Recap of Yesterday

  • HAMP REPORT: Few Loan Modifications Made Permanent. READ MORE
  • Fed Governor Calls Attention to Tightened Mortgage Guidelines, Outlines Industry "To Do" List. READ MORE
  • A Call to Action for Private Capital: Filling the Leadership Void in the Housing Industry. READ MORE
  • Household Net Worth Rises in Third Quarter. Mortgage Borrowing Down $370bn. READ MORE
  • Geithner: TARP Extension to Help Mitigate Foreclosures, Stabilize Housing. READ MORE
  • Realty Trac: Forclosure Filings Down 8% in November. READ MORE
  • Fed MBS Purchases Hold Steady at $16bn. READ MORE

The third auction of the week was met with weak demand, something the market was expecting. After the auction results were announced at 1pm, short covering and some bargain buying helped stabilize rates. While the RANGE did hold in 10s,  the yield curve continued to steepen. This implies year end "window dressing"/ profit churning strategies may have run their course as seasonal slowness is fast approaching.  As a result, accounts are reallocating  funds back into risk averse assets in the short end of the yield curve.

Below is a chart illustrating the market's disdain for the long end of the yield curve. The bp difference between 2yr TSY yields and 10yr TSY yields is testing all time highs of 275 bps, a break beyond this level would confirm our fears that a lack of liquidity was settling in over the longer dated TSY and "rate sheet influential" MBS coupon marketplace. Unfortunately a steeper yield curve brings about less rate sheet rebate and higher mortgage rates.

So far this morning

  • SHANGHAI -0.21%, HANG SENG +0.93%, TOPIX +1.68%, NIKKEI +2.48%, CAC +0.77%, DAX +1.31%, FTSE +1.03%
  • House nears passage of financial overhaul legislation. The "cram down" amendment will be debate todayREAD MORE

After a slow week of economic data, market participants were treated to a better than expected read on November Retail Sales this morning.

Led by a 6.0% surge is GASOLINE sales and 2.8% move higher in ELECTRONICS purchases...retail sales improved by 1.3% in November, better than forecasts for a 0.7% gain. Excluding autos, retail sales ticked up 1.2%, which was "on the screws" or exactly as expected. October retail sales were revised for the worse, from +1.4% to +1.1%.  On a year over over basis, retail sales rose 1.9% (since last November), this is the first YoY increase since August 2008.

Here is a table summarizing the data.

While this data was stronger than expected, I have a few bearish observations.  Ex-gasoline, retail sales were up 0.8%. Ex-gas and autos, retail sales were only up 0.5%.  In terms of what consumers like to buy, just to buy, aka discretionary sales were down 0.7%, miscellaneous retailer sales were down 1.8%, and furniture/home furnishing sales dipped 0.7%.  While these categories are not large contributors in terms of dollar prices...they do nonetheless indicate less discretionary consumer spending. On top of that...previous months were revised downward.

Not surprisingly, the better than expected consumer spending data added optimism to stocks and pushed rates higher.

The 10yr TSY yield is testing our first range outlier at 3.56%.

The January FN 4.0 is -0-09 at 98-09 and the January FN 4.5 is -0-05 at 101-05.

Mortgage rates will again move higher this morning....

READ MORE on our outlook.

Consumer sentiment data at 955.