Rates Drop on Fed Surprise: The first FOMC meeting of 2012 surprised markets by indicating the Fed would target overnight bank-to-bank Fed Funds Rate at 0 to .25% through late-2014. Before they were saying mid-2013. Rates dropped as mortgage bonds rallied on the news. The Fed also re-confirmed their Operation Twist strategy of shifting debt holdings from shorter into longer durations, and a ongoing reinvestment of proceeds from their existing mortgage bond holdings into new mortgage bonds, which helps keep mortgage rates low. Fed meeting summary.

Pending Home Sales Reverse Gains: The NAR’s December Pending Home Sales index was -3.5% to 96.6, a stark contrast from a 19-month high of +7.3% in November. This stat is new purchase contracts to buy existing homes that are expected to close in 60 days. Even with December decline, November-December numbers were best since March-April 2010. And December 2011 was +5.6% higher than December 2010. So this stat is trying to improve, but not helping is the fact that 33% of NAR realtors have reported cancelled deals on existing home sales October through December.

New Home Sales Questionable: December’s New Home Sales were 307,000 (seasonally adjusted, annualized), down 2.2% since November, and down 7.3% since December 2010. Average December sale price: $266,000. Estimated 302,000 new homes were sold in 2011, 6.2% below the 2010 figure of 323,000. New home sales are well below the 700k annualized needed for a healthy market. This long-term chart tells the story.

Home Prices Hanging On: The Federal Housing Finance Agency’s (FHFA) home price report was +1% for November but -1.8% since November 2010. FHFA’s report also said home prices are down 18.8% from their April 2007 peak. But this report isn’t as widely followed—nor does it impact rates—because it’s only for homes with Fannie/Freddie mortgages, so doesn’t include a broad enough sample as home price reports from Case Shiller and CoreLogic. The next Case Shiller report is Tuesday, and highlighted below.

GDP Not Looking Good: The first of three GDP readings for 4Q2011 was 2.8%, below estimates of 3%. But the trend for all of 2011 was that subsequent readings were cut. The third and final 3Q reading was 1.8% after being cut twice: second reading was 2%, first reading was 2.5%. Net result: 2011 GDP was just 1.7% vs. 2010 GDP of 3%. And it might go lower if 4Q is revised down.

Jobless Claims Still OK Despite Up Week: For the week ended January 21, claims for unemployment insurance rose 21k to 377k. Despite the rise, claims are still well below 400k, a threshold under which the job market is considered to be improving. The 4-week moving average is at 377,500, also below 400k. This is a good trend, but this report doesn’t count jobs added. We’ll get that data with Friday’s BLS report, previewed below. And also Jobless Claims are reported every Thursday.

PREVIEW JANUARY 30-FEBRUARY 3 MARKET WEEK

Next week’s economic calendar is busy. Plus it’s another big earnings week, and Greece’s debt deal will be top of mind for traders. Highlights below with rate impacts.

Flat Inflation Likely To Continue: December’s personal consumption expenditures index (PCE) is Monday. It’s the Fed’s preferred inflation measure. November’s annual figures were 2.5% total and 1.7% excluding food and energy. Same story with flat or declining monthly and annual PPI and CPI. December’s annual PPI was 4.8% total and 3.0% excluding food and energy. Annual CPI was 3.0% total and 2.2% excluding food and energy. No rate change on this PCE data, unless it’s an upside surprise, then rates up.

Home Prices Down Again?: November’s S&P Case Shiller home price report is Tuesday. Prices of existing single family homes across 20 major U.S. metro areas fell 1.2% in October and fell 3.4% since October 2010. It was second straight down month after a five-month ’20-City’ streak of modest rises. Still, dataset co-creator Robert Shiller said then: it’s a good time to buy a home, and last week did a detailed home price Q&A with Business Insider.

Manufacturing Growth Streak: January’s Institute for Supply Management (ISM) Manufacturing Index is Wednesday and estimates call for 55. December ISM was 53.9, up from 52.7 in November, with 50 as dividing line between between expansion and contraction. This was the 29th month of growth and a 6 month high. It’s slim growth, but a resilient streak. And of course consumers must still buy what’s being manufactured for this to translate into real economic growth. Rates even to up slightly.

