Friday, December 19, 2014

FDIC's study on Higher Rates' Impact on Banks; Energy Efficient Mortgage Backed Bonds


My brain can't keep track of all the statistics coming out of lending. But you won't find many people who will argue that real estate & credit have not rebounded. Zelman and Associates reported that in Q3 of 2014, the total number of loans in delinquency and in the foreclosure process was down 20% YoY and 50% lower than the peak in Q4 of 2009. In November, default notices declined 15% based upon 11 states and were down 9% YoY and the number of homes repossessed by lenders decreased 9%. REO filings are currently at the lowest level since mid-2007 and REO listings were down 16% YoY. The total industry owned 275,000 properties in REO inventory as of 3Q2014 down 21% YoY and 59% below the peak.

Plenty of SoFi's borrowers are recent college graduates, and education holds the key to economic success according to a report published by Wells Fargo Securities Economics Group. The report found that in 2012, 32.7% of White students obtained a four-year college degree, whereas less than half of that share of Blacks and Hispanics received a college degree. More than 40% of Blacks and Hispanics had either some college or received an associate's degree in 2012, which is greater than their White counterparts. Research has also discovered that the median income for those who hold a bachelor's degree is $50,360, compared to a median income of $29,423 for those who only have a high school diploma, whereas an associate's degree leads to a median income of $38,607. People who have obtained a graduate degree see a median income of $68,064. College enrollment remains high for all races, but the percentage of those graduating with a bachelor's degree falls for Blacks and Hispanics. The study also found that Millennials put more importance on college education than previous generations, with Black and Hispanic Millennials still needing to increase college enrollment to improve labor and income prospects. Asian-Americans between the ages of 18-24 years old, have the highest rate of college enrollment at 59.8%, followed by Whites (42.1%), then Hispanics (37.5%) and African Americans (36.4%). Both African-Americans and Hispanics are earning more bachelor's degrees each year, but associate's degrees are still an important alternative for both races.


But in general mortgage lenders are worrying more about lackluster demand impacting margins, according to the latest Fannie Mae Lender Sentiment Survey. The biggest headache remains regulatory, of course. Lenders anticipate a modest housing expansion in 2015. It seems like the homebuilders agree. It is all going to hinge on the return of the first time homebuyer.


What is holding down stronger growth in the mortgage market? When people ask me to comment on what I believe is hobbling the mortgage market, I usually resort to faking an illness and then make a quick exit. As a longtime friend of mine joked, "It's equivalent to asking the question, 'What's wrong with Los Angeles? Is it the smog? Is it the freeways? Is it the crime? Is it the crowded population?" Yes, yes, yes, and yes. Last month Wells Fargo noted, "Mortgage financing activity remains a central linchpin for the economic and housing outlook. Recent data indicate that lending standards are easing and supply is increasing in the mortgage market.  Yet, residential mortgage debt has fallen to historically low levels while the housing recovery remains sluggish. In addition, mortgage debt continues to decline on a year-over-year basis.


But although growth in mortgage lending is slow, the holidays are no excuse to stop servicing flow, just ask Mountain View Servicing which has two deals outstanding; the first a $2.7 billion FNMA/FHLMC non-recourse servicing portfolio which is 100 percent fixed rate 1st lien product, 100 percent retail, 80% purchase origination, WaFICO 746, WaLTV 79%, WAC 4.51%, average loan size of $207k, with production in California (17.6 percent), Arizona (16.4 percent), Utah (16.4 percent), and Colorado (9.7 percent); the second a $252 million FNMA non-recourse servicing portfolio which is 100 percent fixed rate 1st lien product, WaFICO 750, WaLTV 79%, WAC 4.06%, average loan size of $249k, with an almost all Texas production (99.3%). Phoenix Capital Inc. has two projects; the first is Project Nelson a $304 million bulk Fannie Mae, Freddie Mac and Ginnie Mae MSR package offered by an independent mortgage banker established in 1989. Nelson is $231MM of conventional/$73MM of Gov't, with 4.345/4.19% WAC, 738/687 WaFICO, and 87/95% WaLTV; the second is Project Ingram a $800M bulk Fannie Mae A/A and FHLMC ARC servicing rights package which is 100% fixed rate WaFICO 749, WaLTV 70%, WAC 4.23%, average loan balance of $243k, 82% CA originations, with 86% of the package originated by correspondent channel.


