Fannie Mae and Freddie Mac are no longer Government "Sponsored" Entities, but Government "Controlled" Entities. The following series of statements were made by Secretary Henry M. Paulson, Jr. on Treasury and Federal Housing Finance Agency Action to Protect Financial Markets and Taxpayers
Good morning. I’m joined here by Jim Lockhart, Director of the new independent regulator, the Federal Housing Finance Agency, FHFA.
In July, Congress granted the Treasury, the Federal Reserve and FHFA new authorities with respect to the GSEs, Fannie Mae and Freddie Mac. Since that time, we have closely monitored financial market and business conditions and have analyzed in great detail the current financial condition of the GSEs – including the ability of the GSEs to weather a variety of market conditions going forward. As a result of this work, we have determined that it is necessary to take action.
Since this difficult period for the GSEs began, I have clearly stated three critical objectives: providing stability to financial markets, supporting the availability of mortgage finance, and protecting taxpayers – both by minimizing the near term costs to the taxpayer and by setting policymakers on a course to resolve the systemic risk created by the inherent conflict in the GSE structure.
Based on what we have learned about these institutions over the last four weeks – including what we learned about their capital requirements – and given the condition of financial markets today, I concluded that it would not have been in the best interest of the taxpayers for Treasury to simply make an equity investment in these enterprises in their current form.
The four steps we are announcing today are the result of detailed and thorough collaboration between FHFA, the U.S. Treasury, and the Federal Reserve.
We examined all options available, and determined that this comprehensive and complementary set of actions best meets our three objectives of market stability, mortgage availability and taxpayer protection. Throughout this process we have been in close communication with the GSEs themselves. I have also consulted with Members of Congress from both parties and I appreciate their support as FHFA, the Federal Reserve and the Treasury have moved to address this difficult issue.
Before I turn to Jim to discuss the action he is taking today, let me make clear that these two institutions are unique. They operate solely in the mortgage market and are therefore more exposed than other financial institutions to the housing correction. Their statutory capital requirements are thin and poorly defined as compared to other institutions. Nothing about our actions today in any way reflects a changed view of the housing correction or of the strength of other U.S. financial institutions.
I support the Director’s decision as necessary and appropriate and had advised him that conservatorship was the only form in which I would commit taxpayer money to the GSEs.
I appreciate the productive cooperation we have received from the boards and the management of both GSEs. I attribute the need for today’s action primarily to the inherent conflict and flawed business model embedded in the GSE structure, and to the ongoing housing correction. GSE managements and their Boards are responsible for neither. New CEOs supported by new non-executive Chairmen have taken over management of the enterprises, and we hope and expect that the vast majority of key professionals will remain in their jobs. I am particularly pleased that the departing CEOs, Dan Mudd and Dick Syron, have agreed to stay on for a period to help with the transition.
I have long said that the housing correction poses the biggest risk to our economy. It is a drag on our economic growth, and at the heart of the turmoil and stress for our financial markets and financial institutions. Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner on housing. Therefore, the primary mission of these enterprises now will be to proactively work to increase the availability of mortgage finance, including by examining the guaranty fee structure with an eye toward mortgage affordability.
To promote stability in the secondary mortgage market and lower the cost of funding, the GSEs will modestly increase their MBS portfolios through the end of 2009. Then, to address systemic risk, in 2010 their portfolios will begin to be gradually reduced at the rate of 10 percent per year, largely through natural run off, eventually stabilizing at a lower, less risky size.
Treasury has taken three additional steps to complement FHFA’s decision to place both enterprises in conservatorship. First, Treasury and FHFA have established Preferred Stock Purchase Agreements, contractual agreements between the Treasury and the conserved entities. Under these agreements, Treasury will ensure that each company maintains a positive net worth. These agreements support market stability by providing additional security and clarity to GSE debt holders – senior and subordinated – and support mortgage availability by providing additional confidence to investors in GSE mortgage backed securities. This commitment will eliminate any mandatory triggering of receivership and will ensure that the conserved entities have the ability to fulfill their financial obligations. It is more efficient than a one-time equity injection, because it will be used only as needed and on terms that Treasury has set. With this agreement, Treasury receives senior preferred equity shares and warrants that protect taxpayers. Additionally, under the terms of the agreement, common and preferred shareholders bear losses ahead of the new government senior preferred shares.
These Preferred Stock Purchase Agreements were made necessary by the ambiguities in the GSE Congressional charters, which have been perceived to indicate government support for agency debt and guaranteed MBS. Our nation has tolerated these ambiguities for too long, and as a result GSE debt and MBS are held by central banks and investors throughout the United States and around the world who believe them to be virtually risk-free. Because the U.S. Government created these ambiguities, we have a responsibility to both avert and ultimately address the systemic risk now posed by the scale and breadth of the holdings of GSE debt and MBS.
Market discipline is best served when shareholders bear both the risk and the reward of their investment. While conservatorship does not eliminate the common stock, it does place common shareholders last in terms of claims on the assets of the enterprise.
Similarly, conservatorship does not eliminate the outstanding preferred stock, but does place preferred shareholders second, after the common shareholders, in absorbing losses. The federal banking agencies are assessing the exposures of banks and thrifts to Fannie Mae and Freddie Mac. The agencies believe that, while many institutions hold common or preferred shares of these two GSEs, only a limited number of smaller institutions have holdings that are significant compared to their capital.
The agencies encourage depository institutions to contact their primary federal regulator if they believe that losses on their holdings of Fannie Mae or Freddie Mac common or preferred shares, whether realized or unrealized, are likely to reduce their regulatory capital below “well capitalized." The banking agencies are prepared to work with the affected institutions to develop capital restoration plans consistent with the capital regulations.
Preferred stock investors should recognize that the GSEs are unlike any other financial institutions and consequently GSE preferred stocks are not a good proxy for financial institution preferred stock more broadly. By stabilizing the GSEs so they can better perform their mission, today’s action should accelerate stabilization in the housing market, ultimately benefiting financial institutions. The broader market for preferred stock issuance should continue to remain available for well-capitalized institutions.
The second step Treasury is taking today is the establishment of a new secured lending credit facility which will be available to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. Given the combination of actions we are taking, including the Preferred Share Purchase Agreements, we expect the GSEs to be in a stronger position to fund their regular business activities in the capital markets. This facility is intended to serve as an ultimate liquidity backstop, in essence, implementing the temporary liquidity backstop authority granted by Congress in July, and will be available until those authorities expire in December 2009.
Finally, to further support the availability of mortgage financing for millions of Americans, Treasury is initiating a temporary program to purchase GSE MBS. During this ongoing housing correction, the GSE portfolios have been constrained, both by their own capital situation and by regulatory efforts to address systemic risk. As the GSEs have grappled with their difficulties, we’ve seen mortgage rate spreads to Treasuries widen, making mortgages less affordable for homebuyers. While the GSEs are expected to moderately increase the size of their portfolios over the next 15 months through prudent mortgage purchases, complementary government efforts can aid mortgage affordability. Treasury will begin this new program later this month, investing in new GSE MBS. Additional purchases will be made as deemed appropriate. Given that Treasury can hold these securities to maturity, the spreads between Treasury issuances and GSE MBS indicate that there is no reason to expect taxpayer losses from this program, and, in fact, it could produce gains. This program will also expire with the Treasury’s temporary authorities in December 2009.
Together, this four part program is the best means of protecting our markets and the taxpayers from the systemic risk posed by the current financial condition of the GSEs. Because the GSEs are in conservatorship, they will no longer be managed with a strategy to maximize common shareholder returns, a strategy which historically encouraged risk-taking. The Preferred Stock Purchase Agreements minimize current cash outlays, and give taxpayers a large stake in the future value of these entities. In the end, the ultimate cost to the taxpayer will depend on the business results of the GSEs going forward. To that end, the steps we have taken to support the GSE debt and to support the mortgage market will together improve the housing market, the US economy and the GSEs’ business outlook.