ADP Jobs Report Expectations Vary: Payroll provider ADP’s January jobs report is Wednesday and expectations are broad from 175-250k. December’s ADP was a blowout: 325,000 private jobs created versus of 178,000 and November’s 204,000 figure. Still rates didn’t rise on this data last month. More in BLS jobs report preview below.

Rates May Hold Despite Better BLS Jobs Report: The Bureau of Labor Statistics January jobs report is Friday and expectations call for 170-225k nonfarm jobs created and unemployment unchanged at 8.5%. December’s BLS nonfarm jobs report showed 200k new non-farm jobs created vs. the 100k created in November, and unemployment dropped from 8.6% to 8.5%. Encouraging news since people need jobs to spend, but this chart shows just how much ground there is to regain from the recession depths. That link also explains that rates didn’t rise despite a second straight improving jobs report because Europe’s debt troubles loom larger for rate markets.

Greece Debt Deal Imminent, Unpredictable: Headlines and trading this week will focus on two main issues in Europe: (1) Greece’s months-long negotiations with private bond investors that involve exchanging outstanding bonds for new ones (with coupons as low as 3.6-3.75%) and taking 50-70% losses. If most private investors don’t agree, it could trigger credit default swaps, then banks come under pressure, then we’d have a European bank liquidity issue, which is really a global issue—U.S. rates would drop in this scenario. (2) Monday’s EU summit will focus on tighter fiscal union across the EU. But short-term, all sentiment hangs on the Greece deal. Volatility will reign, with most probable scenario being lower rates as investors focus on U.S. mortgage and Treasury bonds.

Earnings Highlights: Earnings season rolls on this week, including lots more that give us a feel for consumer strength: Philips Electronics, Gannett, Exxon Mobil, Honda, UPS, Pfizer, Amazon.com, Aflac, Oshkosh, Tyco, Aetna, Whirlpool, Tupperware, Qualcomm, Chipotle Mexican Grill, Las Vegas Sands, Allstate, AstraZeneca, Merck, Royal Dutch Shell Unilever, Sony, Kellogg, MasterCard, Allergan, Viacom, Cigna, Blackstone, CME Group, Pulte Group, Royal Caribbean, Clorox, Estee Lauder, Aon, Tyson Foods.

RATE & STOCK OUTLOOK

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Homebuilder Confidence Inching Up: January’s homebuilder confidence index was 25, the fourth straight monthly gain and highest since June 2007. But still a long shot from 50+ mark that signals a healthy market—hasn’t hit that level since April 2006. Here’s how it looks 1985-Present.

Home Construction Drops, But Single Family Homes Resilient: Housing Starts (aka new construction) dropped and Building Permits were flat for December. Starts were down 4.1% to 657k (seasonally adjusted, annualized). Still below 1.5m needed to keep in line with population growth and scrappage, but Single Family Starts were up 4.4% to 470k, the highest in 2011 and since April 2010 when homebuyer tax credit boosted production. The more volatile Multi-Family Starts were down 13% to 187k. As for Building Permits, they were barely up: 0.1% to 679k, but still holding to highest levels since March 2010.

Existing Home Sales 11-Month High: December existing home sales hit their highest market in 11 months at 4.61m annualized. This is up 5% in December and up 3.6% since December 2010. For all of 2011, existing home sales rose 1.7% to 4.26m from 4.19m in 2010. Unsold inventory dropped to 2.38m, which is a 6.2 month supply, the lowest level in 7 years. But cancelled deals remain high: 33% of Realtors reported at least one cancelled contract in December, same for previous two months, up sharply from 18% in September and August, and up from 9% in December 2010. Buyers still very jittery, plus loans and appraisals are tough.

Manufacturing Better Again: Two key January U.S. manufacturing reports showed a consistent (but modest) up-trend, and both have 0 as dividing line between expansion/contraction. Empire State Manufacturing was 13.48, highest since May 2011 and third straight monthly gain. Philly Fed was 7.3, down from a from a revised 6.8 in December (was 10.3). But even with revision down for December, the January figure still marks a fourth straight monthly gain.

Inflation Still Flat: Flat producer (PPI) and consumer (CPI) inflation continues. December’s annual PPI was 4.8% total and 3.0% excluding food and energy. Annual CPI was 3.0% total and 2.2% excluding food and energy. All December annual (and monthly) figures were flat or down vs. November. There’s little near-term inflation fear which keeps rates low for now.

