I hate to start off the week on a bad note be unfortunately we are seeing some carry over from the selling last week. It is much of the same story but a strong retail sales number this morning did not help either. The market is still fixated on the story that the Fed is planning is ease their bond purchase program (QE). There was a Wall Street Journal report over the weekend regarding the subject but the reaction to the article was that it did not reveal anything new. So based upon what has yet to be communicated by the Fed, you can make the conclusion that the bond sell-off is a severe overreaction to a non-story. However, if the Fed has formally discussed a easing in QE behind the scenes then maybe there is something to this.

The good news is that we should see some clarification on this mystery because there will be a lot of Fed speeches taking place this week. I for one do think this sell-off is a over-reaction and mind you I am very careful when I say these things. For one I do not like being wrong and allowing everyone who reads this knowing I was wrong. Second, I do not like originators making lock decisions on my market opinion. However, I think most of you are smart enough to take my opinions with a grain of salt. But I just am not buying into this sell-off. Even if the Fed has discussed a plan to curtail QE, it would not happen for several months and it is not like the markets expect this to last forever. Also the markets are basing this on 1 strong NFP report which we have seen can be very different from month to month. Remember the story prior to this month’s NFP was that the Fed might increase their QE purchases. My how things have changed so quickly.

One point that is fact and that is that the Fed does not blink at any one report like traders do. They need more proof and 1 strong NFP report will not do it. Yes, it is a good start but to assume that the Fed will reverse course now is just plain stupid in my opinion. However the markets seem to think otherwise and this has resulted in a big jump in the 10yr to 1.92%. And when we get this close to 2.00% you start to think it may be around the corner. Like I said we get a lot of Fed-speak this week so we expect to know more of what the Fed is thinking. I certainly hope I am right and we get back into the 1.80-1.85% range. Regardless of what happens over the next few days this is yet another painful reminder of how quickly the US Treasury and mortgage markets will change once the Fed starts to exit. Like I have said on multiple occasions, it will not be pretty. It will be quick and painful. Sort of like that scene in “The 40yr Old Virgin” where the Steve Carell character is getting his chest waxed. Also I do not like what I have seen in mortgages since this story came out mid-last week. They have been getting beat up and that is expected when the thought of a buyer of the magnitude of the Fed may no longer be present. Like I said when this does become official and I do not think now is the time, get ready for a 4.5-5.0% par 30yr mortgage rate and a 3%-handle on the 10yr.

Happy May 1st! The summer is within reach and we all know what that means…selling in stocks. You bet. Forget about the Speedo and string bikinis for a second and think stock markets! There is an old stock market adage which I personally cannot stand because I hate all of them but the one for now is “sell in May and go away”. Now this is pretty self-explanatory but for those that have not had their morning coffee yet it means that it is time to sell stocks and take the summer off until we get to the “Santa Clause” rally right after Thanksgiving. Yes it all sounds so stupid but it is out there and a lot of people buy into this nonsense.

If only it was this easy to pick the market. Keep in mind that this is all worth mentioning to us as mortgage originators because weakness in the stocks markets tend to add support to the bond markets. So this adage is getting some love this morning thanks to a lower than expected print for the ADP Report. The consensus was +150k but it came in at +119k. The recent trend between the ADP and NFP is that they have come in similarly to the consensus expectations. Therefore given that the ADP was below consensus the expectation is that NFP will also come in below consensus which as of now is +155k. So as you expect stocks are down (sell in May…) and bonds are up with the 10yr at 1.64%. The 10yr is still trading in a tight range but we are obviously on the low end of that range right now. I get market technical’s from one of our trading partners and it indicates that the 10yr is currently at the resistance level. This means that sellers are expected to enter at this level which in essence provides a resistance in rates going lower. You see bond guys do not use flashy terms and adages like stock guys. They tend to go with direct and abrupt terms. Flashy was never a term used to describe the bond markets even though Michael Milken tried to change that culture in the 80’s but that did not work out too good for him.

