The Week in Review

MONDAY, June 7th

Consumer credit increased by $1.0 billion in April as revolving credit balance like credit cards fell $8.5 billion and non-revolving debt like auto loans increased by $9.5 billion. That is consistent with a surge in auto and truck sales in March. Declines in revolving credit balances are not expected to ease anytime soon as consumers continue to unwind household debt load.

TUESDAY, June 8th

The National Federation of Independent Business' small business optimism index increased 1.6 points to 92.2 in May in its highest reading since September 2008 before the financial crisis and credit crunch. The index remains at recessionary levels however, with businesses putting off hiring until there is a more rapid pick-up in economic activity.

WEDNESDAY, June 9th

The MBA mortgage applications index fell 12.2% to 560.9% for the week ending June 4. The purchase index fell 5.7% while the refinance index dropped 14.3%. Mortgage application activity has fluctuated within a relatively narrow range for the past 10 months and remains near the middle of that range reflecting in large part sustained and historically low mortgage interest rates.

The Fed's survey of economic conditions called the beige book showed that economic activity increased modestly across all 12 Fed banking districts in April and May, since the last report was compiled. Housing demand received a boost from the homebuyer tax credit though commercial real estate was still quite weak in most areas. Consumer and business spending strengthened as labor markets improved. On the inflation front prices were described as largely stable. Slow economic improvement combined with low inflation suggests the Fed will hold monetary policy steady for the foreseeable future.

THURSDAY, June 10th

Jobless claims fell 3k to 456k for the week ending June 5. The level of claims remains elevated and declines in the past three weeks have been only marginal indicating stable but not improving labor market conditions. Job losses continue amid sluggish hiring activity.

The federal government ran a $135.9 billion budget deficit in May compared to a $189.7 billion deficit in May one year ago. For the first eight months of fiscal year 2010, the cumulative budget deficit totaled $935.6 billion vs. a $992.0 billion budget shortfall for the same period in FY 2009. The budget deficit has deteriorated sharply in the last two years mainly due to massive increases in government spending. The OMB is projecting another record deficit of $1.556 trillion again this year.

The international trade deficit on goods and services widened to $40.3 billion in April from a trade gap of $40.0 billion in March. Both imports and exports declined slightly on the month but not by enough to reverse a modest upward trend. Trade activity seems to have stalled in April and will not likely contribute and could possibly subtract from second quarter GDP.

FRIDAY, June 11th

Retail sales fell 1.2% in May compared to expectations for a 0.2% increase. The decline was led by a 9.3% drop in sales at building supply stores, though sales at gas stations, auto dealerships and apparel stores were also weak. The sharp decline last month follows eight consecutive months of gains indicating perhaps that the recovery is losing steam. Nevertheless, retail sales are up 6.9% over May of last year.

Consumer sentiment increased to 75.5% in the first part of June from a reading of 73.6% in May. This was the highest level of sentiment since January 2008. Consumer ratings of current conditions and their expectations both rose in the mid-month period. While not fully recovered because of remaining economic uncertainties, sentiment does continue to improve as the economy moves out of recession.

The Brilliant Alan Keyes on Barack Obama A Radical Communist

This Week in the News

This week brings us the release of only four pieces of data for the markets to digest. The most important news will be posted late in the week, so we may see the most movement in rates during those days. The first part of the week will likely be driven by stock market gains or losses.

There is no relevant data scheduled for release tomorrow or Tuesday. The first report comes Wednesday afternoon when the Federal Reserve will release its Beige Book. This data details economic conditions throughout the U.S. by region. It is relied upon heavily by the Federal Reserve to determine monetary policy during their FOMC meetings. If it shows surprisingly softer economic activity, the bond market may thrive and mortgage rates could drop shortly after the 2:00 PM ET release. If it reveals signs of inflation growing, we could see mortgage rates revise higher Wednesday afternoon.

April's Goods and Services Trade Balance report will be posted early Thursday morning. This data gives us the size of the U.S. trade deficit and will be released at 8:30 AM ET. It isn't likely to cause much movement in the markets or mortgage rates, but nevertheless forecasters are expecting to see a $41.2 billion deficit.

