Rates dropped as mortgage bonds rallied big and stocks were flat on a Fed pledge to keep overnight rates near zero through 2014, iffy New and Pending Home Sales, weak GDP, and doubts about investors in Greek debt to agreeing on losses they’ll take.

Greek debt negotiations will dominate market action early this week.

The latest looks like a deal where Greek bond investors exchange outstanding bonds for new ones with coupons as low as 3.6-3.75%, and take 50-70% losses in the process. If most private investors don’t agree, it could trigger credit default swaps (CDS) on these securities, leading a European bank liquidity issue, which is really a global issue, and U.S. rates could drop further in this scenario.

The week also begins with an EU summit that will focus on tighter fiscal union across Europe. But short-term, most sentiment hangs on the Greece deal.

Volatility will reign, with most probable scenario being low rates hold as investors focus on U.S. mortgage and Treasury bonds.

The week’s data breaks down like this:

Monday we’ll see the Fed’s preferred inflation measure, the Personal Consumption Expenditures Index (PCE), which is likely to be flat. Tuesday brings November’s Case Shiller home price report where we’ll find out if a losing streak extends into a third month or turns positive. Wednesday and Friday bring ADP and BLS jobs reports for January. Expectations are wide for both after blowout ADP (+325k private jobs created) and much better BLS (+200 nonfarm jobs created) for December. Also Wednesday is ISM Manufacturing for January which may show an improving trend extending into its 30th month. Plus 4Q earnings season rolls on all week.

Here I preview each item for those who want more details.

Looking at stocks, the S&P 500 closed last week at at 1316, flat on the week and well above its 200-day and 50-day moving averages of 1257 and 1255. Seems stock investors are awaiting signals out of Greece before committing further or pulling back. A possible deal impasse and/or CDS spiral on Greek debt could push the S&P 500 down to its 50 and 200-day averages. But given this unpredictable macro environment, analyst Robert Sinn put it best in his 1/28 Weekly Letter:

You can expect to hear people mention S&P 500 levels less often as they speak more in terms of individual names and in which sectors they want to be invested.

Looking at mortgage bonds (MBS), the 3.5% Fannie Mae coupon – a key benchmark lenders use to price consumer rates – rose a whopping 103 basis points last week to close at 103.69. MBS are now a comfortable 88 basis points above 25-day moving average and 125 basis points above their 50-day moving average.

Rates drop when bond prices rise like this, but rates only dropped .125% because lenders didn’t price all these gains into rate sheets until they see whether the rally holds—which again, is dependent largely on Greece to start the week.

The tricky balance is that U.S. data could continue its modest improvement this week, so if the EU situation stabilized even slightly, MBS would sell, pushing rates up. And lenders don’t want to get caught in that reversal so they price conservatively.

I’ll repeat my outlook for last week since the Greek deal is dragging on:

MBS and rates will hold or improve slightly if the Greek debt deal goes sideways. But if it’s reasonably clean -meaning there’s no event that triggers claims on credit default swaps and squeezes banks – then we could see U.S. rates rise short-term as investors shift out of MBS and Treasury safe havens into riskier assets.

BOTTOM LINE: Rates are absurdly low. Only a meltdown in Europe will cause U.S. rates to go lower near-term.

If you’ve been waiting for a rate bottom, this could be your week.
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Related:
-Refi Roadmap: A Locked Rate Isn’t A Closed Loan
-Stat by Stat: Recap Jan 23-27, Preview Jan 30-Feb 3

SUPER-CONFORMING RATES ($417,001 to $625,500 cap* by county) 0 POINT:
30 Year: 4.0% (4.12% APR)
FHA 30 Year: 3.75% (3.87% APR)
5/1 ARM: 3.125% (3.245% APR)

JUMBO RATES ($625,501 to $2,00,000) 1 POINT:
30 Year: 4.25% (4.37% APR)
10/1 ARM: 3.5% (3.62% APR)
5/1 ARM: 2.625% (2.745% APR)

