Friday, July 30, 2010

Market Snapshot by Sigma Research by SC Mortgage Assoc

The bulls on the economic recovery have a huge hurdle to spin this morning; the advance Q2 GDP report at 8:30 showed the US economy grew at 2.4%, not much lower than 2.5% consensus. The devil however lurked in Q1; in the data released this morning Q1 was revised from +2.7% to +3.7%, the revision took markets by surprise and made the economic decline in Q2 that much worse. In 2009 GDP was revised from -2.4% to -2.6%; 2008 revised from +0.4% to unchanged and 2007 revised from +2.1% to +1.9%. Will the lowered GDP revisions finally wake up markets and media that unless consumers spend the economy will not grow? Or will this data be swept under again in favor of corporate earnings as the economic driver? How many times do markets need to be reminded that until consumers open up and spend the economy is not going to improve, and eventually those better than expected corporate earnings built on massive cost cutting will wane?

Most talking heads on CNBC after the data were already spinning the data better; it doesn't look as bad as the data reflects if one looks at the details according to a couple of analysts. Well, how bad does it need to be to drive home that until the housing sector bottoms and employment begins to improve consumers won't spend much and the economy will muddle along with little growth? The revisions today revised lower the growth in 2007, 2008, and 2009; 2010 won't be any different. Wealth has been peeled away like the skin on an onion, businesses are confused about all the crap coming from Washington on taxes, health care and FinRegs and not likely to hire. US wealth, to the surprise of Washington and Wall Street was in the home, that has eroded and will take more than a few years to recover. Even Bernanke in comments recently has been saying five to six years for full recovery.

On the initial reaction to the GDP data the rate markets rallied, taking the 10 yr note to 2.90%, 2 bp from its 2.88% low that has been tested twice in the last month. The key stock indexes dropped with DJIA running down 100 points; mortgage prices at 9:00 up 8/32 (.25 bp) on the day. At 9:30 the DJIA opened -85, the 10 yr +17/32 2.92% -7 bp and mortgage prices +9/32 (.28 bp).

More data at 9:45; the July Chicago purchasing managers index, expected at 56.0, was stronger at 62.3. New orders component at 64.6 frm 59.1, employment at 56.6 frm 54.2 and prices pd at 58.1 frm 61.9. A much better report from the mid-west manufacturing sector put a little initial support in the weak stock market but didn't have much impact on the interest rate sectors. Prior to the data the DJIA was off 100 points, it rebounded to -75 on the reaction.

One more data point at 9:55; the U. of Michigan consumer sentiment index. It dropped hard on the last outing, the forecasts this morning were for the index to firm a little to 67.0 frm 66.5; as reported the index increased to 67.8; the 12 month out expectation index increased to 66.0 frm 65.0. The slightly better indexes gave the equity market a bounce and stopped the bond market rally on the initial reaction.

The bellwether 10 yr note is working at its recent low yield at 2.88%, touched twice in the past month and failed to fall further. These low rates are likely going to be tough to crack; even the weak GDP data has not busted equities and unless that occurs the rate markets will have difficulty at these low rates. Be alert today for a potential reversal. Still bullish on rates and bearish on economic outlook but markets are resisting that view.


Economists Still Forecast Housing Growth in 2010

• From: BUILDER 2010
• Posted on: July 29, 2010 10:07:00 AM
Economists Still Forecast Housing Growth in 2010
Despite weakness in May and June, housing starts will increase 15% this year, according to a consensus of housing economists.
Boyce Thompson
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Economists may have pared their housing growth expectations for 2010 in the face of weak production following the expiration of housing tax credits at the end of April. But they are still calling for, on average, a 15% increase in housing starts this year based on the belief that employment prospects will brighten later in the year.
The 15% consensus increase, gleaned from the forecasts of six leading housing economists, is a far cry from the 20% to 50% surge in housing production that economists were calling for as the year began. Those predictions were based, among other factors, on the 20% acceleration of housing starts from January through October 2009.
The speed-up continued on pace through the first four months of 2010. But after the expiration of home buyer tax credits, which apparently pulled forward demand, housing starts slowed dramatically to a meager 549,000 seasonally adjusted rate in June. That's below the 554,000 homes started last year.
Slow job growth, weakness in the overall economy, and continued deflation in home prices have forced adjustments in forecasts. But housing economists remain very bullish about the industry's prospects later this year and into 2011.
Average forecast calls for a 15% increase in starts in 2010
2009 Starts 2010 Forecast Increase 2011 Forecast Increase from 2010
NAHB 554,000 632,000 14% 906,000 44%
IHS Global Insight 554,000 638,000 14% 962,000 51%
Freddie Mac 554,000 660,000 19% 1,000,000 52%
Wachovia 554,000 580,000 5% 850,000 47%
Moody's 554,000 672,000 21% 932,000 39%
Fannie Mae 554,000 648,000 17% 932,000 44%

