Mixed Market

Monday, October 15, 2007

ECONOMIC DATA / NEWS

October’s Empire State Index doubled from last month, jumping from 14.7 to 28.8.  A burst of new orders was the catalyst for the major improvement.  The markets have not reacted as they normally would though (stock market gains and bond losses), for a couple of reasons.  First of all, there are several other things happening this morning that are having a greater influence on traders.  In addition, the Philly Fed Survey comes out on Thursday, and traders may want to wait for that report to determine if manufacturing improved on a more national scale, or if New York factories were the only ones who benefited from a surge in orders.

Now, let’s get into those other influences we just mentioned.  There have been more disappointing earnings reports this morning, leading to declines in the stock market.  There have been broad losses across many sectors, from retail to banking to aerospace.  The most significant of the day was Citigroup, who reported a 57 percent loss in profits in the 3^rd quarter.  As we know, the growing number of mortgage defaults has cut into profits and forced many lenders to write-down the value of their current loans.  However, the hits that banks have been taking will not last forever, because of how much they have tightened guidelines in an effort to prevent so many defaults in the future.  There could be hefty losses over the next two or three quarters though, if defaults remain as high as most people are predicting.

And Citigroup, along with Bank of America and JP Morgan Chase, plan to take bold steps to increase liquidity in the credit market and fix the situation sooner than later.  These three lenders are working on putting together a fund that would buy mortgage-backed securities of somewhere in the range of $80 - $100 billion.  That would free up money for other lenders who have not been able to unload these mortgages from their portfolios.  Aside from the fact that these banks could profit from bargain prices mortgage-backed securities in the long-run, they will be helping themselves out by preventing the value of these securities, which they already hold in the hundreds of billions from losing value.  They can then sell commercial paper, which is backed by various assets, including the mortgage-backed securities themselves, to maintain their own liquidity and stay competitive in the credit market.

Oil prices hit a new record high at 85.30 per gallon this morning.  This is probably one of the issues pinning down bond prices.  Inflation is not totally out of the picture yet, even though it has become much less of a threat lately.  But if prices do heat up again, the Fed will have a tough decision about rate cuts.

TECHNICAL ANALYSIS

The FNMA 30-year 6.0% is only down 3bp at 99.94.  Unfortunately, that is enough to put today’s candlestick below both the upward trend line, which had held for over three months, and the 50-day moving average.  The stochastics are in oversold territory, but they’re not showing any signs of turning upward yet.

Treasuries have been sneaking higher over the last week, ever since the big jump following the jobs report.  The 10-year yield made a brief appearance above 4.70%, but it is back to 4.69%, where it has spent a lot of time over the last two and a half days.  There is support at the 10-day moving average, but our major challenge is the 50-day moving average, currently at 4.60%.  It is going to take a string of weak economic reports to drop the yield below that line anytime soon.

Read more articles on our Mortgage News page, or view our entire Mortgage News Archive.

Mortgage News & More Info

Modesto mortgage news feed provided by Winchester Lending Group