The Weekly Rap! Friday Apr 12, 2013

The Dow last traded at 14,830 about 300 pts higher than last Friday.  The S&P 500 is trading at 1,584.  Gold is trading lower at $1,501 an ounce, while oil futures at $91.56 a barrel.  Gas prices, (Regular in El Dorado Hills, Costco, AM/PM), are at $3.67/Gal.

Yields on 10-year Treasury notes, which move inversely to prices, last traded at 1.72%.  30-year Treasury Bond yields last traded at 2.92%.  Mortgage Bonds have broken out of the downward trend (higher rates) they’ve been trading in since Dec 5, 2012 and are trying to establish a higher range (lower rates).  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 currently trading at 104.06 lower by about ½ point over last week (higher rates).  Basically each percent change in the price of the security translates to the price (or points paid or credited) of the mortgage rate.  The higher the number (price), the better the rate.

In economic news this week; the reader’s digest version is that the economy looks to be slowing again.  The Fed Gods are hinting at slowing their purchases of bonds, Retail sales is down, as well as inflation and consumer sentiment.

Ok, so I had to dig for this one.  What can I say; you’d be amazed at the indices and indicators that are out there for us and the economites to analyze. The March “small-business optimism” index of the National Federation of Independent Business fell 1.3 points to 89.5.  The biggest fall in the index came from a 5-point slide in “expect real sales higher,” followed by 4-point slides in both “plans to increase employment” and “plans to increase inventories.” The report is based on the responses of 759 randomly sampled small businesses in NFIB’s membership.  Not how’s that for an index?

So we all know by now that the Fed Gods have been buying bonds (treasuries and Mortgage-backed-securities) for quite a while now.  The question begs though; how does the Fed stop buying and effectively pumping cash into the market without totally throwing chaos into the markets and causing all hell to break loose?  Answer:  you leak the information slowly in the form of rumors, or in the case this week you release the minutes of the last Fed meeting with “hints” or vague adjectives like “few,” “some” and “several” of the Fed Gods were in favor of slowing the purchases.

The minutes of the March 19-20 meeting showed a wealth of opinion, from one member who wanted to slow bond purchases immediately to a few who suggest more bond purchases may have to be made should the economy strengthen.  A “few” favored slowing the purchases at midyear, with the program ending later in 2013.  Several others thought that if labor conditions improve as expected, the Fed could slow purchases “later in the year and stop them by year-end.”  But the Fed meeting came before the release of the weak March nonfarm payroll data and other signs that the economy was slowing, which would push back the time for any tapering

Consumers spent less on gas and most other stores in March, as retail sales posted the biggest decline in nine months.  The decline in sales, the biggest since last June, might be a sign that higher taxes and slower job creation are taking a bite out of the economy.  Retail sales in the U.S. fell 0.4% last month after a slightly revised 1.0% gain in February.  Sales for January were also revised to show a 0.1% drop instead of a 0.2% increase, suggesting that first-quarter growth might not be as strong as originally forecast. The U.S. has been estimated to have grown 3.0% in the first quarter.

Sales fell the sharpest at gasoline stations, down 2.2% in the month, as the price at the pump declined.  The average cost of regular gas fell from $3.72 a gallon to around $3.57 in March.  Lower gas prices are a good thing because it gives us more to spend on other items aside from basic necessities. Yet consumers also trimmed purchases at many other stores.  Sales fell 0.6% at auto dealers, 1.6% at electronics and appliance stores, 1.2% at general-merchandise outlets and 1.1% at department stores. Retail sales account for about one-third of consumer spending, the main engine of the economy.  They are a good proxy for how fast the U.S. is growing, though the data is prone to sharp revisions like what occurred in January.

Inflation at the wholesale level (Producer prices) fell 0.6% in March as energy costs retreated after a sharp gain in the prior month.  This is the biggest one-month drop in wholesale prices since last May. Energy prices fell 3.4% in March after a 3% gain in February. This offset a 0.8% rise in food prices. Excluding food and energy, core PPI rose 0.2% for the third-straight month. About a quarter of the increase came from prices for non-government aircraft.  Taken over 12 months, producer prices are up 1.1% in March, down from a 1.7% increase in February. This is the smallest year-over-year advance since last July.

A gauge of consumer sentiment (the University of Michigan-Thomson Reuters consumer-sentiment gauge), dropped to 72.3, the lowest result since July, in early April to the lowest level in nine months, led by gloomier expectations and views on current economic conditions. The sentiment gauge, which covers how consumers view their personal finances as well as business and buying conditions, averaged about 87 in the year before the start of the most recent recession. We watch sentiment data to get a feel for the direction of consumer spending.

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Bill Bartok

Mortgage Advisor  NMLS# 445991

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