Quiet Start

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Markets started quietly this morning ahead of this afternoon’s triple threat. At 1:00 $21B of 10 yr notes will be auctioned, the demand will be important after the recent increase in rates; at 2:00 the minutes from the 6/19/FOMC meeting that triggered the recent explosion in rates; at 4:10 Bernanke will speak, his remarks will be key to the next move in interest rates---but not necessarily the final word. Since last Friday’s overdone selling in the mortgage area the prices have rebounded and recovered about 60% of the declines. The 10 yr note increased 22 basis points in rate last Friday, but has only taken back 10 basis points in rate (30 basis points in price). Mortgages were hit hard as investors tried to sell the low coupons into a rather dysfunctional MBS market that is so thin prices were swinging in wide moves of 15 to 30 basis points in price every 10 minutes (at least that is how it seemed last Friday).   Early this morning the MBA released its weekly mortgage applications data. Mortgage applications decreased 4.0% from one week earlier. The Market Composite Index, a measure of mortgage loan application volume, decreased 4.0% on a seasonally adjusted basis from one week earlier.  The Refinance Index decreased 4 percent from the previous week.  The seasonally adjusted Purchase Index decreased 3% from one week earlier. The unadjusted Purchase Index decreased 23 percent compared with the previous week and was 5 percent higher than the same week one year ago. The refinance share of mortgage activity decreased to 64% of total applications. The adjustable-rate mortgage (ARM) share of activity decreased to 7% of total applications. The HARP share of refinance applications rose from 34% the prior week to 35%. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 4.68%, the highest rate since July 2011, from 4.58%, with points increasing to 0.46 from  0.43 (including the origination fee) for 80% loans.  The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,500) increased to 4.86%, the highest rate since July 2011,  from 4.68%, with points decreasing to 0.37 from 0.38 (including the origination fee) for 80% loans.  The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA increased to 4.37%, the highest rate since September 2011, from 4.27%, with points decreasing to 0.39 from 0.44 (including the origination fee) for 80% loans.  The average contract interest rate for 15-year fixed-rate mortgages increased to 3.76%, the highest rate since July 2011, from 3.64%, with points decreasing to 0.41 from 0.44 (including the origination fee) for 80% loans. The average contract interest rate for 5/1 ARMs increased to 3.40%, the highest rate since May 2011, from 3.33%, with points increasing to 0.54 from 0.31 (including the origination fee) for 80% loans.   At 9:30 the DJIA opened +28, both NASDAQ and S&P were unchanged on the open. The 10 yr at 9:30 2.63% -1 bp and 30 yr mortgage prices up just 6 bps frm yesterday’s close.   At 10:00 May wholesale inventories, expected +0.3%, declined 0.5%, sales were expected up 0.5% but increased 1.6%. Nice, inventories declining while sales increasing will encourage manufacturers to increase inventory levels.   Yesterday the IMF out with reduced growth outlook, the Fund calling into question emerging market growth. The increase in US interest rates has lessened the demand for seeking yield in emerging markets including China and Russia according to the IMF. It is the ripple effect that is spreading as the Fed is seen to be ready to begin slowing the purchases of treasuries and MBSs frm the $85B that began a year ago. Since the 6/16/FOMC meeting and Bernanke’s press conference the same day markets around the globe are seeing increased volatility as investors struggle with the impact of higher rates will have on markets and economies. In the last six weeks investors have pulled $13.5B frm bond funds and $22B in emerging markets stock funds. The new IMF estimate is global growth at 3.1% frm +3.3% in April.   In China news out that the central bank may be planning to cut bank reserve rates in an effort to stem the decline in exports that have slowed the growth the world’s 2nd strongest economy. It is supposition at this time though. China has direct impact on our markets; recently China said it wanted to cut its growth rate to fend off inflation but now with exports falling 3.0% and imports declining the central bank, like our Fed is trying to manipulate markets with talk of stimulus. One serious problem facing all global markets now is, where should markets be without the continual stimulus that has effectively removed much of the typical supply/demand equation that normally (in the past) were the guide posts for investors.   With the three events this afternoon (see above) markets are likely to remain flat this morning, but pending the news this afternoon volatility may increase n the later part of the trading session. Still all technicals remain quite bearish, don’t make too much out the improvement the last two days.