The Mortgage Week: FOMC Meeting, Treasury Auctions, and More

Aug. 13, 2010 - PRLog -- Equity markets are expected to open higher this week despite Friday’s weak employment report, and ahead of the Federal Reserve’s policy announcement Tuesday.

Before Monday’s opening bell, Dow futures are up 33 points to 10,646 and S&P 500 futures are up 4.25 points to 1,123.75. The 2-year Treasury note yield is up 2.4bps to 0.529% and the 10-year note yield is 1.4bps higher at 2.836%. The September delivery Fannie Mae 4.0 MBS coupon is -0-02 at 102-08 and the FNCL 4.5 is -0-02 at 104-13.

Economists at BMO noted that Treasuries are strengthening amid speculation of further easing from the Fed.

“The 30-year yield is threatening to drop below 4% for the first time since last October,” they wrote. “The 2-year rate is up slightly after briefly falling below 0.50% for the first time ever last week. The U.S. dollar is nursing its wounds, sitting at a 15-year low versus the yen.”

Key Events This Week:

Monday:

No significant data released.

Treasury Auctions:

11:30 ― 3-Month Bills
11:30 ― 6-Month Bills
Tuesday:

8:30 ― The Productivity & Costs report for the second quarter is expected to reflect the slowdown in GDP. In Q1, when GDP rose an annualized 3.7%, productive jumped 2.8% and labor costs were slashed by 1.3% ― a great outcome for businesses. In Q2, with GDP growing by by only 2.4%, productivity is expected to advance just 0.2%, while labor costs are anticipated to have risen 1.5%, according to economists polled by Reuters.

10:00 ― After increasing 0.5% in May, Wholesale Inventories in June are anticipated to rise 0.4%. Predictions range from +0.1% to +1.0%, according to Reuters. Economists will be watching the results closely as the Q2 GDP numbers could be revised depending on the results.

“We look for a 0.6% increase of wholesale inventories in June which is slightly stronger than the assumptions used in the BEA's estimate of GDP,” said economists at Nomura. “If that is the case, the tracking estimate of Q2 GDP would be revised up to 2.0% from our current estimate of 1.9%.”        

2:15 ― This week’s key release is the FOMC Meeting Announcement ― the policy statement released by the Federal Reserve after a two-day meeting on monetary policy. It’s a virtual certainty that the Fed will keep interest rates in a band between zero and 0.25%, which means all focus is on the statement. Themes include how the Fed will characterize the recent slew of disappointing economic numbers, what the current outlook is, and whether it will embark on more quantitative easing.

“There is a high likelihood that the Fed will modify its balance sheet tactics,” said economists at IHS Global Insight. “Mortgage principal repayments to the Fed are likely to be reinvested in new mortgage debt and treasury bonds so as to keep the Fed's balance sheet stable, rather than gradually declining. This would be tantamount to a modest easing in monetary conditions, and the markets have for the most part discounted this action. There is also a relatively low probability that the Fed could vote to expand its balance sheet by several hundred billion dollars in a move to beef up quantitative easing measures.”

Surveying recent speeches by FOMC members, economists at BBVA said the central bank is “becoming more concerned” about slowing growth.

“A topic of discussion during this week’s meeting could be the possibility of additional quantitative easing,” they wrote. “Nevertheless, we do not expect the committee to implement any policy measures just yet. Given the current economic outlook and the environment of low inflation, we anticipate the FOMC will vote to maintain the current fed funds rate. We continue to expect the first rate hike to occur in 3Q10.”

Treasury Auctions:

11:30 ― 4-Week Bills
1:00 ― 3-Year Notes
Wednesday:

7:00 ― MBA Mortgage Applications have risen for three consecutive weeks but remain near the lowest level in 13 years. With inventory high and mortgage rates low, there’s reason to see continued applications. But unemployment and economic uncertainty offset those positive factors.

“Despite historically low mortgage rates the number of home purchases has declined after an expiry of a federal tax cut for home buyers, while refinancing activity has been boosted to some extent,” said economists at Nomura. “We believe that this gap between purchase and refinance activity will persist for the time being.”

8:30 ― The Trade Balance is expected to narrow slightly after the monthly deficit expanded to $42.3 billion in May. Economists polled by Reuters look for a June deficit of $42.0 billion, though forecasts range widely from $38 billion to $46.2 billion. In the prior month, exports and imports both rose, but imports outpaced exports by five percentage points despite petroleum imports declining.

“The deficit has grown significantly from its low of -$24.9 billion in May 2009, but is still well below pre-crisis levels,” noted economists at BBVA, who anticipate a widening of the deficit in June. “The strong pace of import growth reflects a strengthening in domestic demand . . . If June’s import data comes in below expectations, the negative contribution of net exports could be smaller in the next GDP release.”

Meantime, economists at IHS Global Insight said imports is the key category to watch, while exports should remain unchanged. They predict a $44 billion gap in June.

2:00 ― The Treasury’s Budget Statement is expected to show the federal government overspent by $169 billion in July, versus a monthly deficit of $181 billion in the same month one year ago, according to Reuters. Those figures are more the double the average July deficit of $81.3 billion over the past 5 years, according to Bloomberg. In June, the fiscal year-to-date gap worsened to more than $1 trillion.

“Thanks to a gradual recovery in tax income the federal budget balance is expected to improve in July from a year ago,” said economists at Nomura.

Treasury Auctions:

1:00 ― 10-Year Notes
Thursday:

8:30 ― Initial Jobless Claims averaged 458k in July, down from 467k in June, equivalent to the 458k in May, and down from 463k in April. Despite the drop in the month, the week ending July 31 saw new claims spike to 479k, the highest level since early April (or 16 weeks ago). Economists anticipate claims to fall in the first week of August to 465k, a figure that indicates job losses at the national level.

“In spite of distortions from seasonal adjustments, the persistently high headline numbers suggest the recovery of the labor market has been very slow,” said economists at Nomura. “We believe initial claims will drift in a narrow range of 450-470k for the time being.”

Continuing claims, a tally of all those who are still receiving benefits, is expected to be 4.54 million at the end of July.

Treasury Auctions:

11:00 ― 30-Year Bonds
Friday:

8:30 ― The Consumer Price Index should continue to give the green light to an accommodative monetary policy. Headline prices are expected to rise 0.2% in July after falling 0.1% in June, putting the year-to-year gain at 1.2%, well below historical norms. Core prices, the more closely watched measure which excludes volatile food and energy prices, is expected to rise a less-than-frightening 0.1%, after advancing 0.2% in June. Annual core prices are anticipated to rise 0.9%, more than a percentage point below the Fed’s unofficial target.

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