THE BASIS POINT

WeeklyBasis 11/12: Record Low Rates Will Rise

Rates were down .125% last week, ending at record lows of 3.875% with zero points on 30yr fixed single family home loans to $417k. This level was last hit October 3. Below I review whether it’ll hold next week.

And please note: you can see if you quality now for for HARP II, the new refi plan for underwater homeowners, then Tuesday lenders will have more details from the government—which I’ll cover.

RECAP NOVEMBER 7-11 MARKET WEEK
Jobless Claims: Claims for unemployment insurance dropped to 390k last week, below the 400k threshold considered to signal an improving jobs picture. The 4-week average dropped to 400k, the start of an improving trend, which is better for stocks and worse for rates.

Europe/Greece/Italy: Europe’s debt crisis focused on Italy last week and it’s benchmark 10yr yields rose above 7% briefly as investors sold those bonds. The concern is justified: Italy is the world’s third largest debtor nation with $2.6 trillion in debt, making it too big to fail OR bail. But for now, actions to replace Italy’s prime minister Silvio Berlesconi (a politician) with Mario Monti (an economist) have given markets some confidence. Same story in Greece where politician George Papandreou was replaced by central banker Lucas Papademos. Plus the European Central Bank is buying European debt to help matters. This cycle of events hurt stocks and helped rates early in the week, then those trades reversed as the week ended.

PREVIEW NOVEMBER 14-18 MARKET WEEK
Here are next week’s economic calendar highlights with rate impacts:

Europe/Greece/Italy: See last week’s recap above. Same theme to open next week. Upward rate risk but hard to forecast given two regime changes.

Inflation: Business inflation (PPI) and consumer inflation (CPI) for October are reported Tuesday and Wednesday. September’s annual PPI was 6.9% total and 2.5% excluding food and energy. September’s annual CPI was 3.9% total and 2% excluding food and energy. All of those figures are creeping up and inflation threats cause bonds to sell and rates to rise. Rates up if trend continues.

Retail Sales: Sales rose 1.1% in September and are expected to rise 0.4% to 0.6% in Tuesday’s October release. This isn’t a big market mover, so rates neutral.

Manufacturing: Tuesday and Thursday bring Empire State and Philadelphia Fed November manufacturing reports, key benchmarks for U.S. manufacturing. The trend has been weak: in October, Empire State (NY) was -8.48, fifth straight monthly contraction. And Philly Fed (PA) was 8.7, up from September’s -17.5, the first positive in 3 months. For PA/NY surveys, 0 is line between growth/contraction. Also the Institute for Supply Management October manufacturing index was 50.8, with 50 as line between growth/contraction. Good news: 27 months of ISM growth. Bad news: ISM barely growing. Rates even to down on continued weakness, but upside surprise possible if NY or Philly data improve.

Washington Budget Debates: The U.S. debt circus will reengage this week as a bipartisan Congressional ‘super committee’ works toward a November 23 deadline to propose how to cut the U.S. budget by $1.2 trillion over 10 years. In theory the committee will be more productive than the full-scale Capitol Hill debates this summer, but politicians have a way of not making decisions. So it’s unpredictable for rates until we see tone of it next week.

Earnings: Third quarter earnings season is almost over and so far 61.9% of companies beat estimates and 59.8% beat top-line sales estimates according to Bespoke Investment Group, and they say bottom line numbers are ok for 3Q but sales are shaky. Next week’s consumer and housing themed earnings include: J.C. Penney, Lowe’s, Urban Outfitters, Home Depot, Wal-mart, Beazer Homes, and Dell.

Technical Trading Factors: Looking at stocks, the S&P 500 closed last week at 1264, up 10 points from the week before. Charts suggest a trading range capped by the 200 day moving average of 1272 and the 50 day moving average of 1201. As for mortgage bonds—namely the 3.5% Fannie Mae coupon most lenders use to price consumer rate sheets—they closed the week just below their 50 day moving average after holding above that line for two weeks. This suggests rates could rise a bit.

Bottom Line For Rates: Going into last week, I said “record lows seem feasible to touch again” and they did. But this week, the technical signals discussed above suggest a slight correction from record lows. Economic fundamentals don’t warrant a spike, but rather a .125% to .25% rise above record lows. Inflation, manufacturing, the end of 3Q earnings and Europe are the key themes. Radical daily rate swings are now the norm, so here’s how to shop for a mortgage in this environment.