Jobless Claims Fall Sharply: For the week ended January 14, claims for unemployment insurance dove 50k to 352k. This was the biggest weekly drop since September 24, 2005, and the lowest reading since March 2008. The 4-week moving average is at 379k, also below 400k, a threshold under which the job market may be improving. This is a good trend, but this report doesn’t count jobs added. The job market is still weak despite a decent run for claims. Next report Thursday 1/26.

PREVIEW JANUARY 23-27 MARKET WEEK

Next week’s economic calendar starts slow then picks up steam Wednesday. Plus it’s another big earnings week, and Greece’s debt deal will be top of mind for traders. Highlights below with rate impacts.

First Fed Rate Decision of 2012: There’s two camps on Wednesday’s first Fed rate decision of 2012: those who say we’ll get a QE3 signal, and those who say we won’t. I’m in the latter. I think the Fed confirms their three current strategies: overnight bank-to-bank Fed Funds Rate targeted at 0 to .25%, a continuation of Operation Twist to shift debt holdings from shorter into longer durations, and a ongoing reinvestment of proceeds from their existing mortgage bond holdings into new mortgage bonds, which helps keep mortgage rates low (here’s how). The U.S. economy has been improving enough to have them hold on explicit QE3 signals. This could hurt stocks, and also hurt rates as bonds sell slightly.

STAT OF THE WEEK-Pending Home Sales: December’s Pending Home Sales are Wednesday and estimates call for -3%. Stark contrast from a huge November: New purchase contracts to buy existing homes were up 7.3% in November and up 5.9% since November 2010. At 100.1, this NAR pending home sales index was the highest in 19 months. April 2010 was last time index was higher (111.5) as buyers rushed in to get federal homebuyer tax credits. Very strong report but 33% of realtors reported cancelled deals on existing home sales October through December, and this pending home sales report is a leading indicator of existing home sales expected to close in 60 days. As noted above, December Existing Home sales were better and didn’t reflect these cancelled contracts yet, so maybe pending home sales will. Rates would only rise if it was another upside blowout.

Will 2011 Be Worst New Home Sales Year Ever?: December’s New Home Sales are Thursday and estimates call for 310k-320k. November’s new home sales were 315k (annualized), 1.6% better than October, 9.8% better than year ago. This was the best since April, but well below the 700k needed for a healthy market, and 2011 looks to be the worst year ever for new home sales—we’ll also get the full 2011 number Thursday. Average November new home sale price: $242,900. Rates would rise if it was a big positive surprise but that’s unlikely.

Home Prices: Speaking of home prices, we’ll get the Federal Housing Finance Agency’s (FHFA) November home price report Wednesday, and find out if the -0.2% figure from October will continue or turn positive. But this report isn’t as widely followed—nor does it impact rates—because it’s only for homes with Fannie/Freddie mortgages, so doesn’t include a broad enough sample as home price reports from Case Shiller and CoreLogic.

Fourth Quarter GDP: The first of three GDP readings for 4Q2011 is Thursday and estimates call for 3% to 3.2%. The third and final 3Q reading was 1.8% after being cut twice: second reading was 2%, first reading was 2.5%. This was a common pattern for 2011 GDP. But if we’re at the high side of estimates, rates would get worse as bonds sell on the initially positive perception.

Europe’s Hottest Topics: There are two main Europe topics impacting global markets next week: (1) Greece’s months-long negotiations with private bond investors that involve exchanging outstanding bonds for new ones and taking a 50% or greater losses. Losses more than 50% could cause investors to sue, which could trigger credit default swaps, then banks come under pressure, then we’d have a European bank liquidity issue, which is really a global issue—U.S. rates would drop in this scenario. (2) Besides short-term debt auctions in 5 Eurozone countries next week, the Netherlands and Germany have 30yr debt auctions Tuesday and Wednesday. These longer auctions are important to test appetite for European debt—U.S. rates would also drop if European demand is weak.

Earnings Highlights: There are about 119 S&P 500 companies reporting 4Q earnings this week including lots of companies that give us a feel for consumer strength: Apple, Johnson and Johnson, McDonald’s, Verizon, Travelers, Coach, Yahoo, AMD, ConocoPhillips, ETrade, Netflix, Delta Airlines, Nokia, Colgate-Palmolive, United Continental, JetBlue, Starbucks, Time Warner Cable, Under Armour, Eastman Kodak, Ford, Procter and Gamble, Altria, Chevron.

