Yesterday was a little bit of a head fake. We had reason to be hopeful that our luck might be changing when the day started out but by mid-morning the bond markets started to take a turn for the worse. The selling was a consistent grind into the close where we did end up at 2.00% on the 10yr. So since last Thursday’s close we have gone from 1.84% to 2.00% in just 3 trading days.

Now I have lived thru worse but such sell-offs never get easy and this one has additional meaning because of the pivotal 2.00% psychological barrier. It has been painful and today it is not getting better as we are opening @ 2.02% but try and look at things with a little humor by realizing that A-Rod did have a much worse day yesterday. The big difference there is that he has a few hundred million reasons to get over his problems. So it is very apparent that the stock markets are determined to keep the rally going in-spite of a weak GDP report this morning that indicates our economy is not as strong as many thought. I get the feeling that the stock markets want to print a 14k Dow and will do it regardless of logic.

We are currently at 13,953 so a part of me wants to just get there because I expect a retreat from that milestone. At this time the bond markets & stock markets are playing off each other. It happens in such a orchestrated way from time to time and right now the bond markets are just getting beat-up because of this. We do have the Fed announcement at 2:15 today that is a culmination of their FOMC meeting. So we can only hope that they continue to be the gift that keeps on giving. There is nothing that is expected to be outside the box in their announcement but hopefully they say something that gets the bond buyers back.

We did have ADP report for January this morning which was pretty much shrugged off by the markets but worth mentioning because it is a prelude to Fridays NFP report. The ADP when factoring the December revisions came in as expected. So this does set the stage for Friday morning because the markets have no reason to not expect the consensus of +160k. Like we said yesterday it is going to be a big number because it will either validate this bond market sell-off or it will bring it into question. Let’s hope for the latter.

Last but not least we got the release of the Weekly Application Survey from the MBA. It showed an expected decline which you can bet your bottom dollar will only get worse next week. Here are the highlights:

• Mortgage applications were down 8.1%;
• The Refinance Index decreased 10%;
• The Purchase Index decreased 2%;
• The refinance share decreased to 79% for last week’s 82%;
• The conventional 30yr rate increased to 3.67% w/.42pts which is the highest since Sept ’12. This rate has increased in 6 of the last 7 weeks;
• The 30yr FHA rate increased to 3.48% w/.33pts;
• The 15yr rate increased to 2.95% w/.38pts;
• The 5/1 ARM decreased to 2.60% w/.33pts.

It is always a conflicting mindset when your professional life revolves around how low or high interest rates are. The reason being that in general terms bond yields are low when things are bad in the world and they are higher when the world is skipping along. So yes we in the origination world benefit when the world is suffering. And yes that at times is a little conflicting because you really do not want the world to be suffering but you also want a paycheck.

Well I guess we are fortunate that the world is so screwed up right now and providing us all with a sense of job security. As a result of this continued dysfunction surrounding the FC, the uncertainty is just putting tremendous pressure on bond yields as we now have grinded the 10yr down to 1.59%. Yes as originators we are benefiting as the MBA’s Weekly Application Survey has shown that we matched the lowest rates in the history of the survey for all products with the exception of ARMs. Here are the highlights of the report:

• Mortgage applications increased 4.5%
• The Refinance Index increased to 6%
• The Purchase Index increased .1%
• The refinance share of application rose to 83% from 81%
• The ARM share of applications actually declined even further to a meager 3%
• The average 30yr conventional rate was 3.52% w/.41pts
• The average 30yr FHA was 3.34% w/.62pts
• The average 15yr was 2.86% w/.27pts
• The average 5/1 ARM was 2.62% w/.40pts

So it is clear that our problematic world anchored by Washington is giving our business plenty of ammunition to succeed (aside from the excessive and convoluted regulations of course).

In addition to the news on the MBA Application Survey we did get the ADP Report this morning which is the precursor to the NFP report on Friday. The part of the ADP report that was noteworthy is that we lost 86k jobs as a result of Hurricane Sandy. Now of course this is specific for November. As anyone who needed a contractor to come to your home post-Sandy knows is that any payroll related reports should show job gains as result of the storm.

Therefore this decline is viewed as a temporary disruption to the report with a degree of normalcy returning to the report sometime in the early part of 2013. So as mentioned early this week, I do believe the next few payroll related reports will be received with some degree of indifference. Especially this Friday’s NFP Report that is expected to show a gain of 80K.

(Image courtesy of Chip Somodevilla/Chicago Tribune)

The markets are opening down as the ADP report came out a bit higher than expected. It showed a 163k increase when the consensus was 120k. For those that read this regularly know that I downplay the ADP number because it tends to have little in common with the succeeding NFP report.

However, what is does do is create expectations and now the expectation for Friday’s number is that it is higher than the 100k consensus. So even if the actual number is on the nose @ 100k the markets would probably view this as a weak number which would result in a negative reaction in stocks and positive one for bonds. Also what this higher than expected ADP number does is create a sense that the Fed could wait to roll out QE3. I will say that is a bit of a stretch because in a few hours we will find out soon enough what the Fed thinks with the release of the FOMC minutes @ 2:15. However, this is what traders grab on to in order to give themselves a chance to be one step ahead and make a few bucks.