Through the four actions we have taken today, FHFA and Treasury have acted on the responsibilities we have to protect the stability of the financial markets, including the mortgage market, and to protect the taxpayer to the maximum extent possible.
And let me make clear what today’s actions mean for Americans and their families. Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe. This turmoil would directly and negatively impact household wealth: from family budgets, to home values, to savings for college and retirement. A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance. And a failure would be harmful to economic growth and job creation. That is why we have taken these actions today.
While we expect these four steps to provide greater stability and certainty to market participants and provide long-term clarity to investors in GSE debt and MBS securities, our collective work is not complete. At the end of next year, the Treasury temporary authorities will expire, the GSE portfolios will begin to gradually run off, and the GSEs will begin to pay the government a fee to compensate taxpayers for the on-going support provided by the Preferred Stock Purchase Agreements. Together, these factors should give momentum and urgency to the reform cause. Policymakers must view this next period as a “time out” where we have stabilized the GSEs while we decide their future role and structure.
Because the GSEs are Congressionally-chartered, only Congress can address the inherent conflict of attempting to serve both shareholders and a public mission. The new Congress and the next Administration must decide what role government in general, and these entities in particular, should play in the housing market. There is a consensus today that these enterprises pose a systemic risk and they cannot continue in their current form. Government support needs to be either explicit or non-existent, and structured to resolve the conflict between public and private purposes. And policymakers must address the issue of systemic risk. I recognize that there are strong differences of opinion over the role of government in supporting housing, but under any course policymakers choose, there are ways to structure these entities in order to address market stability in the transition and limit systemic risk and conflict of purposes for the long-term. We will make a grave error if we don’t use this time out to permanently address the structural issues presented by the GSEs.
In the weeks to come, I will describe my views on long term reform. I look forward to engaging in that timely and necessary debate.
Look for additional releases over the next several days from Paulson and others to this and other GCE's matters. I would also expect announcements from the 4 major mortgage lending firms discussing hopefully business as usual or futher pullbacks on capacity or product depth.
Sunday, September 7, 2008
Monday, August 25, 2008
Fannie & Freddie: "To Regulate or Not to Regulate... that is the Question"
As I write this piece, the current stock prices for Fannie Mae (FNM) and Freddie Mac (FRE) are sitting just off their 60’ year lows at $5.20 and $3.28 respectively. There has been a plethora of talk, both on Wall Street and those around Capital Hill as to what exactly should and can be done with these Government Sponsored Entities (GSE's).
Here’s a question; Assuming these entities are “too big to fail” (or perhaps too important) which I believe they are, it begs to question who really benefits if these firms are not privatized.
My thoughts: Both of these companies have some of the largest lobbyist groups in the country. The non-balance sheet payrolls these firms have include very senior officials in both branches and on both major governmental parties. In fact the GSE's have some of the most impressive "paid" supporters of any industry.... and that’s pretty impressive considering the likes of the auto industry, oil, and others.
While the discussions may publicly revolve around the GSE’s ability to remain solvent or if necessary raise more capital to meet federal regulations as it relates to balance sheet ratio’s, a real challenge remains; Will the large number of people who receive a handout from these firms do the right thing, look themselves in the mirror and recognize the overwhelming benefits of taking these firms off of the national balance sheet or will greed and self interest prevail. Unfortunately, I believe we all quickly realized the answer to that question. So look for more shallow justification about the values and virtues of keeping the mission statement alive for Fannie and Freddie.
This week’s economic news:
Release Date & Time
Economic Indicator
Consensus
EstimateMy Analysis
Mon. Aug. 25, 10:00 a.m. ET
July Existing Home Sales
Up 0.8%
Certainly one month of data does not make a trend and no one is suggesting that the bottom has been reached in the housing sector – but if the consensus estimate is accurate, the July number may be a first small step in the right direction. Just kidding!!! This number is insignificant… most pundits are now in strong support of a lengthy recovery which may last till 2010.
Tue. Aug. 26, 10:00 a.m. ET
July New Home Sales
Down 1.3%
Most fixed income traders will take a pretty good look at this number. This data is expected to add one more hopeful sign to a growing number of signs that the worst of housing bubble may soon be behind us. While this is a narrow minded approach, the sales number that matches the forecast won’t likely influence the direction of mortgage interest rates much. A sales pace number showing a drop of 0.6% or less will probably put a little upward pressure on mortgage rates. My personal opinion is that the consensus estimate will likely prove to be too pessimistic this time around.
Tue. Aug. 26, 10:00 a.m. ET
Aug. Consumer Confidence
53.0 vs. last 51.9
Investors are always far more interested in what the consumer is actually doing -- than how they say they are feeling. Look for this data to have little, if any direct impact on the trend trajectory of mortgage interest rates today.
Tue. Aug. 26, 2:00 p.m. ET
Minutes of Aug. 4th & 5th Federal Open Market Committee meeting released
While this document will likely do little more than reinforce mortgage investors’ conviction that the Fed will not hike short-term interest rates anytime in the foreseeable future, it will provide for some guidance for Wednesday and Thursday and a low volume trading week in the equities.
Wed. Aug. 27, 8:30 a.m. ET
July Durable Goods Orders
+0.1% vs. last +0.8%
July orders probably eked out a small gain on an uptick in demand for aircraft and auto manufacturers response to increased calls for more fuel efficient vehicles. This data will likely do little more than take up space on this week’s calendar.
Wed. Aug. 27, 1:00 p.m. ET
Treasury auctions $31 bil. of 2-year notes
It likely will be very difficult for mortgage interest rates to move to notably lower levels in the face of the deluge of supply coming in from Uncle Sam over the next two days.
Thurs. Aug. 28, 8:30 a.m. ET
1st revision to Q2 Gross Domestic Product
+2.7% vs. last +1.9%
New information released since the government made its initial estimate of the value of all the goods and services produced in the United States points to a sizeable upward revision here. Mortgage investors have already priced this expectation into their rate sheets.
Thurs. Aug. 28, 8:30 a.m. ET
Initial jobless claims for the week ended 8/23
Down 2,000
Unless this number is significantly lower, this report will likely have little, if any impact on direction of mortgage interest rates today.
Thurs. Aug. 28, 1:00 p.m. ET
Treasury auctions $21 bil. of 5-year notes
Wednesday’s $31 billion of 2-year notes and today’s big 5-year note offering will likely choke the thinly traded pre-holiday market. If my assessment proves accurate, it will be very difficult for mortgage interest or any fixed income products rates to move notably lower today.
Fri. Aug. 29, 8:30 a.m. ET
July Personal Income Spending PCE
Index 0.0 vs. last +0.1% 0.2% vs. last +0.6%+0.3% vs. last +0.3%
The few traders still at their desk will likely shrug off the income and spending figures but will bore in on the personal consumption expenditure index with laser-like intensity. A gain of more than 0.3% for this measure of inflation pressure at the consumer level will likely prod investors into pushing mortgage interest rate higher.
Fri. Aug. 29, 2:00 p.m. ET
US market will closes early for Labor Day Holiday
Here’s a question; Assuming these entities are “too big to fail” (or perhaps too important) which I believe they are, it begs to question who really benefits if these firms are not privatized.
My thoughts: Both of these companies have some of the largest lobbyist groups in the country. The non-balance sheet payrolls these firms have include very senior officials in both branches and on both major governmental parties. In fact the GSE's have some of the most impressive "paid" supporters of any industry.... and that’s pretty impressive considering the likes of the auto industry, oil, and others.
