San Diego Home Mortgage Blog

Treasuries and mortgages opened weak this morning but managed to claw back through the day to generally unchanged. All in all it has been quiet through most of the day after the initial volatility early. The dollar got a boost today after Ben Bernanke said yesterday he favors a strong dollar; but the real deal on the better dollar today is the euro currency still unable to hold over $1.50 per one euro, every time the dollar weakens to that area currency markets bounce back as short timers cover heavy short dollar positions. Adding to what may be a big correction coming in the otherwise dollar bearishness, talk has become so commonplace on the sinking dollar that a bounce is more likely. Goes to the worn adage; when everyone gets on one side of the boat, it tips over; and now everyone sucking air is bearish the buck. If the dollar were to start a prolonged retracement it won't be good for stocks and bond markets.

Try as hard as he can to lessen the concerns over inflation, Bernanke may not be winning the war---or maybe he has won. The recent increase in gold has foundation that it is a hedge against inflation; but with no pricing pressures, a very weak economy and not too favorable outlook for real improvement, the only inflationary potential is the continuing weak dollar. According to WSJ the battle between bonds and gold over inflation will have to be won by one side or the other, with the bonds relative complacency over potential inflation juxtaposed against gold's shiny, red-hot record setting levels with heated concern over potentially popping prices. The penchant to buy gold is as strong as I have seen in 40 years, outstripping the gold drive in the early 80s. Then gold hit $800+ on panic buying. Gold appears to be on a speculative binge that economic disaster is just around the corner, and inflation will increase rapidly.

Where the hell is the economy now, and where will it head next year? Establishment economists and equity markets are all but giddy over the declining job losses, giddy over the Q3 GDP jumping to +3.5% and gooey over the belief the economy has bottomed. Job losses are still growing, less than in the past but still increasing and no reason to expect a bottom in jobs is anywhere in sight. The US has lost a total of 300K jobs since 1999 in the private sector, in a period where the economy exploded. Now on its knees, why should anyone believe the job market will return to 5.0% unemployment (where it was before the collapse). Unemployment will continue over 10% for at least the next six or more years, topping out in 2011 at over 11.5%. Not going to hear that from the establishment. The number of unemployed actually soared by 558,000, to 15.7 million, as measured by the household survey (the unemployment rate), not the 190,000 you read about in the mainstream media. Unemployment is sadly continuing to rise by significant amounts. The establishment is dead set on ignoring the unemployment rate, focusing on non-farm job loss data developed by surveying large and intermediate size companies and leaving small businesses aside; betting heavily on a jobless recovery.

Q3 GDP will likely be revised from +3.5% to +2.5% when the preliminary Q3 GDP hits on Nov 24th; according to what we are seeing, states are taking as much as 40% of the government stimulus package to shore up their budgets---no shovel ready stimulus. All in, the restraint in the state and local government sector is estimated to drain a full percentage point from GDP growth in 2010 and more than fully offset the simulative efforts from Washington. The U.S. economy is more likely to post growth of little more than 2% next year, rather than the 5% currently being discounted by the equity market.

Tomorrow Oct housing starts and permits( +1.7% and +1.2% respectively); and Oct CPI (+0.2% overall and +0.1% for the core rate).

Equities and rate markets marked time all day after a choppy volatile trade early this morning. Mortgage prices were strong yesterday until the Fed's Fisher threw cold water on the rally, saying he expects the spread between mortgages and treasuries to widen in the coming year. Technically the mortgage market is testing key longer term resistance at 102.01 for the Dec 4.5 FNMA coupon. The 10 yr note yield at 3.32% is just 5 basis points from it key and very strong resistance at 3.28%. Heavy lifting will be required to break those levels; likely a big sell-off in equities and given the current strength and optimism on equities not a likely scenario.

PRICES @ 4:00 PM

10 yr note: 100.13 +2/32 3.33% unch

5 yr note: 100.30 +2/32 2.17% -1 BP

2 Yr note: 100.14 unch 0.76% unch

30 yr bond: 102.01 +19/32 4.25% -3 BP

Libor Rates: 1 mo 0.236%; 3 mo 0.270%; 6 mo 0.506%; 1 yr 1.059%

30 yr FNMA 4.5 Dec: 101.26 -2/32 (-1/32 (0.03 bp) frm 9:30)

15 yr FNMA 4.0 Dec: 102.05 -3/32 (.09 bp) (-1/32 (.03 bp) frm 9:30)

30 yr GNMA 4.5 Dec: 101.31 -3/32 (.09 bp) (-2/32 (.06 bp) frm 9:30)

15 yr GNMA 4.0 Dec: 102.28 -3/32 (.09 bp) (-1/32 (.03 bp) frm 9:30)

Dollar/Yen: 89.28 +0.20 yen

Dollar/Euro: $1.4868 -$0.0101 (dollar stronger)

Gold Dec: $1141.70 +$2.50

Crude Oil Dec: $79.29 +$0.39

Goldman-Sachs

Commodity Index: 519.58 +1.71

DJIA: 10437.42 +30.46

NASDAQ: 2203.78 +5.93

S&P 500: 1110.32 +1.02