Growing up and living in California all my life I can recall seeing the first residential solar array in my neighbor's yard. It required a substantial portion of their backyard, a crane to move the panels into position, and if I remember correctly the breakeven date on the investment was sometime around 2027....needless to say, at that time, solar was more of a way of life, than any sort of economic arbitrage. Times have changed; solar is more efficient, is easier to finance, upfront costs are coming down, and if you believe what you read in Bloomberg, thanks may be due in part to the secondary markets. Jody Shenn writes, "Renovate America Inc., a closely held company that works with municipalities to let homeowners use property liens to borrow cheaply for energy-efficiency improvements, is expecting more sales of a new type of bond tied to the financing. New York hedge fund 400 Capital Management LLC, with more than $1 billion of assets under management, helped bring the first $233 million of securities into the market this year, including $129 million of notes last month that helped finance 6,858 projects that will save homeowners 6.7 million kilowatt-hours in energy and 4 million gallons of water annually, according to an e-mailed statement today." Like I've always said, banking needs more acronyms; the debt is backed by liens called Property Assessed Clean Energy assessments (PACE with a silent lower-case 'A', I guess), which are similar to property taxes, created as consumers are given funds for work such as solar-panel installations, better windows and artificial turf. Renovate America calls its product the Home Energy Renovation Opportunity, or Hero, program.


Banks out there know that the Winter 2014 issue of Supervisory Insightswas released this week. It looks at key aspects of interest rate risk (IRR) management, including the implementation of effective governance processes, the development of key assumptions for analyzing IRR, the development of an in-house independent review of IRR management systems, and what to expect during an IRR review. "Banks need to be prepared for a period of increasing interest rates," stated Doreen R. Eberley, Director, Division of Risk Management Supervision for the FDIC. "The articles in this issue of Supervisory Insights, which were prepared by FDIC field examiners who specialize in IRR reviews at community banks, can help banks identify the potential risks and take steps to mitigate the risks where needed." "Effective Governance Processes for Managing Interest Rate Risk" discusses supervisory expectations for a community bank's IRR governance process, identifies potential risks associated with a period of increasing interest rates, and discusses approaches for mitigating IRR as needed. "Developing the Key Assumptions for Analysis of Interest Rate Risk" describes common sense approaches for developing the assumptions necessary to analyze interest rate sensitivity in the current environment. "Developing an In-House Independent Review of Interest Rate Risk Management Systems" describes ways that smaller institutions may be able to effectively and economically perform an in-house IRR independent review. Finally, "What to Expect During an Interest Rate Risk Review" describes what examiners focus on during an IRR review, supervisory expectations with respect to IRR, and communication with the FDIC during an examination.


But are rates going up? No one knows for sure - remember all the smart guys a year ago saying we'd be at 3% on the 10-yr in 2014? It closed yesterday at 2.20%. We did have a little news yesterday. Besides a decent Jobless Claims number, the Philadelphia Fed Manufacturing Business Outlook Survey diffusion index of current activity decreased 16 points to 24.5 in December from a reading of 40.8 in November.  And the Conference Board's index Leading Indicators Increased 0.6% in November, increasing for third month in a row. Ken Goldstein, Economist at The Conference Board, observed, "The biggest challenge has been, and remains, more income growth. However, with labor market conditions tightening, we are seeing the first signs of wage growth starting to pick up."


The headlines were grabbed by the stock markets while 30-yr agency MBS prices sold off - they are down nearly ½ point the past two days while the 10yr note is off more than 1.5 points and its yield higher by 15 basis points. There is no scheduled news today and the 10-yr, and MBS prices, are unchanged from Thursday's closing levels.


