Friday August 20th, 2011 6:15 PM ET
By John Sauro
Can You Say Whiplash?
Whiplash is a good description of the recent activity in the financial markets. The stock market has logged its worst 4-week drop since March of 2009. Stocks accelerated their selloff to finish near session lows in light, choppy trading Friday as investors were reluctant to remain in the market ahead of a weekend, amid worries over a global recession in addition to the ongoing euro zone jitters.
Bonds prices and Mortgage rates have been the beneficiary of the concerns in the global economy and the selloff in stocks. The 10 Year Treasury yield plunged to a record low of 1.97% as the weekly 30-year mortgage tracked by Freddie Mac hit a low not seen in over 50 years. At one point the 30 year conforming fixed rate was priced at 4 percent.
After a wild week of trading, Mortgage Bonds hit a ceiling of resistance at the $101.75 level to settle the week at $101.44. The charts are showing a “Bearish Double Top Reversal”, a good reason for my bias toward locking into mortgage rates.
If the stock market reverses, it’s possible much of the gains in Bonds would evaporate pushing mortgage rates higher.
Inflation numbers and expectations will help to determine the direction of interest rates. It’s important to pay close attention to incoming inflation numbers and expectations - as in order for Mortgage Bonds, the 10-year Note and the 30-year Bond are to go higher - inflation expectations and numbers must level off. Otherwise Bond prices will have to move lower over time, pushing mortgage rates higher.
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Economic News
Home prices rose 1% in May compared to April, and 16 of 20 metropolitan areas tracked by the Standard & Poor's/Case-Shiller house price index registered monthly price gains.
The Mortgage Bankers Association's weekly mortgage applications survey for the week ending Aug. 12 noted its market composite index – a measure of mortgage loan applications – grew 4.1% on a seasonally adjusted basis, while the same index increased 3.6% on an unadjusted basis.
The Wall Street Journal said that Fannie Mae is paying $500 million to buy $73 billion worth of servicing rights from the wobbly Bank of America. Since Fannie is a ward of the Treasury that means the $500 million (more or less) is coming from – guess who– Taxpayers.
July Housing Starts Off 1.5%, Less Than Expected; Permits Down 3.2%,
Lower rates and more liquidity will not help this economy further. There is plenty of money to lend, but the "velocity of money", the rate at which money is spent or lent, is as Fed President Richard Fisher said, "in a coma" …meaning that everyone is neither spending nor lending.
Gold hit a Record $1,877 an ounce on Friday, highlighting the ongoing panic buying over the debt crisis. Analysts believe a correction of 8 percent is likely as prices may be overblown due to the debt crisis.
Jobless claims up to 408,000
Initial jobless claims increased 2.2% last week, climbing back over 400,000.
The Labor Department said the seasonally adjusted figure of actual initial
claims for the week ended Aug. 13 rose by 9,000 to 408,000 from 399,000 the
previous week, which was revised upward 4,000. Analysts surveyed by Econoday
expected 400,000 new jobless.
Inflation Surging:
Producer Price Index Gains 0.4%; Up 0.2 % ex-Food and Energy