Better or worse rates apply to specific borrower and property profiles. Better or worse rates available using tax deductible points or zero-cost transactions. These rates assume full doc pricing on Single Family Home purchase loans for borrower with 740 FICO score or greater, at least 20% equity (unless FHA), and 6-12 months reserves left over after close (retirement assets counted at 60% of value for reserves). ARM rates adjust the first month after initial fixed period shown, and once per year thereafter until year 30. Adjusted rate calculated by adding 2.25% margin to 1yr LIBOR index at time of adjustment. At first adjustment LIBOR+margin cannot exceed start rate+5%, subsequent yearly adjustments can never be greater than 2% per year, total of all adjustments for 30yr life of loan can never exceed start rate+5%. Rates based on loan amount ranges shown and rates available at the time of production. Rates aren’t a loan commitment nor a loan guarantee, and are subject to change without notice.

*Conventional Super-Conforming cap = $625,500. FHA Super-Conforming cap = $729,750.

Rates rose as bonds sold and stocks rallied on better U.S. housing and jobs data, mixed earnings, and optimism about Greece getting investors in their bonds to agree on losses.

The months-long talks have centered around a target 50% loss for investors. It could be higher and if so, could lead to a situation where defaults trigger a liquidity crisis for European banks. This would cause stocks to sell and a rally in U.S. mortgage and Treasury bonds, pushing our rates down.

There’s also a U.S. Fed meeting and press conference Wednesday where it’s likely the Fed will hold to current policy. Some expect a more explicit signal of QE3, which is when the Fed prints money to buy bonds and lower rates.

I don’t think it happens this meeting, and if not, both U.S. stocks and bonds could sell off a bit, pushing rates up.

Adding to volatility will be 4Q GDP, 3 key housing reports, and earnings from 119 S&P 500 companies.

Here I preview each item for those who want more details.

Looking at stocks, the S&P 500 closed last week at at 1315, up 2% on the week and well above its 200-day and 50-day moving averages of 1257 and 1249. Given that the Fed may well disappoint on QE3 and a possible impasse or worse on Greek debt, it’s probable that the S&P 500 could drop as much as 5% to it’s 50-day average. But it could be offset by better earnings and U.S. data.

Looking at mortgage bonds (MBS), the 3.5% Fannie Mae coupon—a key benchmark lenders use to price consumer rates—dropped 54 basis points last week to close at 102.66.

Rates rise when bond prices drop, and we’re lucky rates only rose .125% because normally an MBS move this big would cause lenders to adjust rates more.

MBS are now resting just 3 basis points above 25-day moving average and 35 basis points above their 50-day moving average. Those averages have provided strong support in recent months, and will be tested this week by Fed and European issues noted above.

MBS and rates will hold or improve slightly if the Greek debt deal goes sideways. But if it’s reasonably clean—meaning there’s no event that triggers claims on credit default swaps and squeezes banks—then we could see U.S. rates rise short-term as investors shift out of MBS and Treasury safe havens into riskier assets.

If you’re a consumer rate shopper and can’t stomach the volatility, remember this:

Rates are still a hair above the record low line, and only a massive meltdown in Europe will cause U.S. rates to go lower near-term. Holding for better in the next 1-2 weeks is rather feeble.
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Further Reference:
-Details of Key Data & Events Jan 23-27

SUPER-CONFORMING RATES ($417,001 to $625,500* cap by county) 0 POINT:
30 Year: 4.125% (4.245% APR)
FHA 30 Year: 3.75% (3.87% APR)
5/1 ARM: 3.25% (3.37% APR)

JUMBO RATES ($625,501 to $2,00,000) 1 POINT:
30 Year: 4.375% (4.495% APR)
10/1 ARM: 3.625% (3.745% APR)
5/1 ARM: 2.875% (2.995% APR)

Better or worse rates apply to specific borrower and property profiles. Better or worse rates available using tax deductible points or zero-cost transactions. These rates assume full doc pricing on Single Family Home purchase loans for borrower with 740 FICO score or greater, at least 20% equity (unless FHA), and 6-12 months reserves left over after close (retirement assets counted at 60% of value for reserves). ARM rates adjust the first month after initial fixed period shown, and once per year thereafter until year 30. Adjusted rate calculated by adding 2.25% margin to 1yr LIBOR index at time of adjustment. At first adjustment LIBOR+margin cannot exceed start rate+5%, subsequent yearly adjustments can never be greater than 2% per year, total of all adjustments for 30yr life of loan can never exceed start rate+5%. Rates based on loan amount ranges shown and rates available at the time of production. Rates aren’t a loan commitment nor a loan guarantee, and are subject to change without notice.