 Executive Rate Market Report:

Traders, investors, analysts, and economists are happy these last two weeks are over. The volatility in equity and bond markets has been extreme over the past 10 sessions, time to take a breath and let things settle down a little. The Fed stirred the pot on Wednesday, what it always does at the FOMC meetings, suggesting the bank will be “patient” about when it decides to increase rates. Traders and investors world-wide jumped on “patient” as a green light to keep buying US stocks. No matter that Yellen said the FOMC would not consider increasing rates until the Next two FOMC meetings. The take away; the Fed will not even consider increasing rates until 12 weeks from now, investors took that as any lift off won’t happen until late Summer 2015 at the earliest. The simple truth, camouflaged by many specific details, there is no place in the world investors can go to expect a positive investment return except the US; global investors are all in for US stocks.

The DJIA yesterday up 421 points, on Wednesday +288, 709 points that returned the index t where it traded two weeks ago. The bond and mortgage markets have held well in the face of the current equity market rally, a little separation between the two markets. Equity markets also separating from crude oil movements; crude dropped to a new 5 yr low yesterday as stocks exploded. The new view about the impact of declining oil and commodity prices is that it is good for the economies of the world with a just a couple of exceptions. A couple of weeks ago the collapse of oil prices was seen as a deterrent to economic growth. Just another way to think about the uncertainty (volatility) that has gripped investors recently.

There are no economic reports on the calendar today.

US interest rates still well supported; treasuries may continue to benefit with yields higher than any other Group of Seven country and contained inflation supporting demand. Investors sold foreign bonds this year at the fastest rate ever in a move to repatriate assets as record-low yields in overseas sovereign debt are substantially lower than US sovereign debt. The betting that the ECB will begin a major stimulus program early next year has driven EU interest rates down, the strongest economy in the EU, Germany’s 10 yr bund this morning trading at 0.60% compared to the US 10 at 2.19%. It isn’t as easy as to simply pick stocks over bonds; for numerous reasons there is always demand for sovereign debt no matter how equity markets are doing; as long as the spread between other G-7 countries favors US rates our treasuries will draw demand no matter the level of the rate, 160 bps more yield between Germany and the US is attractive.

At 9:30 the DJIA opened +20, NASDAQ -7, S&P +2 (see below for 10:00 levels). The 10 at 9:30 2.20% -1 bps; 30 yr MBS price +14 bps from yesterday’s close and +16 bps from 9:30 yesterday.

Crude is trading higher this morning after declining $2.00+ yesterday. The US stock market opened a little better. Too soon to draw any conclusions about how much of an influence crude has on investors; the new thought that declining oil prices is a good thing, the reason given for the last two strong performances in the stock market, or the previous view that lower prices are not a plus hasn’t been tested yet.

Quadruple expirations of options today that may cause some unusual movements in stocks and bonds. A lot of the adjustments however were made yesterday in equity markets. The 10 yr note and MBSs are still holding slight bullish technical readings; the 10 has its first support at 2.21%/2.22% the level tested yesterday and the 20 day average on the 10. This morning so far the rate markets are holding, we expect the support will hold today.

PRICES @ 10:10 AM

  • 10 yr note: +3/32 (9 bp) 2.20% -1 bp
  • 5 yr note: +4/32 (12 bp) 1.64% -3 bp
  • 2 Yr note: +1/32 (3 bp) 0.63% -2 bp
  • 30 yr bond: -2/32 (6 bp) 2.82% unch
  • Libor Rates: 1 mo 0.164%; 3 mo 0.245%; 6 mo 0.343%; 1 yr 0.605%
  • 30 yr FNMA 3.5 Jan: @9:30 104.13 +15 bp (+17 bp from 9:30 yesterday)
  • 15 yr FNMA 3.0 Jan: @9:30 103.80 +1 bp (+10 bp from 9:30 yesterday)
  • 30 yr GNMA 3.5 Jan: @9:30 104. 81 +10 bp (+26 bp from 9:30 yesterday)
  • Dollar/Yen: 119.16 +0.32 yen
  • Dollar/Euro: $1.2294 +$0.0008
  • Gold: $1196.90 +$2.10
  • Crude Oil: $55.74 +$1.63
  • DJIA: 17,812.76 +34.61
  • NASDAQ: 4758.21 +9.81
  • S&P 500: 2068.80 +7.57