The NAHB, for instance, expects a 14% increase in housing starts this year. Chief Economist David Crowe believes that housing construction "will slowly improve throughout the second half of this year and into next year, bolstered by continued low mortgage rates, affordable housing prices, and an improving jobs market."
In his latest economic note, Crowe put a positive spin on the June figures for total housing starts. First, he noted that single-family starts barely moved, "suggesting that they are at or near bottom." Second, he said the monthly numbers for multifamily activity, which are typically very volatile, don’t look so bad when adjusted for quarterly activity.
IHS Global Insight was one of the most optimistic forecasters at the beginning of the year, calling for a 49% increase in housing starts. Chief Economist Patrick Newport now expects only a 14% increase in 2010 to 638,000 starts, followed by big increases in 2011 (962,000, or 51%) and 2012 (1,347,000, or 40%).
"The key for housing going forward is job growth," says Newport, who expects the economy to add about 800,000 jobs in 2010, followed by 2.7 million, and 3.5 million increases in 2011 and 2012. Through June, the private sector had added 593,000 jobs, though employment remains 7.9 million below December 2007 levels, according to the U.S. Bureau of Labor Statistics.
"The household formation rate will pick up once job growth takes off," Newport says. "Increases in the household formation rate, in turn, will reduce the housing glut, and this will stimulate new construction."
Freddie Mac Chief Economist Frank Nothaft remains among the most optimistic of housing forecasters. He's still calling for a 19% increase in new home starts this year to 660,000. He believes that low mortgage rates, more affordable home prices, and an improving jobs outlook "should keep the trend in sales generally headed upwards toward year end and into 2011."
Nothaft also has one of the most bullish forecasts going forward. He projects that housing starts will rise to 1 million next year, 1.5 million in 2012, and 1.8 million in 2013.
By contrast, Wachovia’s Mark Vitner has emerged as one of the most bearish housing forecasters. He expects housing starts to eke out only a 5% gain this year, due to summer weakness, though he’s calling for a big increase to 850,000 units next year. His forecast is contained in Wachovia's Monthly Outlook.
"We now expect residential construction outlays to fall 7.5% during the third quarter but then look for a legitimate recovery in home sales and new home construction to finally take hold later this year," says Wachovia's July edition.
The economists at Fannie Mae believe that job security will be the key to housing’s turnaround, even though housing is affordable now due to low mortgage rates and nominal housing prices. "As long as households are concerned about job security, affordability will not be the biggest driver of housing demand," write Chief Economist Doug Duncan and Orawin T. Velz in their July forecast.
Another drag, the Fannie Mae economists say, will come from homeowners who owe more on their mortgage than their house is worth. Five million homeowners had a mortgage with a loan-to-value of 125% or more in the first quarter of the year, according to First American CoreLogic.
Nevertheless, Fannie Mae still forecasts a 17% increase in housing starts this year to a 648,000 level, and a 44% increase to 932,000 starts next year.
PMI, the mortgage insurer, recently cut its 2010 new home sales forecast in half. Going into the year, the group was calling for a 19.9% increase in new home sales. Now, it only forecasts 9.4% growth. David Berson, the former chief economist at Fannie Mae, leads the forecast team at PMI.
"The expiration of the second tax credit has hit housing activity hard," PMI wrote in its latest newsletter, "after having drawn sales forward into March and April. Moreover, all of the near-term leading indicators of housing activity suggest no pickup in coming months (and perhaps even additional declines.)"
PMI is predicting a 48.7% increase in new-home sales next year, though.
Mark Zandi, chief economist at Moody’, said at our Housing Leadership Summit in May that housing starts should reach about 700,000 this year, then rise to 1 million in 2011, and about 1.7 million in 2012. He described 1.7 million housing starts as consistent with demographics in a normally functioning economy.
Zandi recently said on PBS that the housing market appears to be "double-dipping." He told PBS audiences that house prices will continue to decline this year as foreclosure sales and short sales pick up later in the year.
Nevertheless, Zandi has one of the more optimistic forecasts for growth this year. Moody's expects starts to finish 2010 21% higher than the year before.

Thursday, July 15, 2010

Market Snapshot by Sigma Research by SC Mortgage Assoc

A lot of data to think about this morning; weekly jobless claims at 8:30 were down 29K to 429K, continuing claims however increased by 247K, the 4 wk average fell to 455K from 467K. The decline in claims is attributed to less than normal factory closings this time of the year as auto companies normally close for two weeks for re-tooling.The decline in claims was expected at -9K. Likely now will take a week or two to get a real handle on unemployment claims.

More at 8:30; June PPI was expected to decline 0.1% but fell 0.5%; when food and energy are extracted PPI was up 0.1% in line with estimates. No inflation so not much interest in the recent inflation gauges, tomorrow we will see the consumer price index.