RATE & STOCK OUTLOOK

Don’t miss WeeklyBasis, short and sweet outlook on next week’s rate and stock markets.

Retail Sales: December Retail Sales estimates were already modest at 0.4%, but the actual was only 0.1% and even worse at -0.2% if you exclude auto sales. And for the week ended January 7, ICSC-Goldman weekly chain store sales were -5.3%. Weaker than originally thought holiday season and slow start to year for consumer spending.

Europe Downgraded. EU Rescue Fund Next?: S&P issued ratings downgrades throughout the Eurozone Friday. This was telegraphed early-December so it wasn’t as shocking as headlines might suggest. The real issue now is whether the EU rescue fund, the European Financial Stability Facility (EFSF), will also be downgraded which would reduce it’s size and efficacy. More on Europe in next week’s preview below.

Jobless Claims Jump: Claims for unemployment insurance jumped 24k to 399k for the week ended January 7 following a down-trend four of the previous five weeks. Now they’re at the highest level since the end of November, but still below 400k, a key threshold. The job market is still weak despite a decent run for claims before last week. Next report Thursday.

PREVIEW JANUARY 17-20 MARKET WEEK

Next week’s economic calendar is busy, plus it’s a huge earnings week. Highlights below with rate impacts.

Will Better Manufacturing Continue?: Two key January U.S. manufacturing reports are due Tuesday and Thursday, both of which have 0 as dividing line between expansion/contraction. Last month, they were both better: Empire State Manufacturing was 9.5, highest since May and second straight monthly gain. Philly Fed was 10.3, highest since April and third straight monthly gain after three months of contraction. January estimates call for almost no change to either index. Rates even.

No Inflation Again: Flat producer (PPI) and consumer (CPI) inflation for December is expected Wednesday and Thursday. November’s annual PPI was 5.7% total and 2.9% excluding food and energy. Annual CPI was 3.4% total and 2.2% excluding food and energy. All November annual (and monthly) figures were flat versus October. Rates even given that there’s little near-term inflation fear.

Homebuilder Confidence Inching Up: January’s homebuilder confidence index is Wednesday. December’s index was 21, the third straight monthly. Still a long shot from 50+ mark that signals a healthy market—hasn’t hit that level since April 2006. Here’s how it looks 1985-Present. Rates don’t move much on this report.

Will Home Construction Jump Again?: Construction (aka Housing Starts) and Building Permits for December are due Thursday and both are expected to decline slightly from November. Construction was up 9.3% in November to 685k (seasonally adjusted, annualized). Still below 1.5m needed to keep in line with population growth and scrappage, but highest since April 2010 when homebuyer tax credit boosted production. Excluding that one-time event, construction is highest since October 2008. Here’s the single family vs. multifamily breakdown. Building permits were up 5.7% to 681k, best since March 2010. Rates also won’t move on this report unless is was an upside blowout, then rates would rise.

STAT OF THE WEEK-Existing Home Sales: Not surprising that expectations for Friday’s December Existing Home Sales vary rather widely. Along with the November report, the NAR revised 2007-2010 sales down from 20,629,000 to 17,680,000, meaning 2,949,00 (or 14%) fewer existing homes were sold in those years than previously reported. As for November 2011, existing home sales were 4.42m annualized, up 4% in November and up 12.2% since November 2010. This is the highest mark in 10 months and 34% above mid-2010 low point. Also cancelled deals spiked again: 33% of Realtors reported at least one cancelled contract in November. Same for October, which was up sharply from 18% in September and August, and up from 9% in September 2010. Lots of interesting housing data in this report, but it won’t move rates much.

Europe’s Hot Topics: The only good thing about S&P’s Eurozone downgrades noted above is that it enables Merkel and Sarkozy to create more urgency toward an inevitable EU fiscal union. As for next week, there are many hot topics but the hottest is Greece resuming talks Wednesday with private investors on how those investors will take losses on Greek bonds. Those talks broke down last week. U.S. rates likely to remain low as EU fears remain front of mind and U.S. Treasury and mortgage bonds remain a safe bet.