*Conventional Super-Conforming cap = $625,500. FHA Super-Conforming cap = $729,750.

Rates held lows on weaker U.S. retail sales and jobs data, and S&P’s broad EU credit downgrades.

The downgrades now raise a new issue: the possible downgrade and reduction in size of the EFSF, EU’s bailout fund. Also Greece will resume trying to get Greek bond investors to agree on losses this week. Those talks stalled last week.

Plus there’s lots of 4Q earnings and key housing data next week. Here I preview each item.

As for stocks, the S&P 500 closed last week at at 1289, up .86% on the week and well above its 200-day moving average of 1259. While this is slightly overbought territory, the 200 DMA and the 50 DMA at 1244 both provide some downside support if earnings disappoint and the EU situation, especially Greece, grows more dire this week.

Looking at mortgage bonds (MBS), the 3.5% Fannie Mae coupon—a key benchmark lenders use to price consumer rates—rose 11 basis points last week to close at 103.20.

Rates drop when bond prices rise, but this isn’t enough of a rise for lenders to adjust consumer rates down, which is why rates held.

Another reason for lender hesitation is that MBS closed last week a hair below record highs set in September when the Fed renewed their low rate commitment by saying they’d keep buying MBS.

MBS are a comfortable 62 basis points above their 25-day moving average, and have several layers of support below that at the 50, 100, and 200 day moving averages.

These MBS technical signals continue to suggest rates will hold in their current record low range or .125% higher near-term.

People in contract to buy homes must lock rates in order to stay on target with loan approvals and closing, but refinancers have two choices: (1) hold for better, or (2) lock record lows now.

Option two is advisable since mortgage bonds are now at record levels. Even if they rise a bit, lenders are still unlikely to lower rates. We’d need MBS prices to spike for that to happen.

With EU problems driving our rates down for so long, it’s easy to get complacent, but if U.S. economic data improves next week and beyond, MBS can reverse quickly.

Remember, rates change all day everyday as mortgages trade, so the best thing to do is give your mortgage lender a rate target you can’t or won’t go above and give them a standing order to lock it when it comes.
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Economic Data Roundup:
-Recap Last Week, Preview Next Week

SUPER-CONFORMING RATES ($417,001 to $625,500 cap* by county) 0 POINT:
30 Year: 4.0% (4.12% APR)
FHA 30 Year: 3.75% (3.87% APR)
5/1 ARM: 3.125% (3.245% APR)

JUMBO RATES ($625,501 to $2,00,000) 1 POINT:
30 Year: 4.375% (4.495% APR)
10/1 ARM: 3.5% (3.62% APR)
5/1 ARM: 2.75% (2.87% APR)

Better or worse rates apply to specific borrower and property profiles. Better or worse rates available using tax deductible points or zero-cost transactions. These rates assume full doc pricing on Single Family Home purchase loans for borrower with 740 FICO score or greater, at least 20% equity (unless FHA), and 6-12 months reserves left over after close (retirement assets counted at 60% of value for reserves). ARM rates adjust the first month after initial fixed period shown, and once per year thereafter until year 30. Adjusted rate calculated by adding 2.25% margin to 1yr LIBOR index at time of adjustment. At first adjustment LIBOR+margin cannot exceed start rate+5%, subsequent yearly adjustments can never be greater than 2% per year, total of all adjustments for 30yr life of loan can never exceed start rate+5%. Rates based on loan amount ranges shown and rates available at the time of production. Rates aren’t a loan commitment nor a loan guarantee, and are subject to change without notice.

*Conventional Super-Conforming cap = $625,500. FHA Super-Conforming cap = $729,750.