While the discussions may publicly revolve around the GSE’s ability to remain solvent or if necessary raise more capital to meet federal regulations as it relates to balance sheet ratio’s, a real challenge remains; Will the large number of people who receive a handout from these firms do the right thing, look themselves in the mirror and recognize the overwhelming benefits of taking these firms off of the national balance sheet or will greed and self interest prevail. Unfortunately, I believe we all quickly realized the answer to that question. So look for more shallow justification about the values and virtues of keeping the mission statement alive for Fannie and Freddie.
This week’s economic news:
Release Date & Time
Economic Indicator
Consensus
EstimateMy Analysis
Mon. Aug. 25, 10:00 a.m. ET
July Existing Home Sales
Up 0.8%
Certainly one month of data does not make a trend and no one is suggesting that the bottom has been reached in the housing sector – but if the consensus estimate is accurate, the July number may be a first small step in the right direction. Just kidding!!! This number is insignificant… most pundits are now in strong support of a lengthy recovery which may last till 2010.
Tue. Aug. 26, 10:00 a.m. ET
July New Home Sales
Down 1.3%
Most fixed income traders will take a pretty good look at this number. This data is expected to add one more hopeful sign to a growing number of signs that the worst of housing bubble may soon be behind us. While this is a narrow minded approach, the sales number that matches the forecast won’t likely influence the direction of mortgage interest rates much. A sales pace number showing a drop of 0.6% or less will probably put a little upward pressure on mortgage rates. My personal opinion is that the consensus estimate will likely prove to be too pessimistic this time around.
Tue. Aug. 26, 10:00 a.m. ET
Aug. Consumer Confidence
53.0 vs. last 51.9
Investors are always far more interested in what the consumer is actually doing -- than how they say they are feeling. Look for this data to have little, if any direct impact on the trend trajectory of mortgage interest rates today.
Tue. Aug. 26, 2:00 p.m. ET
Minutes of Aug. 4th & 5th Federal Open Market Committee meeting released
While this document will likely do little more than reinforce mortgage investors’ conviction that the Fed will not hike short-term interest rates anytime in the foreseeable future, it will provide for some guidance for Wednesday and Thursday and a low volume trading week in the equities.
Wed. Aug. 27, 8:30 a.m. ET
July Durable Goods Orders
+0.1% vs. last +0.8%
July orders probably eked out a small gain on an uptick in demand for aircraft and auto manufacturers response to increased calls for more fuel efficient vehicles. This data will likely do little more than take up space on this week’s calendar.
Wed. Aug. 27, 1:00 p.m. ET
Treasury auctions $31 bil. of 2-year notes
It likely will be very difficult for mortgage interest rates to move to notably lower levels in the face of the deluge of supply coming in from Uncle Sam over the next two days.
Thurs. Aug. 28, 8:30 a.m. ET
1st revision to Q2 Gross Domestic Product
+2.7% vs. last +1.9%
New information released since the government made its initial estimate of the value of all the goods and services produced in the United States points to a sizeable upward revision here. Mortgage investors have already priced this expectation into their rate sheets.
Thurs. Aug. 28, 8:30 a.m. ET
Initial jobless claims for the week ended 8/23
Down 2,000
Unless this number is significantly lower, this report will likely have little, if any impact on direction of mortgage interest rates today.
Thurs. Aug. 28, 1:00 p.m. ET
Treasury auctions $21 bil. of 5-year notes
Wednesday’s $31 billion of 2-year notes and today’s big 5-year note offering will likely choke the thinly traded pre-holiday market. If my assessment proves accurate, it will be very difficult for mortgage interest or any fixed income products rates to move notably lower today.
Fri. Aug. 29, 8:30 a.m. ET
July Personal Income Spending PCE
Index 0.0 vs. last +0.1% 0.2% vs. last +0.6%+0.3% vs. last +0.3%
The few traders still at their desk will likely shrug off the income and spending figures but will bore in on the personal consumption expenditure index with laser-like intensity. A gain of more than 0.3% for this measure of inflation pressure at the consumer level will likely prod investors into pushing mortgage interest rate higher.
Fri. Aug. 29, 2:00 p.m. ET
US market will closes early for Labor Day Holiday
Tuesday, August 19, 2008
Anyone had enough of the Economic Ride we’re on?
As much as I would love to opine about the bottoming out of our economy and how now is the time to jump back into equity investing and home purchasing, I continue to shake my head in disbelief as I see a systematic dismantling of precious economic levels which have been supporting our economy over the past eight years. Above and beyond the obvious issues plaguing our economy (gas at $3.50+ a gallon, rising unemployment, inflation creeping to well over 1% a month, depressed or negatively convexed housing values) is the continued hammering and stress our financial markets are taking from overseas participants. Like it or not we live in a global economy. The US does not have the financial wherewithal to operate independently of the world. The economies of scale working with global partners allows our financial system to be much more efficient, in turn passes the savings on to us… the consumer. The stress I am eluding has been most publically seen in the Godfather and Godmother of our housing markets; Fannie Mae and Freddie Mac.
The Government Subsidized Entities (GSE), as Fannie and Freddie are known for rely heavily in foreign investment to keep the capital wheels well greased. With US government backing, foreign governments have traditionally purchased up to two-thirds of every multi-billion dollar note offering these two companies release of Mortgage Backed Securities (MBS). Last week? Central banks bought only 37 percent, down from 56 percent in May. Last week may be an anomaly, but considering the deficient our country presently has outstanding, and the unknown to what exactly the level of participation and to who’s detriment US government will bail these two behemoths is causing for quite stir. There are some who might argue against my next statement; but in my mind, there is no doubt that the US economy is a highly agile and fluid economy. Our capital markets and national diversified industries allow intellectual know-how to adapt very quickly to market pressures and demands both within the US and globally. That said, this economy will rebound with housing playing its’ part. Note: I did not say leading or significant part. However, should MBS bonds continue to trade poorly, Fannie and Freddie will be forced to raise rates to spur interest in their products. This will be like coming down with the flu while battling cancer….possibly deadly. As mentioned above, add an already increasing inflationary environment and we have a very, very painful period for everyone in every segment of the US economy. That includes Housing, Banking, Food, Energy, Technology, Consumer Spending, Finance, Public Services, and just about every supply or demand curve business.
Hand on kids… this ride isn’t nearly over yet.
This week’s economic releases
Release Date & Time
Economic Indicator
Consensus Estimate
My Analysis
Mon. Aug. 18
Tue. Aug. 19, 8:30 a.m. ET
July Housing Starts &
Building Permits
-9.9%
-13.8%
These numbers are distorted by changes in the New York City building code that pulled June starts and building permits sharply higher as builders scrambled to get projects underway before the code changes took effect on July 1st. Excluding the northeast multifamily figures, housing starts probably slipped 4.0% lower last month. It really doesn’t matter all that much, investors have already priced in lower starts and permits figures for July – so a number a little higher or lower than expected won’t likely mean much in terms of its impact on the direction of mortgage interest rates today.
Tue. Aug. 19, 8:30 a.m. ET
July Producer Price Index
Core rate
+0.6% vs. last +1.8%
+0.2% vs. last +0.2%
Ugh oh!!! 1.2% is NOT what the Dr. Ordered. At this juncture, even a hint of building non-energy related inflation pressure will likely be enough to induce mortgage investors to defensively nudge mortgage interest rates higher.. and well expect them to have a serious movement.. if you know what I mean.
