor market via Wednesday’s ADP Employment Report, as well as Thursday’s Initial Jobless Claims.  Estimates of Friday’s official jobs number are calling for a positive reading of 13,000 jobs to be created.

In economic news today, Pending Home Sales for December arrived essentially in line with expectations at 1.0%.  This was up significantly from November’s reading of -16.4%, as buyers reacted to the perceived expiration, then the extension and expansion of the Homebuyers Tax Credit.  Pending Home Sales are now up 10.9% compared with December of 2008 – this is a great talking point to bring out to your clients and referral partners today, to help encourage homebuyers to get off the fence before home loan rates move up.
Paul Volcker, Former Federal Reserve Chairman and Obama point man, as head of the newly formed Economic Recovery Advisory Board, will be testifying on Capitol Hill today.  Mr. Volcker was Chairman of the Fed from 1979 to 1987, and came under much political fire for taking the Fed Funds Rate up to 20% – yes 20%, during 1980, in an effort to fight inflation.  Many politicians fought him tooth and nail on this, and similar to the recent Bernanke reconfirmation, Mr. Volcker came under fire and had a difficult time getting reconfirmed.  As it turned out, Mr. Volcker was right, and not surprisingly, the politicians were dead wrong.  This highlights the importance of the Fed being able to act independently, and not under the influence of politicians.  Following Volcker’s unpopular decisions, America enjoyed high prosperity and low inflation in the years that followed.  And Fed Chair Alan Greenspan, who took over the reins for the next 18 ½ years, was also a good steward of a low inflation environment.  But with the passage of time and short memories, the Fed again is coming under fire from politicians.  This is why it is so critically important to see if the Fed is able to retain their independence, particularly as many in Congress are facing reelection and may not be acting in the best long term interest of the country.
Today, Volcker will be urging lawmakers to keep bank risk activities restrained, mostly referring to disallowing banks from making potentially risky trades on their own behalf and profitability.  Financial shares could be volatile during the session, and this could have an impact on the Bond markets as well.
While there is no immediate reason to take action, we feel that a bias towards Locking is prudent, as prices are up against a dual ceiling of resistance.

All times listed in the table below are Eastern.
Economic Calendar for February 01 – February 12

Current Trend Direction: Higher

Risks favor: Carefully Floating into Fed Meeting

Current Price of FNMA 4.5% Bond: $101.06, +12bp

“I’m from the Government, and I’m here to help.” …Uh oh. And like it or not, we’ll be getting a heavy dose of “help” from the Government today.

The action will begin when results from today’s enormous auction of $42B in 5-Year Notes are released at 1pm ET. As we know, auction results can be a market mover – and handling the market reaction could be challenging today, as just about an hour later, the highly anticipated and pivotal Fed Policy Statement will arrive, at 2:15pm ET.

The Fed Funds Rate will remain unchanged, but as we discussed back in Monday’s Daily Update, the Policy Statement sure could be a market mover this time around. Will the Fed hint that they may start to shift away from their present accommodative policy, by the exclusion of the line they’ve included in all of 2009’s Statements, about rates staying low “for an extended period”? If so – this could fuel selling pressure in Stocks, and even Bonds, as the carry trade unwinds a bit.

And what might the Fed say about their present Mortgage Backed Security purchase program? It has been made clear at each of the last two meetings that this program will end. But there has been chatter from different Fed Members, who feel this program should be extended. However, the Fed and Mr. Bernanke have come under fire for the expansion of the Fed’s balance sheet – and with $1.25T already added to the Fed’s balance sheet in MBS purchases, it’s hard to imagine a meaningful expansion taking place. Hopefully we get a clear message on this today as the market hates uncertainty.

And in the backdrop of this two day meeting is the elephant in the room…the Fed Chairman himself, Ben Bernanke doesn’t have confirmation yet that his position as Fed Chair will continue for another term. And let’s remember that Mr. Bernanke is a human being. We all know how important confidence is for each of us to be successful, and especially for someone in a high profile role, like an athlete or performer…or Chairman of the Federal Reserve Board. It makes you wonder if Mr. Bernanke may be second guessing himself, and it makes you wonder what the impact of that could be on the meeting, or current decisions being made. We don’t want critical monetary policy decisions being made in a tentative way.

Tonight, President Obama delivers his first official State of the Union address. The administration has come under heavy fire, so it will be interesting to see how President Obama responds, and whether he stays the course or changes direction, much like Bill Clinton did in 1994. These addresses can cause market reaction the following day – so we expect the next 24 hours in the market to be quite bumpy.

In economic news, New Home Sales data will be reported at 10:00am ET. Please watch the Market News section of the site for an update, when the numbers are released.

Technical indicators are a wonderful guide but the news coming out today pushes the technical indicators aside for now. We’ll have to wait and see what kind of “help” the Government has in store for the day.