And finally at 8:30 the NY Empire State manufacturing index got the most attention of the three 8:30 releases. The overall index was expected to decline to 18.0 frm 19.57 in June, it fell to 5.08. The guts of the rep[ort were also weaker than thought; new orders index fell to 10.3 frm 17.53, employment index fell to 7.94 from 12.35 and the prices pd component fell to 25.4 frm 27.16. The report implied manufacturing is still increasing but at a pace that is well below normal for a recovery. (readings above zero is considered expansion)

At 9:15 June industrial production, expected to have declined 0.2%, was reported up 0.1%. June factory usage expected at 74.0% hit unchanged from May at 74.1%. Not much reaction to the two reports as markets awaited the final data point this morning at 10:00.

Ahead of the 10:00 release of the Philly Fed business index the DJIA opened -12, the 10 yr note at 9:30 +5/32 at 3.03% -2 BP and mortgage prices +7/32 (.22 bp).

At 10:00 the key Philly Fed business index, expected to have increased to 12.0 frm 8.0 in June, fell to 5.0. New orders fell to under zero (contraction) to -4.3 frm 9.0 in June, employment however increased to +4.0 frm -1.5 in June, prices actually increased to 13.1 frm 10.0. (indexes over zero are considered expansion, under zero contraction)

The dollar is weakening against the euro and yen this morning adding to the negative action in the stock markets and supporting the bond and mortgage markets. Technically, as we noted yesterday, the bond and mortgage markets tested and held key levels on Tuesday after the correctional increase in rates last week. The stock indexes also worked on their resistance levels and were unable so far to push through. Manufacturing data this morning on the NY Empire and the Philly Fed confirm manufacturing slowed in July. Manufacturing has been the only sector that has been a little positive recently and is now slowing.

Friday, July 2, 2010

Market Snapshot by Sigma Research

The headline this evening in the newspapers will be that the unemployment rate declined from 9.7% in May to 9.5% in June; the sub-text however isn't that cheery, the labor force decreased by 652K. Non-farm jobs declined 125K about what was expected, 225K jobs were cut from the census workers while private jobs increased less than estimates--up 83K against estimates of +112K. Revisions in May and June added an additional 25K non-farm jobs. Manufacturing jobs increased 9K but were expected up 25K; it has been all manufacturing that has driven earnings recently, now that sector is showing signs of weakening. Yesterday's June ISM manufacturing index declined to the lowest in months. The cuts in census workers still leaves 339K temps working on the census. Most of the increases in jobs came in education and health services, transportation and leisure and hospitality. June average hourly earnings declined 0.1%, the first decline in months implying continued weakness in the job sector. The report showed that 14.6 mil are unemployed.

"Since January, 2008, the seasonally adjusted average change in employment per firm has been negative in every month, with a seasonally adjusted loss of 0.3 workers per firm reported in June for the prior three month period. Most firms did not change employment, 5% (down 3 points from May) increased average employment by 3.4 employees, but 15% (down 5 points) reduced their workforces by an average of 3.3. “Job creation” still hasn’t crossed the 0 line in the small business sector. Government (including health care and education) and manufacturing (a large firm activity) has been providing what few jobs are created, weak given the magnitude of employment loss during the recession. And now the elimination of temporary Census jobs will make the picture look more bleak, although more accurate. A few more private sector jobs is not enough, we need 225,000 every month for 3 years to re-employ 8 million workers who lost their jobs and another 125,000 a month to keep up with population growth." frm National Federation of Independent Business June Survey

One hour after the release of the June employment data the markets were still trying to get their collective hands around it. The stock indexes and the treasury and mortgage markets were churning back and forth. The employment report overall was not good in terms of handicapping the economic recovery. Employment isn't likely to pick up to the pace necessary to expand the recovery in any significant way. The unemployment rate is not likely to decline, but to increase as the discouraged workers that left the job search to sit and collect unemployment will have to find some work with unemployment compensation ending for thousands every month.

How much of the weak employment report was already discounted in the decline in stocks and decline in interest rates? The initial reaction to the employment data rallied the bond and mortgage markets with index selling in equities; but by 9:30 when the stock market opened +10, the 10 yr note -6/32 at 2.97% +2 bp and mortgage prices -6/32 (.15 bp). The holiday weekend will influence markets today. As we have mentioned, the bond and mortgage markets are overbought technically and the stock market is oversold momentarily. The trends are well in tact but we expect a pause in both markets' direction. We call your attention that the FNMA 4.0 coupon has not closed below its 20 day moving average since April 15th; to test the average mortgage prices would have to decline .69 bp frm present levels.

At 10:00 May factory orders were down 1.4%; mkts were expecting -0.7% after being up 1.2% in April. More evidence that the recovery is slowing