Wed. Aug. 20,
Nothing Listed
Thurs. Aug. 21, 8:30 a.m. ET
Initial jobless claims for the week ended 8/16
Down 7,000
This report has been skewed for the past several weeks by the impact of a federal program that extends the benefit period for many claimants. One way or the other, the story is the same – the labor sector remains weak – a factor that investors have already priced into current rate sheets. This report will likely have little, if any impact on direction of mortgage interest rates today.
Thurs. Aug. 21, 10:00 a.m. ET
July Leading Indicators
-0.2% vs. last -0.1%
This index is a composite of 10 different statistics ranging from building permits to the Gross Domestic Product figures – and is designed to foretell economic activity levels six to nine months hence. Its accuracy factor is not particularly high but a negative reading today (indicating slower economic growth ahead) will tend to support steady to fractionally lower mortgage interest rates.
Fri. Aug. 22, 10:00 a.m. ET
Fed Chairman Bernanke speaks on financial stability at Kansas City Fed symposium. My initial thought was that Bernanke will likely hold to the “company” line – talking up the Fed’s commitment to inflation fighting while talking down the likelihood the Fed will find it necessary to take any action in that regard. With the latest inflation numbers released today, I anticipate a little more calming of the waters talk than what may have been originally expected. Depending on what is said this event will likely have little or a lot to do with the trend trajectory of mortgage interest rates.
Mon. Aug. 25, 10:00 a.m. ET
July Existing Home Sales
Up 0.8%
Certainly one month of data does not make a trend and no one is suggesting that the bottom has been reached in the housing sector – but if the consensus estimate is accurate, the July number may be a first small step in the right direction.
The Government Subsidized Entities (GSE), as Fannie and Freddie are known for rely heavily in foreign investment to keep the capital wheels well greased. With US government backing, foreign governments have traditionally purchased up to two-thirds of every multi-billion dollar note offering these two companies release of Mortgage Backed Securities (MBS). Last week? Central banks bought only 37 percent, down from 56 percent in May. Last week may be an anomaly, but considering the deficient our country presently has outstanding, and the unknown to what exactly the level of participation and to who’s detriment US government will bail these two behemoths is causing for quite stir. There are some who might argue against my next statement; but in my mind, there is no doubt that the US economy is a highly agile and fluid economy. Our capital markets and national diversified industries allow intellectual know-how to adapt very quickly to market pressures and demands both within the US and globally. That said, this economy will rebound with housing playing its’ part. Note: I did not say leading or significant part. However, should MBS bonds continue to trade poorly, Fannie and Freddie will be forced to raise rates to spur interest in their products. This will be like coming down with the flu while battling cancer….possibly deadly. As mentioned above, add an already increasing inflationary environment and we have a very, very painful period for everyone in every segment of the US economy. That includes Housing, Banking, Food, Energy, Technology, Consumer Spending, Finance, Public Services, and just about every supply or demand curve business.
Hand on kids… this ride isn’t nearly over yet.
This week’s economic releases
Release Date & Time
Economic Indicator
Consensus Estimate
My Analysis
Mon. Aug. 18
Tue. Aug. 19, 8:30 a.m. ET
July Housing Starts &
Building Permits
-9.9%
-13.8%
These numbers are distorted by changes in the New York City building code that pulled June starts and building permits sharply higher as builders scrambled to get projects underway before the code changes took effect on July 1st. Excluding the northeast multifamily figures, housing starts probably slipped 4.0% lower last month. It really doesn’t matter all that much, investors have already priced in lower starts and permits figures for July – so a number a little higher or lower than expected won’t likely mean much in terms of its impact on the direction of mortgage interest rates today.
Tue. Aug. 19, 8:30 a.m. ET
July Producer Price Index
Core rate
+0.6% vs. last +1.8%
+0.2% vs. last +0.2%
Ugh oh!!! 1.2% is NOT what the Dr. Ordered. At this juncture, even a hint of building non-energy related inflation pressure will likely be enough to induce mortgage investors to defensively nudge mortgage interest rates higher.. and well expect them to have a serious movement.. if you know what I mean.
Wed. Aug. 20,
Nothing Listed
Thurs. Aug. 21, 8:30 a.m. ET
Initial jobless claims for the week ended 8/16
Down 7,000
This report has been skewed for the past several weeks by the impact of a federal program that extends the benefit period for many claimants. One way or the other, the story is the same – the labor sector remains weak – a factor that investors have already priced into current rate sheets. This report will likely have little, if any impact on direction of mortgage interest rates today.
Thurs. Aug. 21, 10:00 a.m. ET
July Leading Indicators
-0.2% vs. last -0.1%
This index is a composite of 10 different statistics ranging from building permits to the Gross Domestic Product figures – and is designed to foretell economic activity levels six to nine months hence. Its accuracy factor is not particularly high but a negative reading today (indicating slower economic growth ahead) will tend to support steady to fractionally lower mortgage interest rates.
Fri. Aug. 22, 10:00 a.m. ET
Fed Chairman Bernanke speaks on financial stability at Kansas City Fed symposium. My initial thought was that Bernanke will likely hold to the “company” line – talking up the Fed’s commitment to inflation fighting while talking down the likelihood the Fed will find it necessary to take any action in that regard. With the latest inflation numbers released today, I anticipate a little more calming of the waters talk than what may have been originally expected. Depending on what is said this event will likely have little or a lot to do with the trend trajectory of mortgage interest rates.
Mon. Aug. 25, 10:00 a.m. ET
July Existing Home Sales
Up 0.8%
Certainly one month of data does not make a trend and no one is suggesting that the bottom has been reached in the housing sector – but if the consensus estimate is accurate, the July number may be a first small step in the right direction.
Tuesday, July 22, 2008
This Week's Economic Figures....Lot's of Data, little value.
Stock movements, Oil, regulation push from Hank Paulson (America's Treasury Secretary) on Fannie and Freddie matters, as well as financial updates from our nations largest banks (Wachovia due out today) are going to drive residential mortgage pricing this week more than any of these macro-economic reports. That said, this country continues to slide into recession, regardless of the two day run we witnessed last week in the stock market.
Release Date & Time
Economic Indicator
Consensus Estimate
Analysis
Mon. July 21, 10:00 a.m. ET
June Leading Indicators
-0.1% vs. last +0.1%
This second tier report drew nothing more than a passing glance from mortgage investors.
Tue. July 22, 1:00 p.m. ET
Treasury auctions 20-year inflation-indexed securities
The “adjustable” feature of this offering will likely make it attractive to a broad range of investors. As witnessed, this had no discernible impact on the direction of mortgage interest rates today. If fact we opened lower and continue to trend lower still.
Wed. July 23, 1:00 p.m. ET
Treasury auctions
2-year notes
A solid auction with good foreign investor participation will likely be considered an omen that not only is confidence returning to dollar denominated assets -- but the prospects of a near-term rate hike from the Fed remains extremely low. If this auction goes well, it will tend to be supportive of steady to perhaps fractionally lower mortgage interest rates.
Wed. July 23, 2:00 p.m. ET
Fed releases latest “Beige Book” data
Named for the color of its cover, this compilation of economic data from all 12 Federal Reserve Districts is expected to show generally sluggish growth across the country and anecdotal evidence of an uptick in inflation pressures at both the wholesale and consumer levels. Nothing in this report will likely surprise anyone – so its impact on the direction of mortgage interest rates will probably be minimal to non-existent.
Thurs. July 24, 8:30 a.m. ET
Initial jobless claims for the week ended 7/19
Up 9,000
Most investors tend to discount some of the jobless claims data this time of year to compensate for the volatility surrounding auto manufacturers’ temporary plant shutdowns for new model year retooling. An increase of 9,000 or more new jobless claims will tend to support steady to perhaps fractionally lower mortgage interest rates. If jobless claims fell last week look for investors to push mortgage note rates higher. My take here, it will be higher and while and we shall see headline news in this area.
