Mortgage rates increase

Saturday, December 08, 2007

ECONOMIC DATA / NEWS

ADP’s job growth expectations were not even close, which happens way too often.  The rest of the data over the last couple of weeks gave more accurate indications that job growth was tepid at best last month.  There were only 94,000 jobs created.  Although that beats estimates by about 5000 – 10,000, it is considered a level that represents slower economic growth.  October’s payrolls were revised higher by just 4000, but, much more significantly, September’s number was revised lower by 48,000 to just 44,000 new jobs for that month.  So, when factoring in the revisions, there was a net gain of a mere 50,000 jobs.  You’re going to hear some reporters and anlysts calling it strong, simply because it beat economists’ forecasts.  You’ll also hear others call it weak, which is a much more perceptive characterization.  The main point to take away from this report is that it will likely lead to weaker retail sales this holiday season, and that might bring the economy one step closer to recession.

Furthermore, the initial reading from the University of Michigan sentiment index showed consumer confidence continuing to slide in December.  The result was 74.5 versus 76.1 last month.  All early indications have been that the holiday season is going to be a poor one for retailers.  Similar to last year, shoppers may have scooped up deals early, and there could be a lot less people out in the stores over the next three weeks.

As we mentioned in yesterday’s alert, the government has reached an agreement with lenders to freeze rate increases for adjustable rate mortgage holders for as long as five years.  This could affect over a million people, and it may allow many lenders to avoid some of the losses that they have previously estimated.  The program only applies to those borrowers who have been making consistent on time payments, but cannot afford to pay rate increases.  So, it will help many people, but there will still be numerous defaults from people who have already stopped paying their mortgages or can’t continue to make their payments even at current rates.

TECHNICAL ANALYSIS

Yesterday we talked about how strong downward momentum could potentially push FNMA 30-year 6.0% prices below the 10-day moving average.  Not only did they break this support, but prices actually gapped lower.  We’re now down 21bp at 101.25 and heading toward support at 101.12.  The stochastics have crossed downward sharply, so that would suggest that there are more price declines to come.

The 10-year Treasury yield has also turned on us.  The yield broke the downward trend line this morning, and so far it has tapped on 4.09%.  We do have resistance from the 25-day moving average just overhead, but the technicals are suggesting the yield could keep rising.  The stochastics crossed upward yesterday and are making their way out of overbought territory.

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