Wednesday, December 17, 2014

Builder & Lot price Trends; The latest on Fannie & Freddie

Supreme Lending would like to thank associates and business partners for their unwavering commitment and teamwork after being recognized as the ninth fastest growing company in the Dallas 100™ awards. "We attribute our continued growth and success to the exceptional talent of our 1,100 associates across the country," Rick Hogle, Chief Strategic Officer at Supreme, stated regarding the award. Dale Petrillo, a tenured associate of Supreme and successful Branch Manager at their Denver office, talks more about the commitment and dedication that makes Supreme stand out in their industry in this video.

The latest quarterly results of home builders Toll Brothers Inc. and Hovnanian Enterprises Inc. provide minimal optimism for the new-home market going into 2015, as consumers remain reticent and builders use more incentives to bolster sales. The Wall Street Journal reports that, "Toll notched a 10% gain in sales contracts in its fiscal fourth quarter ended Oct. 31, signaling that luxury buyers are continuing their three-year trend of strong home-buying activity. Toll added that its sales in November and the first half of this month are up 16% from the same period a year ago, but it characterized the housing recovery as "extended and uneven." However, builders' recent results have come against comparatively weak numbers from a year ago, when sales suffered as buyers reeled from a rapid, 1-percentage-point rise in interest rates.

In addition, the bottom half of the market remains constrained. For example, Hovnanian, which caters to move-up buyers purchasing their second-generation house as well as some first-time buyers, registered an 8% gain in sales contracts for its quarter ended Oct. 31, falling short of analysts' expectations. Hovnanian added that it relied more heavily on sales incentives to boost its sales, which caused its gross margin to decline to 19.3% from 22.6% a year earlier. Incentives typically entail offering buyers free upgrades or financial assistance such as covering closing costs. Overall, Hovnanian called 2014 "disappointing" for itself and the broader housing industry. Across the U.S., sales of newly built homes are up by only 1% in the first 10 months of this year from the same period last year."

And Zelman & Associates Land Development Survey indicates strong development activity which will assist future lot supply. The land development index increased to 63.3 from 62.9 a month earlier and on average, it takes 15 months for raw land to be developed into finished lots. Finished lot demand decreased for the seventh consecutive month to 67 but finished lot value is up 13% YoY. Demand ratings for finished lots, raw land, builder appetite and investor appetite all declined in October due to irregular homebuyer demand the past few months. Whereas the absolute land acquisition demand score of 67.7 is above the 50-point threshold representative of a typical demand environment.

Along those lines Zelman & Associates released a report that focused on home builder trends. The analysis reported an improvement in the home building sector as seasonally adjusted order trends bounced back in October from a month prior and order growth jumped to 22% YoY, leading to a 30% increase for the public builders. Unfortunately, the pricing outlook was more negative than in previous months due to disappointing results and guidance from public builders during earnings season. The price appreciation over next year is 4.2% and net order price is up 3.7% YoY. Overall, construction costs have increased 3.5% YoY and margins have declined, indicating that incremental pricing power is not enough to counter higher land and construction costs.

There are deals that "look ahead", such as the one that is noted above, but companies continue to deal with legacy issues. Citibank said it will set aside $2.7 billion in legal costs (investigations into FX, Libor and compliance) and $800mm in repositioning charges in Q4. Darn it! Why didn't I go to law school?

What does the Congressional Budget Office think of moving Fannie and Freddie? Here is the latest: "Transitioning to Alternative Structures in Housing Finance." "CBO expects that the role of Fannie Mae and Freddie Mac in the secondary mortgage market will shrink over the next decade under current policy. If policymakers wanted to reduce that role further and lessen the advantages given to the two GSEs, they could use various mechanisms..."

Look at this market! The 10-yr T-note sitting at 2.07% at the close on Tuesday has investors worried about refinances paying off their MBS holdings - until they realize just how much it costs borrowers to fund a loan these days due to lender costs. Still, MBS prices improved again relative to Treasury prices and 30-yr agency securities closed out the day at or near the highs from earlier improving .250-.375.