Earnings Hit Full Stride: There are about 100 companies reporting 4Q earnings this week including key financials like Citigroup, Wells Fargo, Goldman Sachs, Bank of New York, Charles Schwab, Bank of America, Morgan Stanley. We also have big tech names like Google, IBM, Intel, Microsoft and EBay.

RATE & STOCK OUTLOOK

Don’t miss WeeklyBasis, short and sweet outlook on next week’s rate and stock markets.

GDP Deflator
The GDP Deflator is a measure of inflation in which each component is weighted according to its percent of GDP. The GDP Deflator was +2.5% for 3rdQ2011. With interest rates slow and the economy just barely growing I find +2.5% inflation high.

Corporate Profits
Corporate Profits for 3rdQ2011 were $1.507 trillion annualized. High Unemployment and growing Corporate Profits are part of what OWS is about.

Retail Sales
-ICSC-Goldman Store Sales, Week/Week -0.9%
-ICSC-Goldman Store Sales, Year/Year 2.8 %
-Redbook Store Sales, Year/Year +3.7 %
-Holiday Retail data this year may be odd by comparison because of aggressive pre-Black Friday sales and the fact that Thanksgiving is relatively early this year.

Richmond Federal Reserve Manufacturing Index
For October this index was unchanged ending four months of contraction.

Below I recap last week, then preview what’s coming. And please note: you can see if you qualify now for HARP II, the new refi plan for underwater homeowners, but loans won’t be made until November 15 at the earliest.

RECAP OCTOBER 24-28 MARKET WEEK
Home Prices: Case Shiller’s reported home prices rose 0.2% July to August, the fifth straight monthly gain but a tiny gain. Prices are down 3.8% since August 2010 and stuck at 2003 levels. So: Is owning a home smart?

GDP: The first of three 3Q2011 GDP readings showed the economy grew at 2.5%, compared to 1.3% for 2Q and 0.4% for 1Q.

Europe Debt Deal: Rates rose Thursday on news of the EU debt deal but reversed Friday as skepticism grows. Next week’s preview below.

Consumer inflation: The Fed’s preferred measure of consumer inflation, the Personal Consumption Expenditures Index (PCE), was within their 2% annual cap. They focus on ‘Core’ which excludes food and energy prices. From Sept 2010 to Sept 2011, all-inclusive PCE was 2.9% and Core was 1.6%. Inflation ok for now.

PREVIEW OCTOBER 31 – NOVEMBER 4 MARKET WEEK
Here are next week’s economic calendar highlights with rate impacts:

Manufacturing: Tuesday is the Institute for Supply Management October manufacturing report. September was 51.6 with 50 as dividing line between expansion and contraction. Good news: 26th months of growth. Bad news: barely growing. Also, manufacturing is weak as measured by two other October surveys: Philly Fed (PA) was 8.7, up from September’s -17.5, the first positive in 3 months. Empire State (NY) was -8.48, fifth straight monthly contraction. For PA/NY surveys, 0 is line between growth/contraction. ISM shouldn’t be a blowout number so rates even.

Fed AND European Central Bank Meetings: The Fed’s meets two days with a policy announcement Wednesday. Rates dropped after their September 21 meeting because they recommitted to mortgage bond buying (not QE!). The Fed is unlikely to surprise markets, but Thursday’s European Central Bank meeting is huge: the first with new ECB President Mario Draghi (bio). His stance on ECB policy and EU debt crisis is key. Rates even to down on Fed meeting. Rates are wild card for ECB meeting.

Jobs Report: Markets expect Friday’s jobs report to show 88k-100k new jobs created in October and unemployment to hold at 9.1%. The economy added 103k new jobs in September, plus August was revised from zero to 57,000 jobs created, and July was revised from 85k to 127k. I think this one will be close to consensus. If so, rates even.

Europe Debt Crisis: Besides Thursday’s ECB meeting, there’s a G20 Summit Thursday and Friday. Both may elaborate on last week’s debt deal, which helped stocks and hurt rates. Another wild card for rates.

Corporate Earnings: Another big earnings week including reports from Pfizer, Kraft, Nissan, Honda, Comcast, Clorox, Mastercard, AIG, Unilever, Credit Suisse, Anadarko, Time Warner, News Corp, Sony, LinkedIn.

