Clift Mortgage

This Week

May 5th, 2014
Happy Cinco De Mayo!

This is a much lighter week for economic data compared to last week’s schedule but there are still some very important releases.

We have a large supply of 10 year and 30 year Treasuries that will be auctioned off as well as a lot of “talking Fed’s” this week with Fed Chair Janet Yellen testifying before Congress Tuesday and Wednesday. We will also hear from Evens, Stein, Tarullo and Bullard.

We have just a few economic reports that have the gravitas to actually move pricing. These include ISM Servicing, Non-Farm Productivity and Wholesale Inventories.

But once again….the “Teflon Bond Market” is all about overseas.

Across the pond: Shockingly, Russia and Ukraine did not magically become friends over the weekend and this will continue to provide fantastic support for your pricing. This morning, MBS are up even more due to weaker than expected economic data out of China.

ISM Non-Manufacturing (Servicing): The servicing sector (what you and I do) account for 2/3 of our economy. This report was better than expected (55.2 vs est of 54.1) and is the foremost reading since August. This is the type of data that can really hurt MBS pricing. It has moved pricing off of our early morning highs but international concern is simply providing too much support.

Mortgage backed securities (MBS) gained +46 basis points (BPS) from last Friday’s close which caused 30 year fixed mortgage rates to move lower from the prior week. The market saw the most advantageous rates on Friday and the highest rates on Tuesday.

As a refresher for you – when the economy and labor market expands, long term bonds suffer which is why you see interest rates rise when you see strong economic growth. And that is perfectly natural. You can’t have a growing economy AND low rates at the same time under normal circumstances. But that is exactly what we have right now. Last week’s economic data was very, very strong.

On the housing front, Pending Home Sales were better than expected (+3.4% vs estimates of +1.0%), and the Case-Shiller Home Price Index showed a 12.9% gain in home prices over the past year. On the labor front, ADP Private Payrolls were better than expected (220K vs estimates for 210K) and the Non-Farm Payrolls was much stronger than market forecasts (288K vs estimates for 210K) plus the past two months were revised upward. The Unemployment Rate dropped to 6.3% but this was largely due to the participation rate dropping as close to 1 million people said that they were not looking for work any longer.

On the manufacturing front, Chicago PMI was very robust (63.0 vs est of 56.7), and ISM Manufacturing was hot with a reading of 54.9 (vs estimates of 54.3). Our first look at the 1st QTR GDP was disappointing but this number will be revised two more times and the market is largely discounting the report due to the horrible weather that we had during that period.

The Federal Reserve Open Market Committee voted to reduce their monthly Treasury and Agency mortgage backed securities that means less demand and less support for long term bonds.

So….all of the above makes a wonderful text-book case for a huge sell off in bonds and therefore a big run up in rates. But that is not what happened. Why?

This is because of all of the headlines out of the Ukraine/Russia conflict. Headlines of pro-Russian “civilian” forces capturing administrative buildings, taking hostages, shooting down helicopters and our weak sanctions against Russia are doing nothing to deter them. This has foreign money flocking to U.S. bonds which is driving up demand and therefore…..driving down interest rates.

INFO THAT HITS US WHERE WE LIVE… It’s taken a bit of patience to see Pending Home Sales go up after months of stagnant activity. But go up it did in March. The Pending Home Sales index of contract signings shot up 3.4% for the month, its first gain in the last nine months. The National Association of Realtors (NAR) chief economist explained: “After a dismal winter, more buyers got an opportunity to look at homes last month and are beginning to make contract offers.”

Looking ahead, the NAR economist was upbeat: “Sales activity is expected to steadily pick up as more inventory reaches the market, and from ongoing job creation in the economy.” Some of that added inventory could be from sellers coming off the sidelines as home prices continue to recover. The Case-Shiller/S&P 500 index of home prices in 20 key metros went up 0.8% in February (seasonally-adjusted). This widely followed reading shows prices up 12.9% in the past year.

GOOD ECONOMICS, BAD GEOPOLITICS… It was another one of those paradoxical weeks where investors had to react to things going in both directions. Biggest of the economic uppers was the April jobs report, coming in with a way better than expected 288,000 new payrolls, the biggest gain in two years. But geopolitics sent stocks down, as the Ukraine crisis made Wall Streeters nervous. Although suffering a down day Friday, all three major market indexes finished ahead for the week.

The Unemployment Rate dropped to 6.3%, but this positive was actually a negative, caused by a record 806,000 people leaving the labor force in April. Also a downer was the Preliminary GDP reading for Q1, which showed the economy growing at a barely perceptible 0.1% rate. But ISM Manufacturing and Pending Home Sales beating expectations, while Personal Spending came in with its strongest reading since 2009, up 0.5% for the month. This shows that consumers are continuing to drive the 70% of the economy they support.

The week ended with the Dow up 0.9%, to 16513; the S&P 500 up 1.0%, to 1881; and the Nasdaq up 1.2%, to 4124.


Sean Clift

Sean Clift


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This material is not from HUD or FHA and has not been approved by HUD or any government agency. Equal Housing Opportunity Lender

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