For news today we've had the MBA's application numbers for last week and we will also have the Consumer Price Index. Applications for U.S. home mortgages fell last week and interest rates declined to their lowest level since May 2013, per the MBA. The seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, fell 3.3 percent in the week ended Dec. 12. Refinancing applications were unchanged, while the gauge of loan requests for home purchases, a leading indicator of home sales, fell 6.9 percent.

But the media seems most focused on this afternoon's conclusion of the Federal Open Market Committee meeting at 1PM CST, and the meaning of every little word and punctuation. After that will be Chairwoman Yellen's press conference to follow at 1:30PM CST. So far, in the very early going, we're at 2.10% on the 10-yr and agency MBS prices are worse a shade.

Executive Rate Market Report:

Starting somewhat like yesterday this morning; at 7:00 the DJIA traded +100, 9:00 +50. The 10 at 7:00 2.11% +5 bps, at 9:00 2.08% +2 bp; 30 yr MBS price at 9:00 -6 bp. The FOMC policy statement and Yellen’s press conference dominate trading today. In the meantime Nov CPI expected down 0.1%, dropped 0.3%, the largest decline since Dec 2008 and the east increase since last February. The core (ex food and energy) expected +0.1% was as expected; yr/yr +1.7%. No inflation on the horizon but most continue to expect the FOMC will signal rates will begin to increase next year; if there is any debate it is about when the Fed will start increasing the FF rate. The Fed likes to look at the PCE data (personal consumption expenditures) measuring consumer spending, it increased 1.4% in October.

In Europe Nov consumer prices increased at the slowest rate in 5 yrs; the EU edging closer toward deflation. The European Central Bank has said it will reassess its existing stimulus policies, which include cheap bank loans and purchases of asset-backed securities and covered bonds, in early 2015, and decide whether to do more to ensure that annual inflation moves closer to its target of just below 2%. Deflation fears also spreading to the UK; inflation fell to a 12-year low of 1% in November, and Bank of England Governor Mark Carney acknowledged it will fall further. Germany’s 10 yr bund set another low yield record today at 0.57%.

Also out this morning, Q3 current account balance, it increased more than estimates to -$100.3B against -$97.5B forecasts.

Yesterday crude oil prices calmed and ended about unchanged; this morning the selling is back on, early trade had oil down another $2.00. Oil traders are almost giving up looking for a bottom after OPEC essentially has lost all control of oil. Oil experts saying OPEC as an influence over oil prices for the last 4 years is all but finished as a major factor on production and price.

The DJIA opened +42 after being 100 points higher in futures trading at 7:00 this morning. At 9:30 the 10 after trading at 2.11% early was 2.07% +1 bp and 30 yr MBSs also recovered from early lows to unchanged on the day and unchanged from 9:30 yesterday.

Cuba/US relations thawed today with Cuba releasing prisoner Alan Gross. The President is scheduled to speak at 12:00 today. Gross got a 15 yr sentence in Cuba, he was working to expand Internet access for Havana’s Jewish community. He was accused of undermining the Cuban state and in December 2009 was sentenced to 15 years in prison. A long overdue defrosting in US/Cuba relations.

More volatility this morning; the stock indexes already have been swinging widely; from +100 in the futures to opening +42 and by 9:45 up 102. The 10 and MBS also swinging around, the 10 early at 2.11%, now essentially unchanged as is the MBS market. Every technical model we use and all of the momentum oscillators are bullish for lower interest rates. The slight near term concern is that the momentum of the current rally is approaching oversold levels suggesting a potential pause and slight uptick is possible. Any selling in the treasury and mortgage markets is not likely to change the bullish technical outlook and will open the door for more buying from traders and investors. Our forecast presently is for the 10 yr note to decline to 2.00% before a potential major trend change.