Thurs. July 24, 10:00 a.m. ET
June Existing Home Sales
Down 1.2%
The expectation for another puny existing home sales number from the National Association of Realtors is already priced into the mortgage market – probably making it a “yawner” as far as most investors are concerned. In the off-chance the Realtors report a month-over-month gain for existing home sales – look for mortgage interest rates to move higher.
Thurs. July 24, 1:00 p.m. ET
Treasury auctions
5-year notes
Given the big run-up in yields last week – I look for this offering to be well received by market participants.
Fri. July 25, 8:30 a.m. ET
June Durable Goods Orders
-0.3% vs. last 0.0%
The modest decline in the June Durable Goods Orders figure was likely created by significant weakness in transportation orders. It really does not matter much – since this data is unlikely to have a notably impact on the trend trajectory of mortgage interest rates today.
Fri. July 25, 10:00 a.m. ET
June New Home Sales
Down 1.8%
Home Builders continue to find it difficult to reduce their inventories. As long as this number remains negative -- it will likely have little impact on the direction of mortgage interest rates. In the off-chance that new home sales post a positive number expect investors to react by pushing note rates higher and prices lower.
Mon. July 28
No releases.
Have a great week. Keep an eye on the developments of Fannie and Freddie. I am not sure their powerful lobbyist' contingencies are going to keep them out of regulation any longer. They simply failed to keep the cash aside over the last few years run up for anyone to feel comfortable in allowing themselves to be self-managed.
Release Date & Time
Economic Indicator
Consensus Estimate
Analysis
Mon. July 21, 10:00 a.m. ET
June Leading Indicators
-0.1% vs. last +0.1%
This second tier report drew nothing more than a passing glance from mortgage investors.
Tue. July 22, 1:00 p.m. ET
Treasury auctions 20-year inflation-indexed securities
The “adjustable” feature of this offering will likely make it attractive to a broad range of investors. As witnessed, this had no discernible impact on the direction of mortgage interest rates today. If fact we opened lower and continue to trend lower still.
Wed. July 23, 1:00 p.m. ET
Treasury auctions
2-year notes
A solid auction with good foreign investor participation will likely be considered an omen that not only is confidence returning to dollar denominated assets -- but the prospects of a near-term rate hike from the Fed remains extremely low. If this auction goes well, it will tend to be supportive of steady to perhaps fractionally lower mortgage interest rates.
Wed. July 23, 2:00 p.m. ET
Fed releases latest “Beige Book” data
Named for the color of its cover, this compilation of economic data from all 12 Federal Reserve Districts is expected to show generally sluggish growth across the country and anecdotal evidence of an uptick in inflation pressures at both the wholesale and consumer levels. Nothing in this report will likely surprise anyone – so its impact on the direction of mortgage interest rates will probably be minimal to non-existent.
Thurs. July 24, 8:30 a.m. ET
Initial jobless claims for the week ended 7/19
Up 9,000
Most investors tend to discount some of the jobless claims data this time of year to compensate for the volatility surrounding auto manufacturers’ temporary plant shutdowns for new model year retooling. An increase of 9,000 or more new jobless claims will tend to support steady to perhaps fractionally lower mortgage interest rates. If jobless claims fell last week look for investors to push mortgage note rates higher. My take here, it will be higher and while and we shall see headline news in this area.
Thurs. July 24, 10:00 a.m. ET
June Existing Home Sales
Down 1.2%
The expectation for another puny existing home sales number from the National Association of Realtors is already priced into the mortgage market – probably making it a “yawner” as far as most investors are concerned. In the off-chance the Realtors report a month-over-month gain for existing home sales – look for mortgage interest rates to move higher.
Thurs. July 24, 1:00 p.m. ET
Treasury auctions
5-year notes
Given the big run-up in yields last week – I look for this offering to be well received by market participants.
Fri. July 25, 8:30 a.m. ET
June Durable Goods Orders
-0.3% vs. last 0.0%
The modest decline in the June Durable Goods Orders figure was likely created by significant weakness in transportation orders. It really does not matter much – since this data is unlikely to have a notably impact on the trend trajectory of mortgage interest rates today.
Fri. July 25, 10:00 a.m. ET
June New Home Sales
Down 1.8%
Home Builders continue to find it difficult to reduce their inventories. As long as this number remains negative -- it will likely have little impact on the direction of mortgage interest rates. In the off-chance that new home sales post a positive number expect investors to react by pushing note rates higher and prices lower.
Mon. July 28
No releases.
Have a great week. Keep an eye on the developments of Fannie and Freddie. I am not sure their powerful lobbyist' contingencies are going to keep them out of regulation any longer. They simply failed to keep the cash aside over the last few years run up for anyone to feel comfortable in allowing themselves to be self-managed.
Wednesday, July 16, 2008
National City Bank - Did the C' Ranks Really Drop the Ball?
The following blurb was taken directly from National City Bank's 2007 annual Report:
National City Corporation (NYSE: NCC), headquartered in Cleveland, Ohio, is one of the nation's largest financial holding companies. The Company, though it's principal subsidiary National City Bank, operates an extensive banking network in Ohio, Florida, Illinois, Indiana, Kentucky, Michigan, Missouri, Pennsylvania, and Wisconsin, and also serves costumers in selected markets nationally. Primary business activites include commercial and retail banking, mortgage and asset management. Visit NationalCity.com for more information.
I believe the opening statement says a lot about who National City is and exactly why NCC's present stock price (currently $3.82) has dropped from a 55 week high of $33.54. Keep in mind, 6 months ago, NCC was the US' 8th largest U.S. bank. Wisely National City no longer offers the current daily quote for NCC's stick price on their splash page.
While CFO and Vice Chairman Jeff Kelly has been asked to step down (ok retire) and several other C' level executives (including CEO Peter Raskind) have also been rumored to consider early retirement, it appears all is lost for this once proud intuition.
It's easy to pick on someone when they are down. So I don't give additional props to such characters as widely watched tv televangelist Jim Cramer and his Mad Money show (http://www.cnbc.com/id/15838459 & http://www.cramers-mad-money.com/) along with many, many others who (correctly so), shown National City ZERO love as this struggling entity trys valiantly to stay afloat. So what happened? Was NCC' so mismanaged that despite their efforts to explain otherwise see (http://biz.yahoo.com/prnews/080714/clm098.html?.v=71) that they indeed are the next to fall? Are we going to find out that there was an exploit of this firm in the way Enron and others have come to light? The answer may be a little of both.
To understand what currently and has happened to NCC, one need not look at volumes of their financial records, trading account, negotiated execution levels through their various trading partners or even their C' level expense accounts. NCC is a humble company with humble leadership. Corporate expanses are tightly controlled and waste is looked down upon. What happened to NCC can be derived by simple economic fundamentals (mostly outside the CEO and Board's control) and a few poor decisions. Allow me to opine further.
Well before the national liquidity crisis which halted (for all intense and purposes) the fixed income mortgage markets in August of 2007, NCC was in trouble. It's mortgage unit (once a top 6 player nationally) had fallen due to new market participants, poor product placement, lack of technology, poor service times, as well as a weak marketing and branding effort. The banking unit found it's deposits slowing and reversing in key states such as Ohio, Indiana and Michigan. NCC leadership witnessed these events and to their credit looked to expand their banking arm to sunnier states such as Florida and Illinois. As illustrated below, NCC was concentrated in markets which were troubled prior to any bubble bursting. National City's mortgage unit drove a significant amount of revenue to NCC's bottom line. In order to understand the health of the mortgage market and capture credit conditions, one has to look at the dynamics for the entire market. Many other measures simply reflect certain parts of the process, and can vary significantly based on local conditions. A heat map reflecting Q3 mortgage late's and foreclosures are shown below (sorry the images aren't great).
