THE BASIS POINT

WeeklyBasis 11/20: Lower Rates Coming. Loan Limit Clarity.

Rates were up .125% last week, edging off record lows the week before. Below I review last week’s market themes and preview the short-but-busy holiday week coming.

And please note: FHA loan limits have been raised to $729,750, but non-FHA Conforming loans are still capped at $625,500, and everything above $625,500 is a jumbo. Go here for current FHA, Conforming and Jumbo loan limits on 1-4 unit properties.

RECAP NOVEMBER 14-18 MARKET WEEK
Jobs Better: Claims for unemployment insurance dropped to 388,000 last week, a seven-month low and the third week below the 400k threshold considered to signal an improving jobs picture. The 4-week average dropped to 396,750, also a seven-month low and the start of an improving trend, which bodes better for stocks and worse for rates if the trend continues.

Inflation Flat: October’s annual producer inflation (PPI) was 5.9% total and 2.8% excluding food and energy. Annual consumer inflation (CPI) was 3.6% total and 2.1% excluding food and energy. All of these annual figures are creeping up, but the October monthly figures last week were resoundingly flat, so rates held lows as bonds liked this news.

Retail Sales Weak: Sales rose 0.5% in October following a 1.1% rise in September. Consumer spending is weak enough to lead to lower 4Q GDP and possible recession in first-half 2012. If jobless claims continue down, look for this to improve. Next big retail data will come after Black Friday kicks off holiday shopping this week.

Manufacturing Better: Better data from two key U.S. manufacturing benchmarks. 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. For both reports, 0 is dividing line between expansion/contraction.

Housing Starts Weak: Construction began on .3% fewer new homes in October; the annualized rate was 628k vs. the 1.5m needed to keep pace with population growth and the January 2006 peak of 2.27m. Too much of that excess was sold to people who couldn’t afford it. Recovery to a 1.5m pace unlikely before 2013.

PREVIEW NOVEMBER 21-25 MARKET WEEK
Here are next week’s economic calendar highlights with rate impacts:

Europe: There’s been some optimism the past 10 days as Italy’s prime minister Silvio Berlesconi (a politician) was replaced by Mario Monti (an economist) and Greece’s prime minister George Papandreou (a politician) was replaced Lucas Papademos (a central banker). But fear is moving back to center stage. The only consensus ‘solution’ is for the European Central Bank to print money and buy bonds of the most debt-strapped EU countries. Whether it’s actually a solution long-term isn’t being discussed yet. But short-term, such an ECB announcement might help stocks and hurt rates, while the longer-term outlook is worse for stocks and better for rates. Investors are right to be dubious on execution of an ECM bond buying program (what countries to target and how much to buy) and the ultimate impacts (does it really help these nations grow).

Washington Budget Debates: The U.S. bipartisan Congressional ‘super committee’ has until Wednesday, November 23 to propose how to cut the U.S. budget by $1.2 trillion over 10 years. It’s not going well. Same political paralysis theme as in Europe. If this continues in coming days, rates would benefit as investors seek shelter from uncertainty.

Existing Home Sales: Sales of existing homes dropped 3.0% in August-to-September but rose 11.3% from September 2011 to 2011. The telling stat was that 18% of contracts didn’t close in September (same as August), up from 9% in Sept 2010. This increase speaks to increasingly shaky buyers. This is the trend I’m watching. Rates usually neutral on this report unless it’s wildly outside expectations.

GDP: The second of three 3Q2011 GDP reports will show whether economic growth will hold at +2.5% as reported last month. The 2Q figure was +1.3% and 1Q was 0.4%. Rates even to down on flat or lower revision.

$99b in New Treasury Supply: $99b in Treasury Notes will be sold into markets as follows: $35b 2yr notes Monday, $35b 5yr notes Tuesday, $29b 7yr notes Wednesday. Sometimes supply uptake can rattle mortgage bond markets, pushing rates up, if Note demand is weak. But the theme next week is pointing toward U.S. bond demand. More below.

Technical Trading Factors:
Looking at stocks, the S&P 500 closed last week at 1216, down 48 points from the week before mostly on negative Europe sentiment. Charts suggest a bottom level of support at the 50 day moving average of 1207 if the mood stays dour. But bargain hunting after last week’s losses may push stocks up a bit, just don’t look for them to rise to the 200 day moving average of 1271. 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 for the second straight week, and are supported by the 25-day moving average. This suggests resilience in mortgage bonds and they could rise next week, pushing rates down bit.

Bottom Line For Rates:
My prediction last week of “a .125% to .25% rise above record lows” was correct. Rates rose .125% as noted in paragraph 1 above. For this Thanksgiving week, all the factors discussed above suggest rates even to slightly down, recapturing record lows at miscellaneous trading intervals during the week. I say it that way because big daily rate swings are the reality, and any rate you’re reading about in the news is already expired. So you have to target your rate and give your lender a standing order to lock when it’s there. Here’s more.

Happy Thanksgiving!