Something worth mentioning happened yesterday which was the official release by Edward DeMarco who is the Acting Director of the Federal Housing Finance Agency(FHFA) on Obama’s proposed Home Affordable Modification Program Principal Reduction Alternative (HAMP PRA). You may recall from some older Market Updates when we reported on the Obama Administration putting pressure on DeMarco to approve some aggressive (some may say Socialist) measures to have the FHFA allow FNMA/FHLMC to implement Obama’s HAMP PRA.

The HAMP PRA plan by Obama would give FNMA/FHLMC the ability to give borrowers a principal pay-down which in the opinion of the Obama administration would help stem foreclosures. DeMarco strongly disagreed with this and in essence termed the program as a moral hazard. However he agreed to do a complete analysis on the cost/rewards of this politically driven program funded by the taxpayers. So his report came out yesterday and said, “ Given our multiple responsibilities to conserve the assets of Fannie Mae and Freddie Mac, maximize assistance to homeowners to avoid foreclosures, and minimize the expense of such assistance to taxpayers, FHFA concluded that HAMP PRA did not clearly improve foreclosure avoidance while reducing costs to taxpayers relative to the approaches in place today.”

This was not met with much acceptance from the Obama Administration as Treasury Secretary Geithner called for DeMarco to reconsider. Some interesting political theater that does affect our business. Also I am impressed with DeMarco for having the grapefruits to stick up for what he strongly believes in even if it does eventually cost him his job. If we had more people like him in Washington then maybe this country would get its financial house in order.

Finally the Weekly MBA Application Survey came out this morning. Here are the highlights:

• Mortgage applications increased .2%
• The Refinance Index increased .8%
• The Purchase Index decreased 2.0%
• The refinance share was 81% which is the highest since 1/20/12
• The average 30yr conventional rate was 3.75% w/.51pts
• The average 30yr FHA was 3.52% w/.55pts
• The average 15yr was 3.09% w/.49pts
• The average 5/1 ARM was 2.73% w/.41pts

I hope everyone had a happy and safe July 4th. Now for those of us who are working and feel like we were not invited to the big party, there are a few things going on in the financial markets over the next few days. To start we are opening up unchanged for the most part with the 10yr @ 1.62%. This is on the heels of what has been a good start to the week that was fueled by a weak ISM index which indicates slow economic growth. Now we restart the week with the ADP report which is and is not a precursor to the NFP report. It is because it gives economists an indication on whether their forecast is accurate and gives them a chance to revise but it also creates a degree of expectation in the markets for the subsequent NFP report.

However, it does not because the number tends to conflict with the actual NFP number which never really makes sense to me but that rant will be saved for another day when everyone is not so hung over. Anyway the report came in stronger than expected at +176k vs. the +105k consensus. There was also a slight revision for the May report of +3k from +133k to +136k. This is definitely strong and sets the stage up for higher expectations for tomorrow where the consensus is +100k. So if we come in below +75k I expect a decent but not earth-shattering bond rally. However if we see a strong number above 150-175k then we might see a jump into the 1.70ish% on the 10yr. But if we are in the 75k-150k range then the reaction might be as exciting as a wet firecracker. I do believe that any significant moves will be contained and even reversed in the following days as the focus shifts back to the EU which is really where this market is taking its lead. We will see @ 8:30 tomorrow…

We are also getting some rate cutting news. Relax it is nothing that is directly affecting us but it is interesting to note that the ECB (European Central Bank) and China have both lowered their benchmark interest rates. So there is effort out there to stimulate growth as it appears other central banks are doing what they can.

We also had the release of the MBA Weekly Application Survey. I am still waiting for our friends at the MBA to update their web site with the announcement (I guess they got invited to the big party as well) so our usual format will be a little different but I believe the message is the same. Here are the highlights:

• The Index is down 7.1%
• The Refinance Index is down 8.4%
• The Purchase Index is up .6%
• Gov’t Refi’s are down 21.5%
• Conventional Refi’s are down 4.7%

All-in-all this Survey does show a marked slowdown in mortgage applications. Thankfully we are bucking the trend. Keep up the good work.

(Image courtesy of Mike Keefe)

So here we are on the much anticipated NFP report day, which the markets were waiting on since the non-eventful FOMC statement. Well this is kind of like the movie Groundhog’s Day all over again. The number was a weak report (not as bad as last month) but relatively in-line with the consensus once you take into account the prior months revisions. This is what I had mentioned the other day as being the best scenario because it does not give the markets any real reasons to move aggressively in any one direction. So the markets should maintain a low yield/rate environment but I do not expect us to have any meaningful break out of what should be a tight trading range. All this points to what I believe is a healthy rate environment for the summer season so let’s hope that originations are strong.

Here are the highlights or low lights of the April payroll report:

• Payrolls rose 115k with consensus being +165k;
• Revisions to February and March added 53k jobs so if you factor that in it is pretty much dead on @ 168k;
• Private payrolls rose 130k with Gov’t jobs down 15k;
• The unemployment rate dropped to 8.1%  but that is misleading because it came at the expense of workers leaving the workforce as the participation rate dropped to 63.6% vs. 63.8%.

Bottom-line: This is weak and the markets will be looking for future economic data for further insight on what the Fed’s next move will be. The markets were dying for some direction from both the FOMC statement and this NFP report but got nothing. Therefore, like I already said, we should be in a tight range until we get more data on where our economy is going. Stagnation?? Perhaps.