May's Retail Sales data will be released early Friday morning. This very important report measures consumer spending, which is highly relevant to the bond market because consumer spending makes up two-thirds of the U.S. economy. Analysts are expecting to see that sales rose 0.3% last month. A smaller than expected rise in sales would be good news for the bond market and could lead to lower mortgage rates Friday.

The last report of the week is June's preliminary reading to the University of Michigan Index of Consumer Sentiment late Friday morning. This index measures consumer willingness to spend and usually has a moderate impact on the financial markets. It is expected to show a reading of 74.8. A smaller than expected reading would be considered good news for bonds, but since this report is only moderately important it likely will not influence mortgage rates considerably.

Also worth noting are two relevant Treasury auctions scheduled for this week. The 10-year Treasury Note sale is scheduled for Wednesday while the 30-year Bond sale will be held Thursday. Results of both auctions will be posted at 1:00 PM ET on the sale days. If investor demand was high, we may see bonds rally during afternoon trading, however, weak demand could lead to selling and an increase to mortgage rates.

Overall, it likely is going to be a fairly busy week for the financial markets, but the most action will probably come in the latter days. I think that Friday will be the single most important day of the week, but as we have seen over the past couple of weeks, we don't need significant news from economic reports for the markets to move heavily and mortgage rates to change. Accordingly, this would be a very good week to maintain fairly constant contact with your mortgage professional.

Mortgage Rates drop

The average rate for a 30-year fixed-rate mortgage remained near lows last seen in December of 2009 as it continued its slide, the Freddie Mac Primary Mortgage Market Survey for the week ended May 27 found.

Mortgage rates at a near 50 year low.

Today rates are near the lowest level in 50 years . As existing home sales show a big jump in sales.

So is it time to buy a house?

As it turns out, the financial trouble in Europe the past few weeks, caused by worries about the ability of certain countries to pay off their debts, is pushing investors to put their money into comparatively safe U.S. Treasury Bonds.

Basically, investors think America is better positioned to pay back its debts over time than European countries. Since the rates on those bonds, which drop as the need to entice investors to buy our debt drops, are connected to mortgage rates, those drop at the same time.

"Whenever Treasury bonds come down, so do mortgage rates," stated by Diane Swonk, Chief Economist at Mesirow Financial.

Yet, for months, homeowners have been told higher mortgage rates were coming because of the trillions of dollars in federal help, and homebuyer tax credits were coming to an end.

Economists say those efforts appeared to have an effect on the housing market.

Sales of previously-owned homes rose 7.6 percent in April to a seasonally-adjusted annual rate of 5.77 million, the National Association of Realtors said Monday.

That increase led to a rise in home prices as the median price for a new home rose to $173,100, up 4 percent from a year ago.

Will you Get a Loan?

Even though rates are dropping, lenders, who just five years ago could not give mortgages away fast enough, have stiffened lending standards.

"It doesn't make it any easier to get a mortgage, but if you're in the market already, and you can qualify for a mortgage, you're going to get it a lot cheaper now than you did just a few weeks ago," said Swonk.

The good news is that even a small drop in mortgage interest rates can add up quickly. If you take a home valued at $400,000 with a 30-year fixed-rate mortgage, a one-point decline in your mortgage rate can cut about $200 off what you pay ever month.

Economists are hopeful the month-to-month jump in existing home sales might be sustained by this unexpected boost driven by worried overseas investors helping to bring mortgage rates down.

More Market News

The $8,000 and $6,500 homebuyer tax credits went out—to use poet T.S. Elliot's phrase—not with a bang but with a whimper. The applications index for purchase money mortgages managed to climb to 257, thankfully, but if you look at the history of this Mortgage Bankers Association index, you find that it's spent a good deal of time above 1,000…and 250 is very, very small potatoes.