PRICES @ 10:00 AM

  • 10 yr note: -4/32 (12 bp) 2.08% +2 bp
  • 5 yr note: -3/32 (9 bp) 1.54% +2 bp
  • 2 Yr note: -1/32 (3 bp) 0.57% +2 bp
  • 30 yr bond: -14/32 (44 bp) 2.71% +3 bp
  • Libor Rates: 1 mo 0.162%; 3 mo 0.242%; 6 mo 0.341%; 1 yr 0.597%
  • 30 yr FNMA 3.5 Jan: @9:30 104.38 unch (unch from 9:30 yesterday)
  • 15 yr FNMA 3.0 Jan: @9:30 104.12 +4 bp (-2 bp from 9:30 yesterday)
  • 30 yr GNMA 3.5 Jan: @9:30 104.90 -23 bp (-15 bp from 9:30 yesterday)
  • Dollar/Yen: 117.22 +0.81 yen
  • Dollar/Euro: $1.2456 -$0.0055
  • Gold: $1198.00 +$3.70
  • Crude Oil: $54.82 -$1.11
  • DJIA: 17,157.72 +88.85
  • NASDAQ: 4576.34 +28.51
  • S&P 500: 1987.52 +14.78

Monday, December 15, 2014

Lehman in the news; Down payment assistance study; Fitch's Forecast for MBS market in 2015


"What I don't like about office Christmas parties is looking for a job the next day." Here are a few tips on how to avoid that. And avoiding mortgage application fraud is even more important - but according to this story in the New York Times this type of fraud is increasing. And how are we in the last non-holiday week of 2014 already?

Here's your legal puzzle for the day. What company's t-shirts are now collectibles and has an estimated 209,000 loans that must be reviewed one by one? The answer is Lehman Brothers. Reuters reports that "Judge Shelley Chapman declined a motion for Lehman to increase the amount of reserves it must hold to make payments on 255 residential mortgage-backed securities (RMBS) from US$5bn to US$12.1bn. Chapman also said all 209,000 mortgages underpinning the bonds must be reviewed one-by-one." There's some job security for some out-of-work mortgage folks!


Seventy percent of U.S. adults are unaware of down-payment assistance programs available for middle-income homebuyers in their community, according to findings from the second annual America at Home survey commissioned by NeighborWorks America, a national nonprofit community development corporation based in Washington, DC. 

Many Millennials face unexpected hurdles when looking to purchase a home for the first time such as not being able to qualify for a loan due to student debt, low starting salary and the inability to come up with a large down payment.  Zillow analyzed how affordable it is for the average millennial or first-time buyer, given their economic hardships, to purchase a home in certain metro areas. To analyze the data, Zillow assumed that the average first-time buyers makes the median income of $54,000, attains a 30-year fixed rate mortgage with only 5% down and looks for a home priced according to the 33.3 percentile of all home values. Most first time home buyers put less than 20%, so primary mortgage insurance and upfront fees have to be considered and in Q3 of 2014, MI added an average of 1.3 percentage points to the effective mortgage rate. First-time home buyers should expect to pay about 17.4% of their income on a mortgage, compared to 15.3% for more traditional buyers. Despite the hurdles that most millennials face, current affordability for first-time buyers still looks more favorable than the pre-bubble standards from 1985 to 1999, when they could have allocated 22.5% of their income to a mortgage. You can utilize the interactive map to determine how first-time home affordability compares in your area. 

Besides downgrading countries like France to AA, Fitch Ratings also publishes reports on residential mortgage-backed securities. And it came out with a forecast for 2015. "While the vast majority of structured finance sectors maintain stable of positive outlooks for 2015, the residential mortgage-backed securities sector faces a 'challenging' environment next year. "Despite strong credit attributes, RMBS issuance is expect to remain anemic as the industry continues to face challenges including ongoing GSE dominance; more attractive financing alternatives such as whole loan sales; new mortgage regulation; and a weak 'AAAsf' investor base," Fitch said in its 2015 Outlook: U.S. Structured Finance. "Fitch expects many of these same challenges will persist in 2015 and keep U.S. RMBS a small niche market with projected issuance in the $15 billion-$25 billion range." 

