WeeklyBasis 12/11: Rates Incredibly Resilient

Rates ended even last week, holding near record lows for the third week in a row: 30yr loans to $417k are 3.875%. Below I recap last week’s slow markets and preview a packed week ahead. It’s all broken in sections for easy reference. Scroll to ‘Bottom Line’ if you’re in a hurry.

RECAP DECEMBER 2-9 MARKET WEEK
Another Declining Home Price Report: CoreLogic’s October home price report showed that home prices were down 1.3% monthly and 3.9% annually. This follows Case Shiller’s September report the week before showing home prices were down 0.6% monthly and 3.6% annually. These reports don’t count all homes; here’s more on homes they count and the latest home price details.

Lowest Jobless Claims Since Feb: Claims for unemployment insurance were 381,000 for week ended December 3, down 23,000 from previous week. It was the lowest level since February and the second lowest since Lehman failed in September 2008. Also the 4-week moving average was 393,250. Below 400k signals improving job market. This Thursday’s report will be critical to see if the Thanksgiving break artificially slowed claims, or if a positive jobs trend is emerging.

Highest Consumer Sentiment In 6mo: The University of Michigan Consumer Sentiment Index was 67.7 for December, the highest in six months, indicating consumers may be in the mood to spend. The November reading was 64.1 and the strongest since June. This also has to develop into a consistent trend, but this number fluctuates with gas prices, political mood, etc. so it doesn’t really move markets. Actual spending data moves markets.

PREVIEW DECEMBER 12-16 MARKET WEEK
Next week’s economic calendar is quite busy. Below are highlights and rate impacts.

Last 2011 Fed Meeting: One thing driving rates lower in recent weeks is rumors the Fed may buy $545b of mortgage bonds (MBS) in a third round of QE to be announced 1Q2011. If Tuesday’s final Fed rate policy meeting of 2011 doesn’t confirm this QE3, the meeting won’t move markets because the Fed will hold to near-zero overnight rates and to their current policy of keeping rates down by reinvesting proceeds from existing MBS into new MBS.

Retail Sales Post Black Friday: Estimates call for retail sales to rise 0.6% to 0.8% in November. Sales rose 0.5% in October following a 1.1% rise in September. We could see this number beat since jobless claims and consumer sentiment have trended better (noted above), and because of early holiday shopping. If so, rates up.

Manufacturing Up Trend: November showed better data from two key U.S. manufacturing reports, both of which have 0 as dividing line between expansion/contraction. Empire State was +0.61 in November, the first positive since May and a huge jump from October’s -8.48. Philly Fed was +3.6 in October, the second month of growth (September was +8.7) following three months of contraction. December reports are Thursday for Empire and Friday for Philly. Estimates call for Empire to be 3.0 and Philly to be 4.0. If so, rates up.

Jobless Claims Trend: As noted in last week’s recap above, this Thursday is critical to see if an improving jobs outlook continues this week. Rates up if it does.

Inflation Flat Again?: November inflation for producers (PPI) and consumers (CPI) is due Thursday and Friday. October’s annual PPI was 5.9% total and 2.8% excluding food and energy. Annual CPI was 3.6% total and 2.1% excluding food and energy. All of these October annual figures were creeping up, but the October monthly figures were resoundingly flat, so rates held lows as bonds liked this news. If November monthlies inch up, rates will rise.

Biggest Stock IPO Since 2007: There are 12 IPOs this week including gaming site Zynga, making this the busiest IPO week since 2007. Traders will be looking to see if Zynga suffers same strong-start-then-retreat as LinkedIn, Pandora, and Groupon, but still, this kind of IPO activity could bode well for stock sentiment.

Europe: Last week, European Union leaders agreed to more centralized budget controls and the ability to hold nations more accountable for not balancing budgets (more from FT and WSJ). If it sounds thin, it may be, like many previous EU steps. But markets liked it to close the week.

Technical Trading Factors: Looking at stocks, the S&P 500 closed last week at at 1255, just below its 200-day moving average of 1263, a mark it rose above three trading days but couldn’t close above. Bulls could take charge if it closes above this level next week. There’s room to drop down to the 50-day moving average of 1220 if sentiment turned negative. As for mortgage bonds (MBS), rates rise when MBS sell, and rates haven’t risen for three weeks because the 3.5% Fannie Mae coupon—a key benchmark lenders use to price consumer rates—continue to be incredibly resilient at their 25 and 50 day moving averages even as stocks rally.

Bottom Line For Rates: Last week, I said rates could rise slightly unless EU leaders truly blow it. They didn’t blow it but a theme has emerged: stocks rally on the littlest EU optimism yet MBS hold the line, keeping rates low. This MBS technical strength could have to do with QE3 rumors because most other economic data points noted above are improving, which would normally cause MBS to sell and rates to rise above record lows. For this to happen, markets must see sustained improving U.S. economic data and a week where Europe isn’t front and center. That could be this week. But even if rates rise slightly, the long EU slog will still keep MBS a safe haven, so a mass selloff (aka rate spike) isn’t likely near term.