Weekly Review Here is the week’s review of the news that affected the financial markets during this past week. Monday… was one of those relatively lifeless trading days for both the bond and stock markets as investors showed some patience before the arrival of several significant economic reports scheduled for release later in the week. Second quarter GDP (Wednesday) and the July employment reports (Wednesday and Friday) are highlights of this week’s economic calendar while the FOMC will announce its latest policy decision on Wednesday. Furthermore, this is one of the busiest weeks for corporate earnings releases as close to 150 of the S&P 500 companies are scheduled to report their results. Bonds began the day near unchanged levels while the stock market got off to a weak start this morning with the S&P 500, the NASDAQ Composite, and the Dow Jones Industrial all pulling back from the open to probe support at their respective 25-day moving averages. The indexes then rebounded to recover their morning losses forming bullish hammer/Doji candlesticks in the process. This trading suggests the bulls are still in charge of the stock market, and this may weigh on the bond market to pressure prices a little lower and yields a little higher. Today’s economic news consisted of a worse than forecast Pending Home Sales report that came in at -1.1% actual vs. -0.8% expected. When considering May’s 6% gain in Pending Home Sales, June’s number wasn’t as bad as it first appears and the year-over-year sales level of -4.5% remains a little better than expectations of -5.0%. For the session, the yield on the 10-year Treasury increased 1.9 basis points to yield 2.49% while the FNMA 30-year 3.5% coupon bond lost 4.7 basis points to close at $102.36. For stocks, the Nasdaq Composite Index lost 4.65 points to close at 4,444.91. The Dow Jones Industrial Average gained 22.02 points to finish at 16,982.59. The S&P 500 Index added 0.57 points to end at 1,978.91. Tuesday… … the bond and stock markets both headed higher from the open, then stocks pulled back while bond prices advanced following news that the European Union voted to apply harsher economic sanctions against Russia. Stocks subsequently went on a roller-coaster ride, trading up and down into the close while bonds ended higher. Investors mostly seem to be taking a wait and see attitude into Wednesday’s FOMC interest rate and monetary policy decision. In economic news, the S&P/Case-Shiller home price index for May fell 1.5% for both the 20-city and the 10-city composite indexes. The 20-city composite rose 9.3% year-over-year, but was well below the consensus estimate calling for a gain of 10%. Year-over-year, both the 10-city and 20-city indexes recorded a gain of 1.1%, compared with a consensus estimate for month-over-month seasonally adjusted growth of 0.4%. This is the slowest growth rate since February 2013. The Conference Board reported Consumer Confidence jumped to a reading of 90.9 in July vs. a consensus estimate of 85.6. Within this overall report, the Present Situations Index increased to a reading of 88.3 from 86.3 in June. The Expectations Index, which is forward looking by six months, rose to 82.7 from Junes revised 86.4. Lynn Franco, Director of Economic Indicators for the Conference Board, stated “Consumer confidence increased for the third consecutive month and is now at its highest level since October 2007.” Treasury prices backed a little off of their session highs following the release. For the session, the yield on the 10-year Treasury traded 2.5 basis points lower to yield 2.46% while the FNMA 30-year 3.5% coupon bond gained 14.1 basis points to close at $102.50. For stocks, the Nasdaq Composite Index fell 2.21 points to end at 4,442.70. The Dow Jones Industrial Average dropped 70.48 points to close at 16,912.11. The S&P 500 Index lost 8.96 points to finish at 1,969.95. Wednesday… the bond market plunged on news of a far stronger than anticipated 2nd Quarter GDP report, and later in the session was further weighed down by the statement from the FOMC policy decision. The yield on the 10-year Treasury note jumped over the key 2.50% mark and traders will be closely watching to see if the yield closes above this level which has been an area of technical support since mid-July. The stock market opened higher on the GDP news but then turned “mixed” as traders worried that the favorable GDP news may prompt the Fed to conclude its loose monetary policy sooner than most currently believe. Second quarter GDP was reported to have jumped to an annual rate of 4.0%, far better than the consensus 3.2% growth rate forecast by economists. Additionally, the previously reported first quarter GDP economic contraction was revised upward to -2.1% from -2.9%. Digging into the GDP report, the second quarter growth was driven by a 2.5% increase in personal consumption expenditures and inventories. In other economic news, the MBA Mortgage Index for the week ended July 25 showed Applications decreasing 2.2% from the prior week with the Refinance Index falling 4% from the prior week. The seasonally adjusted Purchase Index increased 0.2% from the week earlier. The average interest rate for 30-year fixed-rate mortgages with conforming loan balances remained unchanged at 4.33 percent, with points increasing to 0.24 from 0.23 for 80% loan-to-value ratio (LTV) loans. The ADP Employment report revealed a 218,000 increase in private sector payrolls for July. This was roughly in-line with the consensus estimate of 215,000 and shouldn’t change payroll expectations ahead of Fridays official Labor Department nonfarm payrolls report. The FOMC members voted 9-to-1 to keep short-term interest rates unchanged at 0%-0.25% and to cut another $10 billion from its monthly bond purchases. None of this was unexpected, but the FOMC recognized the economy was strengthening and inflation was closing in on the Feds target of about 2%. The FOMC also stated labor market conditions were improving, and this may foreshadow Friday’s Employment Situation Summary for July (Jobs Report). This afternoon’s FOMC news also asserted the Fed Governors saw household spending rising at a reasonable rate while the recovery in housing was still slow. Overall, there were few surprises in the FOMC statement although Fed watchers are getting a sense the Fed could move more quickly to raise interest