National City Corporation (NYSE: NCC), headquartered in Cleveland, Ohio, is one of the nation's largest financial holding companies. The Company, though it's principal subsidiary National City Bank, operates an extensive banking network in Ohio, Florida, Illinois, Indiana, Kentucky, Michigan, Missouri, Pennsylvania, and Wisconsin, and also serves costumers in selected markets nationally. Primary business activites include commercial and retail banking, mortgage and asset management. Visit NationalCity.com for more information.
I believe the opening statement says a lot about who National City is and exactly why NCC's present stock price (currently $3.82) has dropped from a 55 week high of $33.54. Keep in mind, 6 months ago, NCC was the US' 8th largest U.S. bank. Wisely National City no longer offers the current daily quote for NCC's stick price on their splash page.
While CFO and Vice Chairman Jeff Kelly has been asked to step down (ok retire) and several other C' level executives (including CEO Peter Raskind) have also been rumored to consider early retirement, it appears all is lost for this once proud intuition.
It's easy to pick on someone when they are down. So I don't give additional props to such characters as widely watched tv televangelist Jim Cramer and his Mad Money show (http://www.cnbc.com/id/15838459 & http://www.cramers-mad-money.com/) along with many, many others who (correctly so), shown National City ZERO love as this struggling entity trys valiantly to stay afloat. So what happened? Was NCC' so mismanaged that despite their efforts to explain otherwise see (http://biz.yahoo.com/prnews/080714/clm098.html?.v=71) that they indeed are the next to fall? Are we going to find out that there was an exploit of this firm in the way Enron and others have come to light? The answer may be a little of both.
To understand what currently and has happened to NCC, one need not look at volumes of their financial records, trading account, negotiated execution levels through their various trading partners or even their C' level expense accounts. NCC is a humble company with humble leadership. Corporate expanses are tightly controlled and waste is looked down upon. What happened to NCC can be derived by simple economic fundamentals (mostly outside the CEO and Board's control) and a few poor decisions. Allow me to opine further.
Well before the national liquidity crisis which halted (for all intense and purposes) the fixed income mortgage markets in August of 2007, NCC was in trouble. It's mortgage unit (once a top 6 player nationally) had fallen due to new market participants, poor product placement, lack of technology, poor service times, as well as a weak marketing and branding effort. The banking unit found it's deposits slowing and reversing in key states such as Ohio, Indiana and Michigan. NCC leadership witnessed these events and to their credit looked to expand their banking arm to sunnier states such as Florida and Illinois. As illustrated below, NCC was concentrated in markets which were troubled prior to any bubble bursting. National City's mortgage unit drove a significant amount of revenue to NCC's bottom line. In order to understand the health of the mortgage market and capture credit conditions, one has to look at the dynamics for the entire market. Many other measures simply reflect certain parts of the process, and can vary significantly based on local conditions. A heat map reflecting Q3 mortgage late's and foreclosures are shown below (sorry the images aren't great).
There are few other charts worth mentioning. I think you'll begin to see my agreement.
National City based its growth out of the rust belt focusing on auto, manufacturing and steel. It has been well documented that these industries are in trouble. Unlike Comerica who moved their headquarters out of Michigan to Texas, NCC choose to ride it out and make the best of it's markets. While other banking institutions were focused in 2006 and 2007 on depository growth, NCC through it's marketing efforts was fee' based. This was the wrong decision and can be blamed on executive management. The fact that the banking footprint for NCC is an absolute albatross is not their fault. While several of it's competitors Key Bank and 5th Third choose to extend their efforts on commercial lending not residential, it does not bode well for NCC's C group to not aggressively expand into other markets. Playing Monday morning quarterback is easy given the executive decisions made by NCC over the past 18 months. It should be noted and understand the challenges NCC's leadership has to work with. 2006 was a highly robust year for the US economy and the mortgage industry (NCC's so-called cornerstone). To properly respect the challenges the bank was facing (prior to this present day economic challenges), I'll leave you with the unemployment totals for 2006'. You need income earning clients to fund aand grow a bank.
2006 Unemployment Totals
UNITED STATES 4.60
1 HAWAII 2.40
2 UTAH 2.90
3 NEBRASKA 3.00
3 VIRGINIA 3.00
5 MONTANA 3.20
5 NORTH DAKOTA 3.20
5 SOUTH DAKOTA 3.20
5 WYOMING 3.20
9 FLORIDA 3.30
10 IDAHO 3.40
10 NEW HAMPSHIRE 3.40
12 ALABAMA 3.60
12 DELAWARE 3.60
12 VERMONT 3.60
15 IOWA 3.70
16 MARYLAND 3.90
17 LOUISIANA 4.00
17 MINNESOTA 4.00
17 OKLAHOMA 4.00
20 ARIZONA 4.10
21 NEVADA 4.20
21 NEW MEXICO 4.20
23 COLORADO 4.30
23 CONNECTICUT 4.30
25 ILLINOIS 4.50
25 KANSAS 4.50
25 NEW YORK 4.50
28 GEORGIA 4.60
28 MAINE 4.60
28 NEW JERSEY 4.60
31 PENNSYLVANIA 4.70
31 WISCONSIN 4.70
33 MISSOURI 4.80
33 NORTH CAROLINA 4.80
35 CALIFORNIA 4.90
35 TEXAS 4.90
35 WEST VIRGINIA 4.90
38 INDIANA 5.00
38 MASSACHUSETTS 5.00
38 WASHINGTON 5.00
41 RHODE ISLAND 5.10
42 TENNESSEE 5.20
43 ARKANSAS 5.30
44 OREGON 5.40
45 OHIO 5.50
46 KENTUCKY 5.70
47 DISTRICT OF COLUMBIA 6.00
48 SOUTH CAROLINA 6.50
49 ALASKA 6.70
50 MISSISSIPPI 6.80
51 Michigan 6.90
The following websites were used in preparing this blog:
National City Bank http://www.nationalcity.com/
Mortgage Bankers Association http://www.mortgagebankers.org/
Housing America http://www.housingamerica.org/
National Mortgage News Online http://www.nationalmortgagenews.com/
Reuters http://www.reuters.com/
US Census - Government Link
US Treasury http://www.ustreas.gov/
Tuesday, July 15, 2008
Present Day Fixed Income Challenges
As I write morning, Fed Chairman Bernanke just finished his monetary policy testimony to the Senate Banking Committee. Today’s appearance is part of his semi-annual trek to Capitol Hill to discuss the economy and monetary policy with members of Congress. In response to questions from committee members, Bernanke made it crystal clear that restoring financial market stability is job #1 at the Fed. Bernanke offered nothing new in terms of how exactly the Fed intended to achieve their primary mission – leaving little on which to pin hopes for notably lower mortgage interest rates on.
Just prior to Bernanke began his testimony the Labor Department reported that headline inflation at the producer level rose 1.8% in June as energy prices soared – pushing the overall Producer Price Index to its biggest monthly gain since November. Over the past twelve months producer prices are up 9.2% -- the strongest year-over-year gain since a jump of 10.4% in June of 1981. If there was any good news on inflation, it was that core producer prices (a value that excludes the more volatile food and energy components) edged up just 0.2% last month – a touch below most economists’ forecast calling for a gain of 0.3%. Look for mortgage investors to be very edgy for the balance of the day – the big gains in producer prices can only be absorbed by businesses income and balance sheets for so long before they are passed on to the consumer. We’ll find out if that time has come tomorrow morning when the June Consumer Price Index figures hit the news wires at 8:30 a.m. ET. A core consumer price index reading of more than 0.2% will likely bring the recent rally to lower note rates and higher investor prices to a screeching halt. Separately, the Commerce Department reported this morning that retail sales rose 0.1% in June, less than economists had forecasted. Excluding autos, retail sales rose 0.8% which was also below the consensus forecast. It appears the government rebate check effect faded sharply after supporting the May sales figures. Most bond investors had been anticipating a rather weak June retail sales report – so the actual numbers had little, if any direct effect on the current level of mortgage interest rates.