This drop came despite improving jobs, retail sales, and manufacturing data. Below I recap, preview the rate and stock week ahead, and explain why rates are holding lows despite better economic data. Scroll to ‘Bottom Line’ if you’re on the run.

RECAP JANUARY 3-6 MARKET WEEK

Manufacturing Better Again: The Institute for Supply Management’s December manufacturing report 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.

Blowout ADP Jobs Report: Payroll provider ADP’s December jobs report showed 325,000 private jobs created, blowing away estimates of 178,000 and November’s 204,000 figure. Still rates didn’t rise. More in BLS jobs report below.

Jobless Claims Down-Trend Continues: Claims for unemployment insurance resumed their down trend the week of 12/31 after rising the week before—they’re now down four of the last five weeks. Jobless claims were 372,000 for week ended December 31, down 15,000 from previous week, and the 4-week moving average was 373,250, down 3,250. Average claims since 2000 are 390k, so so 1-week and 4-week numbers are better than long-term trend. More good U.S. economic news.

Holiday Retail Sales Looking Better: The Commerce Department’s December retail sales report is due next Thursday, and previewed below. But the ICSC-Goldman Sachs and Redbook Research chain store sales numbers each week give a more frequent pulse. Last week’s ICSC-Goldman and Redbook numbers continued the positive holiday shopping trend (driven by deep retailer discounts) for the week ended 12/31: ICSC +5.3 and Redbook +4.9 versus same week in 2010.

Better BLS Jobs Report: The Bureau of Labor Statistics December 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. And here’s a good explanation of how jobs are counted.

PREVIEW JANUARY 9-13 MARKET WEEK

Next week’s economic calendar is pretty light, but there are still many factors impacting markets. Highlights below with rate impacts.

Retail Sales: November’s retail sales were 0.2%, confirming that early reports of strong post-Thanksgiving Black Friday sales were overblown. Estimates call for a 0.4% rise in December’s retail sales report Thursday. The ICSC-Goldman and Redbook weekly sales reports discussed above were better year-over-year, but Thursday’s Commerce Dept. report still isn’t likely to be a blowout number. Rates even.

Treasury Debt Auctions: $66n in new Treasury debt will be auctioned as follows: $32 in 3yr Notes Tuesday, $21 in 10yr Notes Wednesday, $13 in 30yr Bonds Thursday. These auctions (not always same coupons) happen every other week. Overall, demand for this new Treasury debt has been strong the past couple rounds, helping mortgage bond (MBS) demand, which keeps rates low. Sentiment is cautious so bonds are in favor, but MBS are priced for perfection. So rates steady, even if strong auction demand.

Europe Front & Center Again: German and French leaders Angela Merkel and Nicolas Sarkozy meet Monday with some brief public comments after. This is likely be reiteration of previously announced debt crisis plans to centralize fiscal authority (which is inevitable and a long slog). They may also preview the agenda for the January 30 EU summit. Additionally, the first ECB meeting of 2012 is is Thursday where no rate changes are expected. And finally, markets expect ratings agency Fitch to downgrade EU credit outlook on Thursday. Such action would cause investors move into U.S. Treasuries and mortgage bonds, keeping rates low.

Lots of Fed Chatter: There are nine senior Fed officials making public speeches everyday but Thursday next week. Traders will be looking for signals about more government buying of mortgage bonds to keep rates low. On Friday 1/6, we got two such signals that stoked mortgage bond markets and brought rates down: (1) NY Fed president William Dudley said he thinks the Fed should continue accommodative policy to help housing, and (2) Boston Fed president Eric Rosengren was more explicit, saying “Further purchases of mortgage-backed securities would in my view help provide a more rapid recovery in housing.”

Stock & Bond Technicals: Looking at stocks, the S&P 500 closed at at 1278, up 1.61% on the week, ending in slightly overbought territory, and above its 200-day moving average of 1259. Earnings season kicks off next week but doesn’t hit full steam until the week after, so headline factors like Fed and EU issues noted above will drive sentiment. As for mortgage bonds (MBS), the 3.5% Fannie Mae coupon—a key benchmark lenders use to price consumer rates—rose 26 basis points on the week to close at 103.09. Rates dropped .125% as a result. MBS are now a comfortable 70 basis points above their 25-day moving average.

