All markets continue to increase focus on Bernanke's opening speech Friday at Jackson Hole. Risk trades coming off in equities and the bond market as well as currency trading. Gold fell $62 yesterday this morning down again another $42 at 9:00. Will we get another money printing QE? or has the Fed recognized it has run out of bullets in terms of increasing economic growth? Keeping interest rates low is already a given from the Fed after the statement from the FOMC two weeks ago; so far the historic low long term interest rates, including mortgage rates, has had no real impact on the economy. With many believing another easing will occur, maybe Bernanke feels cornered and has to do something. What he should do is chastise politicians and the Administration for failing to accept that spending cuts are now mandatory as well as increased revenues. Not going to happen.
Earlier this morning the weekly MBA mortgage applications; weaker again. The purchase index fell steeply for a second week, down 5.7% in the August 19 week and now at its lowest level in 15 years. Low interest rates aren't helping with applications falling across the board including a 15% fall for jumbo loans and an eight percent fall for government housing programs. Low rates had triggered a surge in refinancing applications which however eased back 1.7% in the latest week. Rates moved slightly higher in the week with the 30-year up seven basis points to 4.39%.
At 9:30 the DJIA opened -50, the 10 yr note -3/32 at 2.17% and mortgage prices up 1/32 (.03 bp) frm yesterday's close. After the lower open, by 9:45 the DJIA began to improve and interest rate markets backed off to trade lower in price, the 10 yr note yield at 9:45 at 2.19% +3 bp while mortgages were down 5/32 (.15 bp). Lenders that priced prior to 9:30 are watching closely, anymore weakness will set up re-pricing.
Like yesterday, we are not looking for much in the way of movement, but the very near term bias is slightly negative for the bond and mortgage markets as long as equity markets don't crack. Short covering and positioning ahead of Bernanke on Friday is providing a little support in equities on the idea another easing from the Fed would drive investors back into stocks. Frankly, I don't understand that logic; QE 2 didn't help, another easing that will push interest rates lower---so low that investors have little choice but to buy stocks----seems like a huge stretch. Low interest rates and some improvement in stock prices has had no positive impact on the economy.
At 1:00 this afternoon Treasury will auction $35B of 5 yr notes, yesterday's 2 yr auction met with good demand, most expect the 5 yr today will also be well bid.
At 10:00, the June FHFA housing price index, not much of a market mover, fell 4.3% yr/yr; from May to June +0.9%. No reaction to it as it isn't new news.