July 6th, 2011 6:15 PM by Lehel S.
Treasuries and mortgages rallied yesterday after the panic moves last week that shot the 10 yr note up 37 basis points and mortgage rates up 26 basis points. The rally in stocks last week and the jump in interest rates came with both markets very over-extended and triggered by better economic reads on two manufacturing indexes (Chicago and ISM), the momentary debt crisis in Greece averted, the surprisingly weak demand for Treasury's $99B of auctions and the end of QE 2. Yesterday and so far this morning markets are better but the outlook remains questionable that interest rates will decline to the lows seen three weeks ago.
This morning the bond and mortgage markets continued to gain; at 9:00 the 10 yr note traded +9/32 at 3.09% and mortgage prices +5/32 (.15 bp). The US stock market following the declines inEurope in pre-market trading. Equity markets being hit some on China increasing rates again, the third tome this year to head off inflation that has increased; the rate up 25 basis points to 6.5%. Tomorrow the ECB will likely increase its base lending rate. Rates increasing globally except here in the US. In Europe Portugal, Ireland, Italy and Spain interest rates increasing after Moody's rated Portugal's debt to junk status. Europe's banks and those countries facing continued debt fears that won't likely be solved for a long time, possibly years. The ECB, IMF and the EU trying to hold it all together but fighting a huge headwind.
At 9:30 the DJIA opened slightly lower, down 10; the 10 yr note +5/32 3.10% -2 bp and mortgages at 9:30 +3/32 (.09 bp) frm yesterday's close.
Early this morning the weekly MBA mortgage applications report. Mortgage applications decreased 5.2% from one week earlier. The Refinance Index decreased 9.2% from the previous week. The Refinance Index has decreased for 3 consecutive weeks, reaching its lowest level since May 6, 2011. The seasonally adjusted Purchase Index increased 4.8% from one week earlier. The unadjusted Purchase Index was 11.7% higher than the same week one year ago. The four week moving average for the Market Index is down 0.5%. The four week moving average is up 0.8% for the seasonally adjusted Purchase Index, while this average is down 1.1% for the Refinance Index. The refinance share of mortgage activity decreased to 66.4% of total applications from 69.5% the previous week. The adjustable-rate mortgage (ARM) share of activity increased to 6.1% from 5.8%of total applications from the previous week. The average contract interest rate for 30-year fixed-rate mortgages increased to 4.69% from 4.46%, with points decreasing to 0.90 from 1.19 (including the origination fee) for 80% loans.This is the highest 30-year rate recorded in the survey since the middle of May 2011. The average contract interest rate for 15-year fixed-rate mortgages increased to 3.79% from 3.64%, with points decreasing to 0.88 from 1.11 (including the origination fee) for 80% loans. This is the highest 15-year rate recorded in the survey since the beginning of May 2011.
A few minutes ago at 10:00 the June ISM services sector index, expected at 54, was 53.3 frm 54.6; new orders component 53.6 frm 56.8, prices 60.9 frm 69.6 and employment 54.1 frm 54.0. A little weaker but not much, close to 50 level which is pivotal; under 50 is contraction, over is expansion. There was not much initial reaction to the report.
Markets still focused more on employment due out Friday and tomorrow the ADP non-farm private jobs estimate (+60K) and Friday's BLS estimate +80K on non-farm payrolls and +110K non-farm private jobs increase. The estimates are not strong, employment still soft, could get a bullish surprise when the BLS reports on Friday morning.