May 11th, 2011 3:58 PM by Lehel S.
Yesterday ended 8 straight days of improvement in the bond and mortgage markets, the 10 yr yield increased 5 bp and mortgages up 4 bp. This morning in early trading the 10 down 2/32 at 9:00 and mortgage prices down 3/32 (.09 bp). The 10 yr note driver for mortgages hit 3.14% the level hit in March and failed to break through for three days, the FNMA 4.0 coupon tested but couldn't break its 200 day moving average. Technical momentum oscillators have been in very overbought levels for 4 days. Unlikely the bullish longer term outlook will change but traders will be cautious here and prices may fall further.
At 8:30 the March international trade deficit was $48.18B, Feb deficit was $45.4B. The deficit was in line with forecasts and estimates, no reaction to it. High oil prices in March drove imports up eclipsing exports. Crude oil costs that surged above $100 a barrel for the first time in more than a year and a 9.4% drop in the dollar will probably keep driving up the cost of imports. The weaker dollar however will continue to support exports to emerging markets, China and India.
Mortgage applications increased 8.2% from one week earlier, according to data from the Mortgage Bankers Association’s Weekly Mortgage Applications Survey for the week ending May 6, 2011 on lower interest rates. The Market Composite Index, a measure of mortgage loan application volume, increased 8.2% on a seasonally adjusted basis from one week earlier. The Refinance Index increased 9.0% from the previous week, and is at its highest level since the week ending March 18, 2011. The seasonally adjusted Purchase Index increased 6.7% from one week earlier. The unadjusted Purchase Index increased 7.1% compared with the previous week and was 25.8% lower than the same week one year ago. The four week moving average for the seasonally adjusted Market Index is up 2.9%. The four week moving average is up 0.4% for the seasonally adjusted Purchase Index, while this average is up 4.3% for the Refinance Index. The refinance share of mortgage activity increased to 63.1% of total applications from 62.7% the previous week. The refinance share is at its highest level since the week ending March 25, 2011. The adjustable-rate mortgage (ARM) share of activity decreased to 6.5% from 6.7% of total applications from the previous week. The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.67% from 4.76%, with points increasing to 1.10 from 0.75 (including the origination fee) for 80% loans. The 30-year rate is at its lowest since December 2010. The average contract interest rate for 15-year fixed-rate mortgages decreased to 3.81% from 3.96%, with points increasing to 1.05 from 0.82 (including the origination fee) for 80% loans. The 15-year rate is at its lowest since November 2010.
At 9:30 the DJIA opened down 46 points pulling the 10 yr note back to unchanged and mortgages just .03 bp lower from yesterday's close. With equity markets starting weaker and the dollar stronger mortgages and treasuries have gotten a boost from earlier lower prices, but with the 10 yr auction this afternoon the rate markets will likely sit still this morning.
At 1:00 pm Treasury will auction $24B of 10 yr notes, the demand will be critical to hold rates at these levels. In the meantime we don't look fro any market improvements into the auction, this afternoon after 1:00 look for increased trade on auction results.
At 2:00 this afternoon Treasury will report the April budget data, estimates are for a monthly deficit of $60.0B.
The dollar is stronger against the euro this morning. Bank of England Governor Mervyn King said that inflation remains “uncomfortably high,” and officials signaled they may need to raise interest rates later this year even as the economy struggles to build momentum. Inflation across the world is persisting, putting pressure on central banks to withdraw stimulus and raise interest rates. In China, inflation held above 5 percent in April and lending exceeded analysts’ estimates, according to reports today. Germany’s rate jumped to 2.7 percent, more than initially estimated, separate data released today showed.
Crude oil rallied yesterday, this morning down $1.79 at 9:45; choppy as markets continue to assess demand against supply. Higher margin costs have eliminated some speculators that do not have deep pockets; volatility increase also keeps specs from aggressive trading.