So yes the stage is now set for a disappointing NFP number on Friday but before that we have the Fed statement at 2:00. We touched on what the markets would be looking for on Monday but after this weak ADP report and now an anticipated weak NFP report you start to wonder if the markets are expecting a shift to not when the Fed will stop its bond purchase’s but if they will expand it. This is what I am starting to hear and read. It just goes to show you how quickly this can change. I feel it was only a few weeks ago that I was writing about dissention within the Fed on a stop date. Finance is a very tricky thing given all the moving parts. Stay tuned at 2:00 but my gut tells me there will not be too much in their statement.

Last but not least we got the MBA’s Weekly Application Survey. Some interesting nuggets. Here are the highlights:

• Applications were up 1.8%
• The Refinance Index was up 3.0% and is at its highest level since the week ending January 18, 2013
• The Purchase Index decreased 1.4%
• The refinance share remained unchanged at 75% as did the ARM share at 4.0%
• The average 30yr conventional rate was 3.60% which is the lowest since Dec ’12 w/.30pts
• The average 30yr FHA was 3.34% w/.37pts
• The average 15yr was 2.84% which was its lowest rate since Dec ’12 w/.26pts
• The average 5/1 ARM was 2.55% w/.22pts

In the past few months the housing market in the US had a positive turning point, but even so, there is still a doubt among investors to get back fully into the business.

As an expert on the mortgage and housing market, Shah Tehrany was asked to share his professional opinion. He was featured once again on FoxBusiness, where he shares his belief that despite the improvements, the market is still facing some challenges that need to be addressed.

“There is still a lot of stalled inventory so there are a multitude of people out there who are incapable of making their mortgage payments or delinquent on their mortgages and that still has to be flushed out.”, says Shah Tehrany.

Furthermore, Tehrany is optimist that besides the current circumstances in the housing market, there are still great possibilities to apply and qualify for a mortgage.

“You can get 96.5% financing on a house, you could buy a $300,000 house with $10,000 down—that’s pretty good,” he says. “The lending is out there, it’s about consumers being smart and going to a good bank and understanding their preapproval process… evaluating their options and understanding their loan and what it’s going to cost them monthly.”

You can read the full article here.

Barring any meaningful change today in the bond markets laid back attitude, it looks as if we are going to end this week like we did the previous week which is in this very tight range. The good news is that we are currently on the lower end of this tight range with the 10yr @ 1.68%. Mortgages also continue to follow the trend with the occasional exception by GNMA’s(FHA). I mentioned this the other day but did not give more detail regarding the reason for this. The Bank of Japan is doing what our Federal Reserve is doing which is implementing central bank policy to keep interest rates as low as possible. They are doing it for different reason which is to combat deflation but the current result is the same. So Japanese investors that want to invest in bonds are unable to get yield. Therefore they are expected to look to the good ‘ole US of A in the form of GNMA securities. Now Japan has traditionally always been a big buyer of GNMA’s so this is nothing new. However they were curtailing their purchases recently but are now expected to return.

The problem with this is that there have been some mixed signals as to how much or even if they will be upping their purchases. This has caused the Gn/Fn swaps to be the only thing that has been moving lately. Currently there are not a lot of storylines in the bond markets and especially the mortgage markets right now so this may be getting more attention then it normally would. But the movement is justified given where a aggressive buyer could support this market to the point of outperforming other sectors.

While this week was as exciting as last night’s NFL draft, next week has the makings of some interesting days. We have a lot of economic numbers coming out leading up to the April NFP which comes out next Friday. It will set the tone for where this bond market is expected to go. This report will also be even more important because of what happened last month so all eyes will be glued to CNBC @ 8:30. We will get a opening act on Wednesday with the ADP report. I always look to that number with a grain of salt but I believe it will have more weight this month as traders look for any signs to get a better feel for the NFP report. I think a lot of these high priced Wall Street economists were a little embarrassed by last month’s performance because my 12yr old son would have came closer to some of those estimates. So I assume no one wants a repeat performance unless they want to be part of future month’s unemployed statistics.

One other note regarding unemployment figures. Last month we were at a 7.6% unemployment rate. Not good, right? How bad would things be in this country if we were at 27.2%? Well jump on a plane to Spain and you can see what that is like. I give those folks a lot of credit because as far as I know there is not daily mayhem in the streets. Something tells me that if we were at 27.2% I would be afraid to leave my house unarmed.

Have a good weekend.

(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.