The Weekly Rap! Friday Jan 4, 2013

The Dow is currently trading at 13,412 higher by 382 pts compared with last Friday.  The S&P 500 is also trading lower at 1,463.  Gold is trading at $1,640 an ounce, while oil futures at $92.40 a barrel.  Gas prices, (Regular in El Dorado Hills, Costco, AM/PM), are at $3.35/Gal.

Yields on 10-year Treasury notes, which move inversely to prices, are trading at 1.93%.  30-year Treasury Bond yields are trading at 3.13%.  The MBS (Mortgage Backed Security) FNMA 30-year fixed 3.0% coupon, containing 3.25-3.625% mortgages, pretty much the benchmark or how rate sheets are priced these days, is about 75% of the over-all production.  This security is currently at 103.83 having broken out of its current range.

Since October 4 We’ve been trading in a range of 104.13 to 105.53 hitting the low twice and the top twice.  Basically each percent change in the price of the security translates to the price (or points paid or credited) of the mortgage rate.  Think of anything above 100 as a credit.  The higher the number (price), the better the rate.

In economic news this week; The Mortgage Forgiveness Debt Relief Act of 2007, signed into law by President Bush, which enables struggling homeowners to avoid paying taxes on forgiven mortgage debt from short sales or loan modifications was extended through Congress’s fiscal-cliff deal this week. The tax break was scheduled to expire in the new year, but has been extended through 2013.

Manufacturing expanded in December after contracting slightly in November, according to the Institute for Supply Management (ISM) index. which rose to 50.7% from 49.5% in November. Readings over 50 indicate more manufacturers are expanding instead of contracting.  The ISM’s new-orders gauge was flat at 50.3% and the production index came in at 52.6%. The employment gauge, however, climbed 4.3 points to 52.7% to boost the overall ISM index. That’s the highest employment reading since September.  At least we’re moving in a positive direction.

The Fed Gods released the “minutes” from their last meeting and for the first time since the financial crisis started five years ago, may have made its first signal that its extraordinary loose monetary policy will start to get tougher.  The minutes show, the Gods are starting to say, enough is enough. Of the crowd that supported bond buys, a few said they should continue until the end of the year, and several said it could stop, or slow, well before then.

So does the Fed expect a big upturn in the economy, so that there just won’t be a need for more juice in the form of bond purchases?  I don’t think so, the alternative explanation is that the Fed just doesn’t think there’s much benefit to bond buys for the broader economy. The minutes say the program to buy MBS has been “effective” but also that the benefits are “uncertain” and that risks are growing as the balance sheet rises.  Keep in mind that everything the Fed has been buying (taking the security’s out of the market and thus causing its price to rise and rate to fall) will eventually have to be sold back into the market.  Not something I for one, am looking forward too.

To put it differently: the Fed thinks the economy isn’t that great and there’s very little inflation to worry about, but its primary program to improve the economy doesn’t do very much.  It’s a clear admission the Fed is running out of gun powder.  And that’s quite a shot it has fired to the markets. This is what is majorly affecting bond prices and causing rates to go higher. Markets trade more on rumors than on facts.

155,000 jobs were created last month and the unemployment rate was unchanged at 7.8%, suggesting the budget battle in Washington over the fiscal cliff didn’t do much damage to the economy.  The pace of hiring in December almost perfectly matched the level of job growth over the past two years. The U.S. has added an average of 153,000 jobs each month in both 2011 and 2012.

If you know anyone who can benefit from my services, please call me.  My greatest goal is to see clients and friends happy.  I guess that’s why I love providing mortgage financing.  It’s an immediate gratification when you can help someone purchase a home, or lower their payment on their existing home.

Sincerely,

Bill Bartok

Mortgage Advisor

NMLS # 445991

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