rates than recently thought. At the close, the yield on the 10-year Treasury traded 9.8 basis points higher to yield 2.56% while the FNMA 30-year 3.5% coupon bond lost 59.4 basis points to close at $101.91. For stocks, the Nasdaq Composite Index advanced 20.20 points to end at 4,462.90. The Dow Jones Industrial Average dropped 31.75 points to close at 16,880.36. The S&P 500 Index gained 0.12 points to finish at 1,930.67. Thursday… the bond market slipped modestly lower while stocks plunged right from the open following a mixed bag of economic news and disappointing global corporate earnings news. An unexpectedly strong jump in the second quarter Employment Cost Index to 0.7% vs. a consensus estimate of 0.4% put an inflation scare into investors. The wages and salaries component of the index increased 0.6%, up from a 0.3% increase in the first quarter. The benefits spending component jumped 1.0% and is up 2.5% year-over-year. The 0.7% increase in employment costs was the quickest rise since 2008 and suggests higher inflation is on the way. This also renews fears the Federal Reserve will act to raise interest rates earlier than previously thought to get ahead of pending inflation. In other economic news, weekly Initial Jobless Claims increased to 302,000 from a downwardly revised 279,000. The consensus estimate was 310,000. Continuing Claims increased to 2.539 million from an upwardly revised 2.508 million. Jobless Claims have recently dropped into a new lower range around 300,000, and analysts believe this is a sign of improvement and balance in labor market conditions with monthly payroll growth near 300,000. In manufacturing, the Chicago Purchase Managers Index dipped significantly in July, falling to 52.6 from 62.6 in June. The consensus estimate called for a minor pullback to 61.8. The global economic news also weighed on financial markets. The Consumer Price Index in Europe was reported at 0.4% year-over-year in July vs. expectations of 0.5%, eliciting renewed fears about deflation. Argentina was reported to be in default on its bond payments (again). In Portugal, troubled bank Banco Espirito Santo reported a huge net loss for the first half of the year, erasing its capital reserve and cutting its stock price in half. For the session, the yield on the 10-year Treasury traded flat to yield 2.56% while the FNMA 30-year 3.5% coupon bond lost 4.7 basis points to close at $101.86. For stocks, the Nasdaq Composite Index fell 93.13 points to end at 4,369.77. The Dow Jones Industrial Average lost 317.06 points to close at 16,563.30. The S&P 500 Index traded 39.40 points lower to end at 1,930.67. Friday… mortgage backed securities and 10-year Treasuries moved sharply higher to erase most of their losses recorded over the past two sessions while equities continued their slide lower. Bonds rallied following a disappointing Employment Report while the stock market fell because investors remain worried about the possibility the Federal Reserve will raise interest rates earlier than originally thought. The specter of an interest rate hike is seldom viewed constructively by the stock market. In economic news, the Employment Report for July was weaker than forecast with the addition of 209,000 nonfarm payroll jobs vs. a consensus estimate of 220,000. The May and June jobs numbers were revised higher with June revised to 298,000 from 288,000 and May revised to 229,000 from 224,000. However, the Unemployment Rate for July rose to 6.2% from 6.1% in June while the U6 Unemployment Rate (unemployed + under-employed workers) increased to 12.2% from 12.1%. Average hourly earnings and average workweek were both unchanged at 0.0% and 34.5 hours respectively. The labor force participation rate was reported at 62.9%, up from 62.8% in June. The bottom line from this report is the labor market is nowhere near as strong as the initial jobless claims data suggests, and the economy is still stumbling along in a lethargic employment cycle. Inflation news was tame with the personal income and spending report for June showing income up 0.4%, spending up 0.4%, and core PCE prices up 0.1% vs. 0.2% expected. Those figures were all basically in-line with expectations and had no real impact on the market today because the personal income and spending data for June was already incorporated into the second quarter GDP report that was released on Wednesday. For Friday’s session, the yield on the 10-year Treasury declined 6.7 basis points to yield 2.49% while the FNMA 30-year 3.5% coupon bond gained 43.8 basis points to close at $102.30. For stocks, the Nasdaq Composite Index fell 16.88 points to end at 4,352.89. The Dow Jones Industrial Average dropped 70.64 points to close at 16,492.66. The S&P 500 Index fell 5.45 points to finish at 1,925.22. For the week, the FNMA 3.5% coupon bond lost 10.9 basis points to end at $102.30 while the 10-year Treasury yield increased 2.7 basis points to reach 2.49%. Stocks ended with the Dow Jones Industrial Average losing 467.91 points, the S&P 500 losing 53.12 points, and the NASDAQ Composite dropping 96.67 points. Year to date for 2014, the Dow Jones Industrial Average has lost 0.51%, the S&P 500 has gained 3.99%, and the NASDAQ Composite has gained 4.05%. The national average 30-year mortgage rate increased from 4.19% to 4.21% while 15-year mortgage rates held steady at 3.32%. FHA 30-year rates held steady at 3.75% and Jumbo 30-year rates rose from 4.03% to 4.04%. Mortgage Rate Forecast Technically, the FNMA 3.5% coupon bond ($102.30, +44 bp) rebounded on Friday from the 100-day moving average support level at $101.78 to test resistance at the 25-day and 50-day moving averages at $102.35. The bond briefly moved above the $102.35 mark before pulling back to finish the session 8 basis points below this resistance level. However, the bond managed to stay above the 38.2% Fibonacci retracement level at $102.12 and this now serves as closest support. Friday’s trading created a buy signal from a bullish Engulfing Lines candle pattern, and also from a “fast” stochastic crossover but failed to generate a positive crossover or buy signal from the more reliable “slow” stochastic oscillator. If the technical buy signals prove true, we should see a slight improvement in mortgage rates this coming week.
Posted on: Mon, 04 Aug 2014 14:29:03 +0000
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