Technical Trading Factors: Last Thursday, the S&P 500 broke clearly above it’s 200 day moving average of 1274 for the first time since August 2, and closed at 1285 Friday. Also Thursday, mortgage bonds—namely the 3.5% Fannie Mae coupon most lenders use to price consumer rate sheets—dropped clearly below the 50 day moving average they were hugging since October 7. Mortgage bonds regained much of Thursday’s sharp post-EU news losses Friday, but they’re still below the 50 day moving average.

Bottom Line For Rates: These technical factors suggest stocks and rates could start the week stable, but volatility will remain extreme as politicians and central banks hog center stage. Also the 10yr Note yield, a key benchmark for rate markets, has risen enough (now 2.32%) to create upside rate rate risk near-term. Long-term, a rate spike isn’t warranted by weak global economic conditions. But next week is key to determine whether rates rise near-term or hold this volatile-but-steady range we’ve been in since October 7, which is .25% above record lows.
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Rate Shopper Must-Read:
How To Shop For A Mortgage

I’ll quickly recap last week, then preview what’s coming. Also please note: loan limits weren’t increased in Washington last week, just discussed.

Recap Oct 17-21 Market Week
Last week’s slight rate drop was due to mortgage bonds remaining a safe investment amidst global market uncertainty. Rates drop when bond prices rise on buying. Here are the key stats:

Weekly jobless claims were 403k, close to the 400k mark below which the job market is considered to be improving. The 4-week moving average was also reported at 403k. This is better economic news if it holds.

Consumer and producer inflation were both near the 2% Fed comfort zone: CPI 3.9% and PPI 6.9%. Even the Fed’s preferred ‘Core’ readings that exclude food and energy crept up: Core CPI 2% and Core PPI 2.5%.

Manufacturing is still weak, measured by two key regional October surveys. Philly Fed (PA) was 8.7, up from September’s -17.5, the first positive in 3 months. Empire State (NY) was -8.48 vs. -8.82 September, fifth straight monthly contraction. For both surveys, 0 is line between growth/contraction.

Existing Home Sales were down 3.0% in September but up 11.3% since September 2010. UGLY STAT: 18% of contracts didn’t close, same as August but up from 9% in September 2010. This was due to homes not appraising for contract price and buyers getting cold feet after inspections.

Preview Oct 24-28 Market Week
Here are next week’s economic calendar highlights with rate impacts:

August Home Prices: Tuesday brings Case Shiller and FHFA home price reports. Case Shiller was up 0.9% in July, the fourth straight monthly gain, but prices were down 4.1% since July 2010. It’s the broadest home price measure. The FHFA report only measures prices of homes with Fannie/Freddie mortgages. Annual Case Shiller figures aren’t likely to go positive, so rates even.

GDP: Thursday is the first of three 3Q2011 GDP readings. Estimates range from 2% to 2.5% economic growth, compared to 1.3% for 2Q and 0.4% for 1Q. And remember 1Q was revised down sharply along with the first 2Q release. Rates up if higher-end estimates prevail.

Consumer inflation: Friday brings the Fed’s favorite measure of consumer inflation, the Personal Consumption Expenditures Index (PCE) for September. The Fed looks for ‘Core’ PCE (which excludes food and energy prices) to be 2% or less. In August, PCE was 2.9% total and 1.6% Core. Rates up if Core hits 2% or more.

Corporate Earnings: 790 companies report earnings this week including Caterpillar, Netflix, Amazon, UPS, Ford, Boeing, Exxon, Procter & Gamble, and Altria.

Technical Trading Factors: On the stock side, the S&P 500 has traded above key overhead resistance levels and is around its 200 day moving average. On the mortgage bond side, the FNMA 3.5% coupon (that most lenders watch to price rate sheets) is just below it’s 50 day moving average. If anything, the charts look like stocks correct a bit and bonds hold.

Europe Drives Everything: Economic data and earnings will still take a back seat to Europe. This weekend, the 27 EU leaders met then the 17 Eurozone leaders met separately to discuss options. Their latest: To be properly capitalized for Eurozone defaults (my words, there was no explicit mention of defaults), European banks need about 100b euros in capital after marking their sovereign-debt holdings to market values. This estimate looks low. Let’s not forget that during testimony Q&A back in July 18, 2007, Ben Bernanke told congress subprime losses would be contained to “$50 to $100 billion,” then a few weeks later he said it could be “several multiples of that,” then one year later financial markets imploded. The same EU/Eurozone leaders meet again this Wednesday, October 26 to fine tune a plan. Markets await.