Bottom Line: I said rates would be even to up .125% last week on expectations of a stronger jobs report. We got the better jobs data but rates actually dropped .125%, mostly on Friday’s rather surprising comments from NY and Boston Fed presidents signaling more mortgage bond buying. Boston’s Fed president was especially explicit (excerpt above). Mortgage bonds are now priced for perfection, meaning any positive news would cause them to sell, pushing rates up a bit. But there’s not a lot of economic news next week. Only an impending ratings downgrade in Europe, more Fed speeches, and a rather light entry into earnings season. So rates will hold this range they’ve been in for weeks, and I expect them to be even to up .125%.

SUPER-CONFORMING RATES ($417,001 to $625,500 cap* by county) 0 POINT:
30 Year: 4.25% (4.37% APR)
FHA 30 Year: 3.875% (3.995% APR)
5/1 ARM: 3.5% (3.67% APR)

JUMBO RATES ($625,501 to $2,00,000) 1 POINT:
30 Year: 4.5% (4.62% APR)
10/1 ARM: 3.625% (3.745% APR)
5/1 ARM: 2.875% (2.995% APR)

Better or worse rates apply to specific borrower and property profiles. Better or worse rates available using tax deductible points or zero-cost transactions. These rates assume full doc pricing on Single Family Home purchase loans for borrower with 740 FICO score or greater, at least 20% equity (unless FHA), and 6-12 months reserves left over after close (retirement assets counted at 60% of value for reserves). ARM rates adjust the first month after initial fixed period shown, and once per year thereafter until year 30. Adjusted rate calculated by adding 2.25% margin to 1yr LIBOR index at time of adjustment. At first adjustment LIBOR+margin cannot exceed start rate+5%, subsequent yearly adjustments can never be greater than 2% per year, total of all adjustments for 30yr life of loan can never exceed start rate+5%. Rates based on loan amount ranges shown and rates available at the time of production. Rates aren’t a loan commitment nor a loan guarantee, and are subject to change without notice.

*Conventional Super-Conforming cap = $625,500. FHA Super-Conforming cap = $729,750.

Below I recap last week’s housing and jobs data, and preview the rate and stock week ahead. Scroll to ‘Bottom Line’ if you’re in a New Year rush. And I offer humble thanks to all my WeeklyBasis readers as I kick off year nine of this report.

RECAP DECEMBER 26-30 MARKET WEEK

Home Prices Down Again: Last week, Case Shiller reported 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. This is the second straight declining month following a five-month ’20-City’ streak of modest rises. This followed FHFA’s report on 12/22 showing the same trend for homes with Fannie/Freddie loans: October was -0.2% month/month and -2.8% year/year. CoreLogic and Zillow November home price reports come out in the next two weeks–their October reports confirmed the down trend.

Blowout Pending Home Sales. But Beware: 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. This report was strong but remember: 33% of realtors reported cancelled deals on existing home sales October and November, and this pending home sales report is a leading indicator of existing home sales expected to close in 60 days.

Improving Jobs Data: Claims for unemployment insurance were up for the week but down for the month. Jobless claims were 381,000 for week ended December 24, up 15,000 from previous week, and the 4-week moving average was 375,000, down 5,750. Average claims since 2000 are 390k, so even with the weekly rise, the 1-week and 4-week numbers are still better than long-term trend. But this number doesn’t capture newly hired people or new jobs created. That data is in this Friday’s jobs report, previewed below.

PREVIEW JANUARY 3-6 MARKET WEEK

Next week’s economic calendar is all about jobs, but also has important manufacturing and chain store sales data. Below are noteworthy reports with rate impacts.

ISM Manufacturing: Tuesday is the Institute for Supply Management’s December manufacturing report, which was 52.7 in November, with 50 as dividing line between between expansion and contraction. Good news: November was the 28th month of growth and a 5 month high. Bad news: growth has been slim. December estimates call for 53.4. Also ISM’s December non-manufacturing index that measures services industries is due Thursday. Estimates call for 53, a slight increase over last month’s 52 which was the lowest since January 2010′s reading of 50.7. Rates won’t swing big on these reports unless there’s an unlikely surprise.