Economic Calendar for January 25 – February 05

	Date	ET	Economic Report	For	Estimate	Actual	Prior	Impact
	Mon. Jan. 25	10:00	Existing Home Sales	Dec	6.00M	5.45M	6.54M	Moderate
	Tue. Jan. 26	10:00	Consumer Confidence	Jan	53.5	55.9	53.6	Moderate
	Wed. Jan. 27	10:00	New Home Sales	Dec	368K	342K	370K	Moderate
	Wed. Jan. 27	10:30	Crude Inventories	1/22	NA	-3.89M	-0.471M	Moderate
	Wed. Jan. 27	14:00	FOMC Meeting	1/27	.25%		.25%	HIGH
	Thu. Jan. 28	08:30	Durable Goods Orders	Dec	2.0%		0.2%	Moderate
	Thu. Jan. 28	08:30	Jobless Claims (Initial)	1/23	450K		482K	Moderate
	Fri. Jan. 29	08:30	Gross Domestic Product (GDP)	Q4	4.6%		2.2%	Moderate
	Fri. Jan. 29	08:30	Chain Deflator	Q4	1.3%		0.4%	HIGH
	Fri. Jan. 29	08:30	Employment Cost Index (ECI)	Q4	0.4%		0.4%	HIGH
	Fri. Jan. 29	09:45	Chicago PMI	Jan	57.4		58.7	HIGH
	Fri. Jan. 29	10:00	Consumer Sentiment Index (UoM)	Jan	73.0		72.8	Moderate
	Mon. Feb. 01	08:30	Personal Consumption Expenditures and Core PCE	YOY	NA		1.4%	HIGH
	Mon. Feb. 01	08:30	Personal Income	Dec	0.3%		0.4%	Moderate
	Mon. Feb. 01	08:30	Personal Spending	Dec	0.2%		0.5%	Moderate
	Mon. Feb. 01	08:30	Personal Consumption Expenditures and Core PCE	Dec	NA		0.0%	HIGH
	Mon. Feb. 01	10:00	ISM Index	Jan	56.7		55.9	HIGH
	Tue. Feb. 02	10:00	Pending Home Sales	Dec	NA		-16.0%	Moderate
	Wed. Feb. 03	08:15	ADP National Employment Report	Jan	NA		-84K	HIGH
	Wed. Feb. 03	10:00	ISM Services Index	Jan	51.1		50.1	Moderate
	Wed. Feb. 03	10:30	Jobless Claims (Initial)	1/30	NA		NA	Moderate
	Thu. Feb. 04	08:30	Productivity	Q4	5.9%		8.1%	Moderate
	Fri. Feb. 05	08:30	Hourly Earnings	Jan	0.2%		0.2%	HIGH
	Fri. Feb. 05	08:30	Non-farm Payrolls	Jan	50K		-85K	HIGH
	Fri. Feb. 05	08:30	Unemployment Rate	Jan	10.0%		10.0%	HIGH
	Fri. Feb. 05	08:30	Average Work Week	Jan	33.2		33.2	HIGH

Current Trend Direction: Sideways to higher

Risks Favor: Carefully Floating

Current Price of FNMA 4.5% Bond: $100.81, +19bp

It’s Round Three of the battle over the 200-day Moving Average.  A look at the chart shows that Round One went to the Bulls, as they pushed above the 200-day Moving Average.  But yesterday, the Bears countered, winning Round Two by pushing prices back beneath the 200-day MA.  And so far this morning, the Bulls are fighting hard to push prices back higher and above the 200-day MA.  As we’ve discussed in the past, this level is important because it can often set the stage for price direction for an extended period of time.  So far today – while prices are modestly higher – they are off their best levels.  We expect this battle to continue.

The Bond Bulls got a boost to start the day with the release of a very tame Core Producer Price Index (PPI).  Although the reading of 0.0% was inline with estimates, Bond Traders were happy to see that the surprising rise of 0.5% in November did not continue.  The headline PPI was slightly hotter than expected, rising to 0.2% when economists were looking for 0.0%, but once again, this was well below the heated 1.8% reading in November.

Housing Starts fell to 557,000 in December, due in part to bad weather throughout the country.  During 2009, Housing Starts fell a record 38.8%.  However – a look down the road appears more positive, as Building Permits rose significantly to 653,000, well above the 580,000 expected…and the best level since October of 2008.

Over in China there is speculation that the central bank will raise the benchmark interest rate by 27 basis points on Friday in an effort to curb inflation.  This is the 3rd major economy this week to report some inflation pressures after the UK and India reported that they expect inflation levels to continue higher.

Republican Scott Brown did win the US Senate seat with the special election held yesterday in Massachusetts.  As explained in yesterday’s Update – this is significant because it means that the Democrats will no longer have the “supermajority” in the Senate, which may alter the course of the Healthcare Reform Bill and other future legislation.

Some news from FHA this morning – like the banking sector, FHA must also maintain capital ratios.  And with the increased popularity of FHA in the absence of other alternative products – they now insure about 30% of all new loans – FHA is nearing the limits of loans they can make based on their capital ratio.  In an effort to fix this problem, FHA will be raising their upfront mortgage insurance premium fees from 1.75% to 2.25%.  Additionally, they have requested approval for an increase in the monthly fee as well.  They will also limit the high LTV financing to borrowers with a 580 credit score; a score under 580 will now require at least a 10% down payment.

We’ll start the day by Floating, as the Bond Page provides us a ringside seat to watch the Bulls and Bears duke it out over the 200-day Moving Average.