The summer session is quietly coming to a close as school is back in session and parents are returning from last minute vacations. Although the pace of trading flows in financial markets has reflected the normal "slowness" that is expected to come in August...this quiet stillness has not been all that obvious on the surface. Interest rates have bounced around wide ranges while stocks have relentlessly rallied. Mortgage rates are down one day and up the next. Its been anything but "SLOW" on charts (I bet your pipelines are less busy though)...
That theme continues...
Check out how the S&P and 10 yr futures contract have behaved. A general uptrend in stocks with quite a bit of hesitation and a general downtrend in TSYs with quite a bit of anticipation...
Mortgages are no different...the FN 4.5 has chopped its way around 100-00 all morning.
A
continued theme among readers seems to be frustration. Frustration
about the way the markets react to news and economic data.
What the heck is going on in these markets?
The media has spent a great deal of time and energy attempting to
connect financial market price fluctuations with fundamental headline
news. Many actively participating readers seem to be hypnotized by the
explanations offered up by talking heads. We must remind all: avoid
attempts at rationalizing current financial market behavior with the
media's perception of economic reality. The logic behind the equity
markets relentlessly bullish bias is far more complex than the
generally backward looking statistical observations and data
collections of our government's finest economists.
Between October 08 and March 09, markets priced in their panicky
reaction to the notion of systematic bank failures. Fortunately for us, the rapid reactions
of the Federal Reserve and Treasury Department helped avoid the "worst
case scenario" market participants had built into stock prices. Slowly,
beginning in March as signs of stabilization began to emerge and panic
dissipated, stocks started to recover the October-March five month
selloff. Once the market began to believe that the worse case had been
avoided, traders reclaimed
the discount that was previously priced into stocks..bringing the S&P
back to pre-October "STATUS QUO" levels...
Unfortunately,in the process... the "avoidance of the worst case" recovery rally in
financial markets led to a major misinterpretation of economic reality. The trend of "BETTER THAN
EXPECTEDS" created an unwarranted amount of economic optimism in headlines...something the media has focused on all summer.
Although
we are willing to admit that a general slowing of the second
derivative (pace of contraction) has played a role in the formation and
continuance of the rally...in no way do we believe these fundamentals
to be the strong foundation of an economic recovery. Even better...given the massive amount of inventory reduction and cost
cutting that
has occurred over the past year...there is definitely room for the
perception of growth in the third and fourth quarter (THE SHORT TERM).
Yes...it appears
that the worst has been avoided...but does that mean we will
witness a rapid recovery or is this just short lived optimism?
WHO REALLY KNOWS...basing long term
outlooks on current data is essentially impossible given the
view is muddled with multiple variables and a wide variety of
assumptions. We do know this though..consumers are the fuel that fires our economic
engines. This industry is upfront and personal with the health of the consumer on a daily basis. What do you think...are consumers ready to lead this recovery?
We say no. Most are more likely to be net savers vs. spenders as they rebuild
lost wealth and dried up and damaged credit. In the short run business cost cutting will help...but we have some serious hurdles to get over in the long run.
Plain and Simple:
Fundamentals have helped restore status quo. Fundamentals have provided
a feeling that the worst of the storm is behind us. But fundamentals
are unable to tell us anything about our long term prospects for
growth...not yet at least, not with so many unknown economic inputs.
At
the moment we are witnessing professional traders react to the short
term perspective of the "big picture"...meaning the short term
positivities combined with the momentum of trading flows outweigh the
long term unknowns. This short term outlook has created a profitable
opportunity for the market...and everyone has jumped on to ride the freight train...til its last stop!
This sentiment has become the basis for the misunderstood
perception of an economic "RECOVERY". Dont get sucked into this read on
reality.... keep telling yourself
It's a trader's world, we're just living in it.
It's a trader's world, we're just living in it.
It's a trader's world, we're just living in it.
It's a trader's world, we're just living in it.
It's a trader's world, we're just living in it.
Long term fundamentals are WEAK. Trading flows run far
deeper than headlines...That is reality right now. Its all short term.
This
perception of reality has had adverse effects on the the mortgage
market. Interest rates have traded in a choppy range and yields have
been volatile....something a pipeline manager dreads.
Managing
interest rate and fall out risk in this marketplace can be a expensive
if not handled appropriately. All a manager can do is set protective
positions...then read and react to market flows. Unfortunately this is
inefficient and at times costly. The broad effect over the mortgage
market has been range bound rate sheets. Notice how lenders are always
willing to reprice for the worse faster than for the better? Notice
that sometimes you just dont get the rebate you were expecting?
If
a lender publishes par rates at 5.00% and "rate sheet influential" MBS
prices move lower...anyone who locked at 5.00% could cost the lender
money as prices are now below where they locked (TBA MBS helps with this risk). On the other hand, if par mortgage rates move to 5.125% and MBS rally....borrowers would expect rates to fall. Anyone who locked in
at 5.125% would be asking "why dont I get for the lower
rate?!?"....leaving the lender with the potential for fall out and added hedging costs. (Fall out is generally same as warehouse risk). Volatility does not bode well for a pipeline hedger....nor does it help lower mortgage rates.
That said...the economic unknowns are not going to clear up in the near
future...so wouldnt it make sense for the short term technicals to continue
to outweigh long term fundamentals?
If that makes sense to you...its seems like the appropriate outlook is that short term technical reactions will likely continue to lead to choppy price action and volatile ranges...not a great
implication for the stability of rate sheets. Dont miss opportunities
when they are presented.
Rate sheets are mostly unchanged to slightly worse.
Next possible ALERT event: The Treasury will action $42 billion 2 yr notes at 1pm..stay tuned for reactions.
Here is a look at previous auctions...
MBS, TSY,LIBOR QUOTES