So the tax credits didn't do all that much for us this time around, though every little bit helps. We will now have to start relying on genuine demand, rather than gimmicks, to bring in homebuyers and financers. The big problem, as I see it, is that we need a bit of confidence in the economic recovery if consumers are to feel good about buying a home. And we don't have that yet, in spite of slowly improving jobs figures and consumer purchases.

Last week provides a case in point. We began the week with the DJIA reeling from fears about the debt situation in Europe. Then, on Monday, the stock and credit markets were frozen in place as concerns that Treasury auctions might go poorly, based on the slightly weak auction of 5-year Treasury Inflation-Protected Securities.

On Tuesday, the DJIA plunged 1.9% on news that Standard & Poor's had demolished Greece's debt rating, sending the country's bonds to junk status, and also lopped two notches off of Portugal's debt rating. The only good news here was that the auction of 2-year T-bills benefited from the resulting global flight to quality.

On Wednesday, largely because the Fed reiterated that it plans to keep rates low and mumbled that the economic recovery seems to be faring slightly better, the DJIA regained 0.5%. But of course, the day's auction of 5-year notes resulted in slightly higher yields than expected, and the 10-year T-note climbed a bit to 3.778%.

Things looked up on Thursday, with a strong auction of 7-year notes, a large array of foreign investors participating. The DJIA climbed another 1.1%--which seems to be what it would like to do each day, left to its own devices—and the 10-year T-note giving very little ground.

And then Friday, a criminal investigation into the Goldman Sachs shenanigans was announced and the markets freaked. The 10-year fell to 3.663%; the DJIA dropped 1.4%.

This week, we face not only the usual auction of 3-month and 6-month T-bills, but also a hefty auction of 1-year T-bills. The stress on the market just doesn't stop—and won't. One of these days, as we all know, we will watch a panic of some sort…hopefully a small beast that can be quickly tricked back into its cage.

This is a difficult gauntlet for a weak recovery to have to run. It suggests that, though it is commonly agreed that interest rates are on the rise from here forward, the rise will be—at the least—slow, choppy and often unpredictable. Low interest rates, indeed, are one of the benefits of all this sound and fury. But I, at this point, would surely settle for slightly higher rates if they resulted from a firming recovery and real estate market.

Weekly Market Preview

Last Week; treasuries and mortgages had a good week; the 10 yr yield fell 16 basis points and mortgages down 12 basis points. Most of the week markets focused on the debt issues in the European Union led by the cliff-hanging balancing on Greece's potential sovereign debt defaults. It took weeks and down grades on the Greek debt by S&P but over the weekend the EU and IMF did come up with $146B in funds to dodge the immediate default concerns. Greece had to agree to spending cuts that were quite severe as a requirement for the "loan". Last week's economic data, the few there was, were generally indicative of recovery. Key stock indexes ended the week lower even with better reports from the Chicago manufacturing report covering the mid-west and another decline in unemployment filings. Equities suffered last week on the Greek debt problems. The FOMC meeting concluded with continued comments that the Fed will interest rates low for a lot longer. Treasury sold $118B in 2 yr, 5 yr and 7 yr notes, of the three auction the 7 yr note on Thursday was the strongest as the Fed continues to confirm that inflation is not on the radar.
 
This Week; Treasury borrowing but the economic data will provide economists a lot of ammo to think about. Monday has March personal income and spending and the April ISM manufacturing report. There key data points each day this week, but the big one markets will be setting up for comes on Friday with the March employment report. The early estimates are for non-farm payrolls to have increased about 200K with the unemployment rate unchanged at 9.7%. With the Greek loan worked out over the weekend, the stock market should have a decent day on Monday and the bond and mortgage markets should start weaker as safe haven trades are unwound. Interest rate markets will likely continue in their respective narrow and directionless pattern with not much change by the end of the week. We  do expect some increased volatility early this week based on economic releases and continuing news coming from the EU over the debt problems in Europe; Spain, Portugal and Ireland and Greece are still unresolved in the longer run. The Goldman-Sachs civil suit and now a possible criminal charge will also get attention from investors and traders this week.