Analysts knew what Fitch said about regulations. Namely that this year global regulators finalized many outstanding regulatory issues, most notably, risk retention, Regulation AB II, and Basel III, along with regulatory capital and liquidity guidance for financial institutions. Fitch said it expects issuers will spend "significant efforts" implementing processes to comply with the new regulations throughout 2015. It also noted that with the Federal Reserve's sunset of quantitative easing, market attention will turn to timing of Fed tightening and a higher rate environment in general. "The effect of higher rates will be felt across all sectors, albeit to varying degrees," Fitch said. It said rising interest rates and unwinding QE will not destabilize the global recovery or financial markets, although an increase in financial market volatility is expected

In general, the news last week reinforced views that the fourth quarter of 2014 is doing pretty well - which ordinarily would push rates higher. The most impressive data point this week came from the November retail sales report that showed sales climbing 0.7 percent for the month while October sales were revised higher. Inflation data for November reflected the continued slide in oil prices with declines in both the producer price index and the import price index. 

But there are two sides of every coin, and every economic statistic. Paul Jacob with Wunderlich Securities points out that, "The rally of 2014 has stampeded through virtually every counter-argument:  strengthening economy, solid stock market, the end of QE balance sheet expansion, rumblings from the Fed about the Funds rate. Sitting from 2.09% on the 10-year in Dec. 2014, it's a useful place to step back and review the bullish and bearish arguments for the bond market." And so we have the dual meanings of oil weakness & dollar strength, inflation, the Federal Reserve's actions, the labor market, consumer spending, the volatility in the stock market, and so on. 

The markets will continue to be driven by the price of oil although this week's FOMC meeting will give us more information. The 8th and final meeting of 2014 for the Federal Open Market Committee (FOMC) is scheduled for December 16-17.  It was at the Fed's December 2008 meeting (held on 12/16/08) that the FOMC voted unanimously to cut short-term interest rates to near zero from its then current level of 1%.  Since then, the FOMC has met 47 times and voted on each occasion to leave rates unchanged 

Certainly lower gasoline prices are stoking consumer confidence (the University of Michigan's preliminary Consumer Sentiment Index for December surged to 93.8, well above consensus expectations) and more confident consumers are buying more stuff. The Libyan National Oil Company says that the oil ports of As Sidra and Ras Lanuf had stopped operating because of fighting - and it is tough to forecast our economy when our markets are driven by news like this.


Hey, only a short period left to do your Christmas shopping! Or maybe I should say, close your loans. Regardless, we're faced with another week of titillating economic news here in the U.S. starting with today's Empire Manufacturing number, the Industrial Production & Capacity Utilization duo, and the NAHB Housing Market Index. Tomorrow is another duo - Housing Starts and Building Permits. Wednesday we'll see the Consumer Price Index and the Federal Open Market Committee's rate decision (don't look for any excitement). Thursday is Initial Jobless Claims, a Philly Fed number of little consequence, and the Leading Economic Indicators figures. The 10-yr closed Friday at 2.09% and this morning we're up to 2.13% with agency MBS prices worse .125-.250.


Rate Market Report:

After a 678 point decline in the DJIA, the 10 yr note falling 23 bps and MBS prices 92 bps higher last week, this morning the stock indexes are better and the 10 yr note yield higher. Not surprising, it was expected after those kinds of moves last week and ahead of the FOMC meeting that begins tomorrow and ends Wednesday afternoon with Yellen’s press conference. Last week the 10 ended at 2.08%, at 9:00 this morning 2.11%; 30 yr MBS prices -20 bps. Crude oil in early trading +$0.27.

Four reports this morning. The Dec NY Empire State manufacturing index fell to -3.58 against forecasts of 12.0. Nov industrial production expected up 0.7%, increased 1.3%, the most since May 2010. Nov capacity utilization expected at 79.3% jumped to 80.1% and Oct revised to 79.3% from 78.9%. The Dec NAHB housing market index 57 from 58.

Another Bloomberg survey; 90% of those responding to the question about the ECB’s ability to launch large scale buying of government bonds believe the ECB will actually do it; last month the same question got just 57% that believed the ECB would be able to do it in the face of Germany’s resistance against sovereign-bond purchases, saying they undermine the incentive for governments to make structural adjustments. The ECB’s next meeting is six weeks off so this survey may change dramatically before the meeting actually occurs. Europe teetering on deflation with oil prices declining and very soft economies has to do something but one serious problem with the EU is 18 nations looking out for themselves. Nov inflation in the EU 0.3%.