My old employer (National City Bank) has been in the news alot lately on fears of a similiar event of Indymac Bank. I have conducting a sizeable amount of research on National city and what exactly happened. I anticipate uploading this blog this evening.
It's something you don't want to miss!
This weeks' economic events:
Release Date & Time
Economic Indicator
Consensus Estimate
Analysis
Mon. July 14,
No data
Tue. July 15, 8:30 a.m. ET
June Producer Price Index
Core rate
+1.3% vs. last +1.4%
+0.3% vs. last +0.2%
Surging energy prices undoubtedly drove up costs at the producer level for the sixth straight month. The core rate, (a value stripped of the more volatile food and energy components) probably posted a gain of 0.3% last month. Investors have already priced-in a relatively “hot” read for June producer inflation. If the consensus estimate proves accurate look for a rather muted market reaction. Should the core producer price index post a gain greater than 0.3% -- mortgage interest rates will likely finish the day notably higher.
Tue. July 15, 8:30 a.m. ET
June Retail Sales
Excluding Autos
+0.4% vs. last +1.0%
+1.0% vs. last 1.2%
The expected gain in June retail sales will be heavily discounted as investors’ factor in the impact of government rebate checks on overall activity. Look for this data to be sharply overshadowed by the Producer Price Index report and Fed Chairman Bernanke’s testimony to the Senate Banking Committee later this morning.
Tue. July 15, 10:00 a.m. ET
May Business Inventories
+0.5% vs. last +0.5%
This bit of stale data will do nothing more than take up space on today’s calendar of events.
Tue. July 15, 10:00 a.m. ET
Fed Chairman Bernanke testifies to the Senate Banking Committee
Bernanke will be on the “hot seat” today as he will undoubtedly be grilled on everything from his take on the economy, to inflation and to the biggest question of all -- what, if anything, happens next in relation to the financial viably of Fannie Mae and Freddie Mac. Look for Bernanke to do a decent job of allaying the overwrought disaster scenarios whipped up by the media and, at least temporarily, soothing investor fears. If I’m right I don’t expect a rally to lower mortgage interest rates today – but I do think one of the preliminary stepping-stones for a bounce toward the end of the week will have been put in place.
Wed. July 16, 8:30 a.m. ET
June Consumer Price Index
Core Rate
+0.7% vs. last +0.6%
+0.2% vs. last +0.2%
In my opinion this is the “bigge” of the week with respect to the macro-economic reports scheduled for release. If the core rate (a statistical measure of inflation pressure at the consumer level that is net of the more volatile food and energy components) matches the consensus estimate, a second stepping-stone for a rally in the mortgage market later this week will have been moved into place. On the other hand, a core consumer inflation reading of 0.3% or higher will likely slingshot note rates higher while investor prices plummet. My personal opinion is that the actual core rate number will match the consensus estimate.
Wed. July 16, 9:15 a.m. ET
June Industrial Production &
Capacity Utilization
Unchanged
79.3 vs. last 79.4
The earlier Consumer Price Index and Fed Chairman Bernanke’s testimony later this morning will easily overshadow this data.
Wed. July 16, 10:00 a.m. ET
Fed Chairman Bernanke testifies to the House Financial Services Committee
His prepared text testimony will be exactly the same as he delivered yesterday before the Senate Banking Committee – and I bet the structure of the questions he will be called on the answer this morning won’t differ much either – likely making this event anticlimactic with respect to its likely impact on the trend trajectory of mortgage interest rates today.
Thurs. July 17, 8:30 a.m. ET
Initial jobless claims for the week ended 7/12
Up 34,000
Most investors tend to discount some of the jobless claims data this time of year to compensate for the volatility surrounding auto manufacturers’ temporary plant shutdowns for new model year retooling. An increase of more than 15,000 new jobless claims will tend to support steady to perhaps fractionally lower mortgage interest rates. If jobless claims fell by more than 15,000 last week look for investors to push mortgage note rates higher.
Thurs. July 17, 8:30 a.m. ET
June Housing Starts &
Building Permits
Down 1.5%
Down 1.8%
This report will have headline news but regardless of the figure, both starts and permits are broadly anticipated and therefore this data will likely have little, if any impact on the trend trajectory of mortgage interest rates today.
Fri. July 18,
Mon. July 21, 10:00 a.m. ET
June Leading Indicators
-0.1% vs. last +0.1%
This second tier report will likely draw nothing more than a passing glance from mortgage buyers.
www.efinitygroup.com
Just prior to Bernanke began his testimony the Labor Department reported that headline inflation at the producer level rose 1.8% in June as energy prices soared – pushing the overall Producer Price Index to its biggest monthly gain since November. Over the past twelve months producer prices are up 9.2% -- the strongest year-over-year gain since a jump of 10.4% in June of 1981. If there was any good news on inflation, it was that core producer prices (a value that excludes the more volatile food and energy components) edged up just 0.2% last month – a touch below most economists’ forecast calling for a gain of 0.3%. Look for mortgage investors to be very edgy for the balance of the day – the big gains in producer prices can only be absorbed by businesses income and balance sheets for so long before they are passed on to the consumer. We’ll find out if that time has come tomorrow morning when the June Consumer Price Index figures hit the news wires at 8:30 a.m. ET. A core consumer price index reading of more than 0.2% will likely bring the recent rally to lower note rates and higher investor prices to a screeching halt. Separately, the Commerce Department reported this morning that retail sales rose 0.1% in June, less than economists had forecasted. Excluding autos, retail sales rose 0.8% which was also below the consensus forecast. It appears the government rebate check effect faded sharply after supporting the May sales figures. Most bond investors had been anticipating a rather weak June retail sales report – so the actual numbers had little, if any direct effect on the current level of mortgage interest rates.
My old employer (National City Bank) has been in the news alot lately on fears of a similiar event of Indymac Bank. I have conducting a sizeable amount of research on National city and what exactly happened. I anticipate uploading this blog this evening.
It's something you don't want to miss!
This weeks' economic events:
Release Date & Time
Economic Indicator
Consensus Estimate
Analysis
Mon. July 14,
No data
Tue. July 15, 8:30 a.m. ET
June Producer Price Index
Core rate
+1.3% vs. last +1.4%
+0.3% vs. last +0.2%
Surging energy prices undoubtedly drove up costs at the producer level for the sixth straight month. The core rate, (a value stripped of the more volatile food and energy components) probably posted a gain of 0.3% last month. Investors have already priced-in a relatively “hot” read for June producer inflation. If the consensus estimate proves accurate look for a rather muted market reaction. Should the core producer price index post a gain greater than 0.3% -- mortgage interest rates will likely finish the day notably higher.
Tue. July 15, 8:30 a.m. ET
June Retail Sales
Excluding Autos
+0.4% vs. last +1.0%
+1.0% vs. last 1.2%
The expected gain in June retail sales will be heavily discounted as investors’ factor in the impact of government rebate checks on overall activity. Look for this data to be sharply overshadowed by the Producer Price Index report and Fed Chairman Bernanke’s testimony to the Senate Banking Committee later this morning.
