San Diego Home Mortgage Blog

Looks like a choppy day ahead; we will continue to float rate locks to start but our finger is on the trigger based on the technicals but mortgages hit strong resistance yesterday.

Treasuries and mortgages opened weaker this morning after a strong rally yesterday for treasuries, taking the 10 yr note rate to its lowest in two months. At 8:00 the 10 yr -7/32, DJIA -16. At 8:30 the 10 yr -12/32 3.38% +5 BP, mortgage prices -8/32, DJIA -6. At 9:00 10 yr -12/32 3.38% +5 BP, mortgage prices -4/32 and the DJIA -13. At 9:30 the DJIA opened -26, 10 yr note -8/32 and mortgages at 9:30 -2/32.

Oct PPI out at 8:30, a good report for the inflation outlook. The overall PPI increased 0.3%, estimates were for +0.5%; the core excluding food and energy -0.6% against estimates of +0.1%. Yr/yr overall PPI +1.9%, the core yr/yr +0.7%; both lower than ion Sept. On the knee jerk the 10 yr recovered fro a moment then made new lows (price); mortgages tried to catch a bid but they too were printing new lows in the very early activity.

At 9:15 Oct industrial production and Factory usage (cap utilization); estimates were for +0.4% on production and 70.8% on factory usage. Production was up 0.1% while cap utilization at 70.7% about in line with estimates; cap utilization is the second highest this year, January being the best. Full capacity is generally considered at 80.0%.

Looking back to yesterday; mortgage markets were rock solid most of the day with double digit price gains, a few lenders re-priced about 2:00 reflecting the improvement from morning prices. Looked very strong until Dallas Fed Pres Fisher said he expected mortgage rates to widen over treasuries in the period ahead. That did it; heavy selling exploded in mortgages and all the gains were erased within 30 minutes. Later in the afternoon mortgages made another attempt to regain footing but going into the end of the day (5:00) mortgages once again were hit by selling leaving mortgage prices only 2/32 better than at 9:30 yesterday morning after being up 10/32 from morning pricing levels.

Fed officials haven't helped the bond market this morning. Three Fed officials including Bernanke repeatedly said there is no bubble building in the equity markets. Janet Yellen (SF), Bernanke and St Louis Fed Pres Poole were in unison sounding like stock market bulls and it hasn't sat well in the bond and mortgage markets. Always just slightly under the surface, concerns economic growth will force the Fed's hand even though Bernanke continues to insist US rates will remain low for a long time. Bernanke said “significant economic challenges remain,” with lending constrained and the jobless rate above 10 percent. Speaking in New York yesterday, he said U.S. asset prices aren’t out of line with underlying values, and central bank policy will ensure that the “dollar is strong.” “Jobs are likely to remain scarce for some time, keeping households cautious about spending,” he said. While payrolls will increase as the economy recovers, unemployment “likely will decline only slowly if economic growth remains moderate, as I expect.”

Another Fed official at 10:00; Jeffery Lacker, Richmond Fed Pres. Yesterday Fedsters stabbed the bond and mortgage markets in the heart with their comments. Lacker usually has a bomb or two to toss.

The economy has lost 15 million jobs so far; 876K jobs have been lost since July. Big numbers, the unemployment rate increased 0.4% from Sept to Oct to 10.2%. Banks still are reluctant to lend and remain vulnerable to further pressures. Yesterday Meredith Whitney, one of the premier bank analysts, said she thinks bank stocks are over-valued, causing bank stocks to slip on her comments. She added her name and reputation to the view of a double dip recession ahead; not looking for a re-test of the lows in the stock indexes but still a W on the economic recovery. Continued uncertainty, with the Fed cheer leading while many very reputable analysts are sounding bearish. The result for the bond market is an increase in volatility; rates at these low levels require continued verbal support, any comments to the contrary will set up selling keeping long term rates confined to tight ranges. In our view, unless consumers begin to spend the economic recovery will be slow and likely drag on through next year; bullish outlooks continue to ignore the fact that consumers account for 70% of GDP growth and concentrate on the idea the economy can recover as a jobless recovery.

The dollar better today against the euro and yen. Not really hindering equities so far.