Bottom Line For Rates: Rates will be extremely volatile next week, but it’s hard to see rates spiking since European uncertainty will likely cap stock gains. Rates should trade in a +/- .125% range next week. I’m holding to my premise that rates can touch record lows as Eurozone issues play out. Here’s a MUST READ to explain this: How To Shop For A Mortgage.

It didn’t fade yet but I also noted that “rates will continue to rise and fall on each little development in the European debt crisis.” So let’s look at the latest in Europe and preview the October 17-21 week.

Recap Oct 10-14 Market Week
Overly optimistic interpretations of “less bad” news and data continue to drive trading.

Jobless claims last week were 404k, above but close to the 400k line, below which the job market is considered to be improving.

September retail sales were 1.1%, which was at the high end of expectations and the largest gain in 7 months.

Eurozone leaders are inching toward a new plan for recapitalizing banks and the bailout du jour for Greece. More below.

The result of this less bad news and data was that the S&P 500 rose squarely above it’s 50 day moving average (chart), and mortgage bonds (3.5% FNMA coupon) dropped below their 50 day moving average.

Rates rise when bond prices drop like this.

Preview Oct 17-21 Market Week
Here are next week’s economic calendar highlights with rate impacts:

Monster Earnings Week: This week is huge for earnings including reports from Apple, Microsoft, Intel, IBM, Citigroup, Bank of America, Wells Fargo, Goldman Sachs, Morgan Stanley, Coca-Cola, McDonald’s, and GE. Tech companies should be ok but financials may offset. Stock momentum was strong last week, contributing to bond selling that pushes rates up. Rates could rise a bit more on better earnings.

Manufacturing Reports: The October Empire State and Philly Fed manufacturing reports are released Monday and Thursday. Both reports were down sharply last month (-8.82 and -17.5 respectively). Any improvement will be in the ‘less bad’ category, which would bring negative rate sentiment. Rates even to up.

Europe Remains Huge U.S. Rate Factor: I’ll repeat a note from last week that market optimism about Eurozone bank safety nets misses the main point: Bank liquidity moves probably won’t stop defaults, they’ll just help manage liquidity problems when defaults come—and U.S. rates would likely benefit from Eurozone defaults. This needs to play out further, but there’s still no clear evidence supporting a sustained rate spike. It might not come this week since there’s new reports of progress, but this story is far from over, and the only bright spot is low U.S. rates medium term.

Technical Trading Factors: The 50 day moving averages noted above are important because there’s still room to drop from here—enough to push rates up another .125% to .25% near term. Charts (or “technicals”) are critical but ultimately impacted by economic fundamentals, which aren’t strong.

Inflation: September consumer and business inflation reports are Tuesday and Wednesday. No strong inflation trend here, so rates even.

Housing Starts & Existing Home Sales: Housing starts have been dismal and no big change expected. Existing home sales rose 7.7% in August, a five month high, so if this turns into a two-month trend, it will provide some optimism. Rates even.

Bottom Line For Rates: Rates could rise more next week on further perception of progress in Europe and corporate earnings, but it’s still reasonable to expect another dip to record levels in the coming months as Eurozone issues play out.

Here’s a MUST READ while waiting: How To Shop For A Mortgage.

But it’s a good time for refinancing (assuming borrowers are clean and have equity). Rates drop when bond prices rise, and mortgage bonds (aka MBS) were up about .375 yesterday on heavier-than-normal volumes. 10-year notes rallied 18/32nds and down to a yield of 2.74%. Today we have the debt bill moving to the Senate, but we have also had Personal Income and Outlays for June (+.1% but -.2%, respectively). After the numbers the 10-yr is at 2.70% and MBS prices are better another .250-.375.