The DJIA opened +105 at 9:30, NASDAQ +26, S&P +12; 10 yr 2.13% +5 bps and 30 yr MBS price -20 bps from Friday’s close.

This week is all about the FOMC policy statement and how the phrasing of the statement will be translated about when the Fed is going to begin increasing interest rates. More than likely the statement will change the previous phrasing but it will still leave investors and traders debating when the Fed will start. The economic performance in the US will dictate when no matter the new wording markets are looking for.

NAHB just released its housing market index, expected at 59 from 58, the index . Home builders appear to be more optimistic than the reality in the housing sector; as the WSJ said in an article today; builders are smiling like the boom in 2005 but are building at 2008 levels. In recent years, builder confidence has appeared detached from the actual construction of houses. The index is based on survey responses from about 400 members, who are asked about sales, expected sales and traffic from prospective buyers for newly built single-family homes. The index declined to 58 from 59; current conditions down 1 point, future outlook down 1 point, buyer traffic unchanged. Overall a soft report.

Technicals still bullish for the interest rate outlook with China, Europe, India, and Japan and other emerging markets are slowing and crude oil and all commodities declining on lower demand as global economies fail to gain any traction. We noted last week we expected an increase in market volatility, we see that today with stocks better to start and the bond and MBS markets weaker. Last week’s huge moves in al US financial markets was, in terms of time and price, somewhat overdone; this week it’s the FOMC meeting on Wednesday that is the focus, crude oil price also a factor. Crude fell $8.00 last week and has been free-falling for a month now; it too is likely to settle this week before declining further. Is it more supply or weak demand, or both; we believe it is both but the price will continue to decline to at least $50.00/barrel.

This Week’s Economic Data:


8:30 am Dec Empire State Manufacturing index (12.0 from 10.6); as reported -3.58
9:15 am Nov Industrial Production (+0.7%); as reported +1.3% Nov Capacity Utilization (79.4%); as reported 80.1% from 79.3% in October, Oct originally reported 78.9%
10:00 am Dec NAHB housing market index (59 from 58); as reported 57.


8:30 am Nov housing starts and permits (starts +2.8%, 1038K; permits -1.8%, 1060K)
10:00 am FOMC meeting begins


7:00 am weekly MBA mortgage applications
8:30 am Nov CPI (-0.1% overall, ex food and energy +0.1%) Current account balance (-$96.3B)
2:00 pm FOMC policy statement
2:30 pm Janet Yellen press conference


8:30 am weekly jobless claims (295K +1K)
10:00 am Dec Philadelphia Fed business index (25.0 from 40.8 in Nov) Nov leading economic indicators (+0.6%)

PRICES @ 10:15 AM

  • 10 yr note: -10/32 (31 bp) 2.12% +4 bp
  • 5 yr note: -8/32 (25 bp) 1.56% +5 bp
  • 2 Yr note: -2/32 (6 bp) 0.57% +3 bp
  • 30 yr bond: -15/32 (47 bp) 2.76% +3 bp
  • Libor Rates: 1 mo 0.160%; 3 mo 0.240%; 6 mo 0.338%; 1 yr 0.600%
  • 30 yr FNMA 3.5 Jan: @9:30 104.14 -20 bp (-17 bp from 9:30 Friday)
  • 15 yr FNMA 3.0: @9:30 103.89 -33 bp (-16 bp from 9:30 Friday)
  • 30 yr GNMA 3.5 Jan: @9:30 104.92 -28 bp (--5 bp from 9:30 Friday)
  • Dollar/Yen: 118.57 -0.18 yen
  • Dollar/Euro: $1.2432 -$0.0030
  • Gold: $1210.10 -$12.40
  • Crude Oil: $75.68 -$0.13
  • DJIA: 17,327.48 +46.65
  • NASDAQ: 4662.67 +9.08
  • S&P 500: 2009.68 +7.35