ADP Jobs Report: Thursday is payroll provider ADP’s December jobs report. In November, ADP showed 206,000 jobs created, and December estimates call for 200,00. This is a precursor for Friday’s main event: the BLS jobs report. If it exceeds expectations, rates will rise.

Jobless Claims Trend: Last week’s jobless claims rose as recapped above. Thursday’s report will be closely watched to see if the rise sticks or not. Rates even as markets hold for Friday.

Holiday Retail Sales: The ICSC-Goldman Sachs and Redbook Research chain store sales numbers released each week give a more frequent retail sales read than the Commerce Department’s monthly retail sales report. That doesn’t come until 1/12, but we’ll see Wednesday if ICSC-Goldman and Redbook numbers for 12/31 can continue the positive holiday shopping trend they showed last week: ICSC +4.5 and Redbook +4.3, both year-over-year figures for week ended 12/24. Minimal rate impact short-term.

The Week’s Main Event–BLS Jobs Report: Estimates call for the Bureau of Labor Statistics December jobs report to show 150-165k new non-farm jobs created vs. the 120k created in November, and for unemployment to rise from 8.6% to 8.7%. There are two different datasets for jobs gained/lost and unemployment, so this report is usually a wildcard as markets sort through it. We’d have to be on the upside of expectations for rates to rise. I cover this and all data daily, so stay tuned.

Stock & Bond Technicals: Looking at stocks, the S&P 500 closed at at 1258, down .55% on the week, ending right near its 200-day moving average of 1259, and ending 2011 exactly even. As for the first week of 2012, Bespoke says that, since 1928, the S&P 500 has averaged a .61% gain to start the year with positive returns 65% of the time. As for mortgage bonds (MBS), the 3.5% Fannie Mae coupon—a key benchmark lenders use to price consumer rates—rose 85 basis points on the week to close at 102.83. Normally a rise like this would cause a nice rate drop, but lenders held the line a second week since MBS moves were on very low volume. MBS are now a comfortable 60 basis points above their 25-day moving average after closing below it Friday, December 23.

Bottom Line: Last week, I said “rates should be even to up slightly as the 25-day average on MBS is tested.” As noted above, MBS rallied to close well above that 25-day average mark. However, rates stayed even despite the rally because volume was light and lenders were conservative about adjusting rate sheets until normal volume returns to provide more reliable signals. I expect rates to remain even to up .125% next week as MBS stick to their multiweek pattern of holding at the 50-day moving average even if stocks rally.

SUPER-CONFORMING RATES ($417,001 to $625,500 cap by county) 0 POINT:
30 Year: 4.25% (4.37% APR)
FHA 30 Year: 3.875% (3.995% APR)
5/1 ARM: 3.75% (3.87% APR)

JUMBO RATES ($625,501 to $2,00,000) 1 POINT:
30 Year: 4.5% (4.62% APR)
10/1 ARM: 3.625% (3.745% APR)
5/1 ARM: 2.875% (2.995% APR)

Better or worse rates apply to specific borrower and property profiles. Better or worse rates available using tax deductible points or zero-cost transactions. These rates assume full doc pricing on Single Family Home purchase loans for borrower with 740 FICO score or greater, at least 20% equity (unless FHA), and 6-12 months reserves left over after close (retirement assets counted at 60% of value for reserves). ARM rates adjust the first month after initial fixed period shown, and once per year thereafter until year 30. Adjusted rate calculated by adding 2.25% margin to 1yr LIBOR index at time of adjustment. At first adjustment LIBOR+margin cannot exceed start rate+5%, subsequent yearly adjustments can never be greater than 2% per year, total of all adjustments for 30yr life of loan can never exceed start rate+5%. Rates based on loan amount ranges shown and rates available at the time of production. Rates aren’t a loan commitment nor a loan guarantee, and are subject to change without notice.