Tue. July 15, 10:00 a.m. ET
May Business Inventories
+0.5% vs. last +0.5%
This bit of stale data will do nothing more than take up space on today’s calendar of events.
Tue. July 15, 10:00 a.m. ET
Fed Chairman Bernanke testifies to the Senate Banking Committee
Bernanke will be on the “hot seat” today as he will undoubtedly be grilled on everything from his take on the economy, to inflation and to the biggest question of all -- what, if anything, happens next in relation to the financial viably of Fannie Mae and Freddie Mac. Look for Bernanke to do a decent job of allaying the overwrought disaster scenarios whipped up by the media and, at least temporarily, soothing investor fears. If I’m right I don’t expect a rally to lower mortgage interest rates today – but I do think one of the preliminary stepping-stones for a bounce toward the end of the week will have been put in place.
Wed. July 16, 8:30 a.m. ET
June Consumer Price Index
Core Rate
+0.7% vs. last +0.6%
+0.2% vs. last +0.2%
In my opinion this is the “bigge” of the week with respect to the macro-economic reports scheduled for release. If the core rate (a statistical measure of inflation pressure at the consumer level that is net of the more volatile food and energy components) matches the consensus estimate, a second stepping-stone for a rally in the mortgage market later this week will have been moved into place. On the other hand, a core consumer inflation reading of 0.3% or higher will likely slingshot note rates higher while investor prices plummet. My personal opinion is that the actual core rate number will match the consensus estimate.
Wed. July 16, 9:15 a.m. ET
June Industrial Production &
Capacity Utilization
Unchanged
79.3 vs. last 79.4
The earlier Consumer Price Index and Fed Chairman Bernanke’s testimony later this morning will easily overshadow this data.
Wed. July 16, 10:00 a.m. ET
Fed Chairman Bernanke testifies to the House Financial Services Committee
His prepared text testimony will be exactly the same as he delivered yesterday before the Senate Banking Committee – and I bet the structure of the questions he will be called on the answer this morning won’t differ much either – likely making this event anticlimactic with respect to its likely impact on the trend trajectory of mortgage interest rates today.
Thurs. July 17, 8:30 a.m. ET
Initial jobless claims for the week ended 7/12
Up 34,000
Most investors tend to discount some of the jobless claims data this time of year to compensate for the volatility surrounding auto manufacturers’ temporary plant shutdowns for new model year retooling. An increase of more than 15,000 new jobless claims will tend to support steady to perhaps fractionally lower mortgage interest rates. If jobless claims fell by more than 15,000 last week look for investors to push mortgage note rates higher.
Thurs. July 17, 8:30 a.m. ET
June Housing Starts &
Building Permits
Down 1.5%
Down 1.8%
This report will have headline news but regardless of the figure, both starts and permits are broadly anticipated and therefore this data will likely have little, if any impact on the trend trajectory of mortgage interest rates today.
Fri. July 18,
Mon. July 21, 10:00 a.m. ET
June Leading Indicators
-0.1% vs. last +0.1%
This second tier report will likely draw nothing more than a passing glance from mortgage buyers.
www.efinitygroup.com
Monday, July 7, 2008
Taking Account
I am writing this morning from Houston where I have spent the last 72 hours trying to explain to my family, my dad's friends and his concerned golfing partners that despite his good health.... he still had a cardiac event the evening of July 4th. He is in CCU, and battling for his life. So while my focus has not been on the state of the union, the existing housing crisis, the price of oil, the mismanagement of Regional Banks, or the sagging dollar; that does not mean it hasn't been on another commodity... our time. Life, like money, is best utilized when it is spent wisely.
This week's economic calendar is as follows:
Release Date & Time
Economic Indicator
Consensus Estimate
Analysis
Mon. July 7,
Tue. July 8, 10:00 a.m. ET
May Pending Home Sales
-3.0% vs. last +6.6%
Most analysts anticipate a little “give back” in May after April’s surprising surge. If the consensus estimate is accurate, investors will likely view this data as slightly mortgage market friendly. In the unlikely event the actual number comes in stronger-than-expected (a slump of 2.5% or less) look for mortgage interest rates to creep fractionally higher.
Tue. July 8, 10:00 a.m. ET
May Wholesale Inventories
+0.7% vs. last +1.3%
Traders holiday sunburns will likely draw far more of their attention than this data set will.
Wed. July 9
Void of economic news
Thurs. July 10 8:30 a.m. ET
Initial jobless claims for the week ended 7/5
Down 14,000
Most investors tend to discount some of the jobless claims data this time of year to compensate for the volatility surrounding auto manufacturers’ temporary plant shutdowns for new model year retooling. A decline of 14,000 or less in the number of jobless claims filed last week will tend to support steady to perhaps fractionally lower mortgage interest rates. If jobless claims fell by more than 15,000 last week look for investors to push mortgage notes and fixed income products to move their rates higher.
Thurs. July 10, 1:00 p.m. ET
Treasury Dept. auctions
10-year inflation indexed securities
Mortgage investors will likely pay a little more attention to this auction than normal. These securities will likely serve as a bellwether index for the longer-term trend trajectory of mortgage interest rates. If the yield on the 10-year inflation-indexed securities should rise look for mortgage interest rates to rise as well -- while a steady to lower yield on these securities will likely indicate the trend trajectory will favor steady to fractionally lower mortgage rates ahead.
Thurs. July 10, afternoon
The current delivery month for most mortgage-backed securities will “roll” to August
This is a standard monthly administrative function of the mortgage market. The price impact on this change from July to August delivery is roughly 25 basis points and is already reflected on most of your investors’ rate sheets.
Fri. July 11
Empty
Mon. July 14
Empty
This week's economic calendar is as follows:
Release Date & Time
Economic Indicator
Consensus Estimate
Analysis
Mon. July 7,
Tue. July 8, 10:00 a.m. ET
May Pending Home Sales
-3.0% vs. last +6.6%
Most analysts anticipate a little “give back” in May after April’s surprising surge. If the consensus estimate is accurate, investors will likely view this data as slightly mortgage market friendly. In the unlikely event the actual number comes in stronger-than-expected (a slump of 2.5% or less) look for mortgage interest rates to creep fractionally higher.
Tue. July 8, 10:00 a.m. ET
May Wholesale Inventories
+0.7% vs. last +1.3%
Traders holiday sunburns will likely draw far more of their attention than this data set will.
Wed. July 9
Void of economic news
Thurs. July 10 8:30 a.m. ET
Initial jobless claims for the week ended 7/5
Down 14,000
Most investors tend to discount some of the jobless claims data this time of year to compensate for the volatility surrounding auto manufacturers’ temporary plant shutdowns for new model year retooling. A decline of 14,000 or less in the number of jobless claims filed last week will tend to support steady to perhaps fractionally lower mortgage interest rates. If jobless claims fell by more than 15,000 last week look for investors to push mortgage notes and fixed income products to move their rates higher.
Thurs. July 10, 1:00 p.m. ET
Treasury Dept. auctions
10-year inflation indexed securities
Mortgage investors will likely pay a little more attention to this auction than normal. These securities will likely serve as a bellwether index for the longer-term trend trajectory of mortgage interest rates. If the yield on the 10-year inflation-indexed securities should rise look for mortgage interest rates to rise as well -- while a steady to lower yield on these securities will likely indicate the trend trajectory will favor steady to fractionally lower mortgage rates ahead.
Thurs. July 10, afternoon
The current delivery month for most mortgage-backed securities will “roll” to August
This is a standard monthly administrative function of the mortgage market. The price impact on this change from July to August delivery is roughly 25 basis points and is already reflected on most of your investors’ rate sheets.
Fri. July 11
Empty
Mon. July 14
Empty
Subscribe to:
Posts (Atom)