Ally (aka GMAC) Earnings
Ally Financial reported a net income of $113 million for the second quarter of 2011, compared to $146 million in the prior quarter and $565 million for the second quarter of 2010. Ally’s mortgage operations (which include ResCap and the mortgage activities of Ally Bank and ResMor Trust) are broken down into several segments. The Origination and Servicing segment reported second quarter 2011 pre-tax income of $47 million, down from 2010′s $249 million, with the drop attributed to lower net servicing income, which was impacted by MSR valuation adjustments, lower production as a result of a smaller overall mortgage market, and compressed margins due to a shift in product mix and lower industry volume. Total mortgage loan production was $12.6 billion, up slightly from the 1st quarter but down from the $13.5 billion in the second quarter of 2010. Ally’s “Legacy Portfolio and Other” segment, which primarily consists of loans originated prior to Jan. 1, 2009, reported a pre-tax loss of $174 million in the second quarter of 2011, compared to a pre-tax loss from continuing operations of $19 million in the corresponding prior year period. The big drop was due to a mortgage repurchase expense of $184 million.

Mortgage Insurance Stats
According to MICA (Mortgage Insurance Companies of America) private mortgage insurers wrote $4.8 billion in new insurance on mortgage loans originated in June, up from $3.92 billion in May. MICA’s members include Genworth, MGIC, PMI, Radian, and RMIC. Insurers under the MICA umbrella had $606.3 billion in primary mortgage insurance in force last month, down from $610.8 billion a month earlier. Insurers who are part of MICA received 28,214 applications for private mortgage insurance in June. Of that group, 24,161 borrowers ended up using private mortgage insurance to refinance or purchase a mortgage. During the same month, the companies also reported 45,573 defaults and 38,753 cures on troubled mortgages.

One thing for sure is that US banks are holding on to more cash and locking in longer-term financing as they brace themselves for the consequences of a potential downgrade of the US’s triple A credit rating. The Financial Times notes that if US government bonds lose their AAA rating, banks using them as collateral may have to endure higher “haircuts” on the collateral, potentially sparking a credit crunch especially in the $3 trillion repurchase, or “repo”, market, on which large institutions rely for short-term funding.

Bank of America is not out of the woods yet. Recently six Federal Home Loan banks have “launched a salvo” against Bank of America’s proposed $8.5 billion mortgage bondholder settlement, suggesting the payout may need to be triple that amount. “Research reports used to determine the settlement figure were too favorable to B of A, used faulty estimates from the Charlotte, N.C., bank and ‘raise more questions than they answer.’” This reminds us that the FHLB’s don’t all have to act together in matters such as this, and the six (Boston, Chicago, Indianapolis, Pittsburgh, San Francisco and Seattle) have filed a separate claim. Others, such as the Federal Home Loan Bank of Atlanta were part of the June settlement along with PIMCO and BlackRock.

Flagstar is not out of the woods yet, either. The holding company for Flagstar Bank reported a 2nd quarter net loss of almost $75 million, following a first quarter 2011 net loss of almost $32 million, and a second quarter 2010 net loss of $97 million. The loss is attributed primarily attributed to “legacy balance sheet” issues. Flagstar has ramped up its commercial lending this year, which has helped, along with selling $68 million in non-performing commercial real estate assets. In the 2nd quarter “Mortgage rate-lock commitments increased $0.9 billion, or 16.8 percent, from prior quarter.”

The tally of 2011 failed banks is at 58 after the FDIC closed three banks Friday: in Florida American Momentum Bank took over Southshore Community Bank and LandMark Bank of Florida. And up in Colorado, Bank of Choice was closed by the Colorado Division of Banking, which appointed the FDIC as receiver, which brought in Bank Midwest, National Association, Kansas City, Missouri. By the way, if one wants to see the data on the latest number of professional liability lawsuits authorized by the FDIC Board of Directors and the total monetary value of these claims, one should visit LiabilityLawsuits .

We’re nearly done with 2Q earnings. The latest round involved BB&T (profit was up 46%, driven by better credit quality and loan growth), Fifth Third (profit up 76% driven by improving credit conditions and lower loan-loss provisions), US Bancorp (commercial and home loans saw roughly 3% growth vs. the prior quarter offsetting runoff of construction and credit card loans), PNC (lower borrowing costs and higher lending to manufacturing, financial services, and health care were offset by distressed real estate loans and lower consumer lending), and M&T (average loans grew at an annualized rate of 2% and it benefitted from the acquisition of Wilmington Trust). Overall, aside from Bank of America, most lenders did well profit-wise during the second quarter.