Slightly better start early this morning for MBSs and treasuries with US stock indexes at 9:00 pointing to a weaker open at 9:30. The World Bank cut its global growth forecast. The Bank cited weaker outlooks for the U.S., China and Russia as it lowered the forecast for global growth to 2.8 percent from 3.2 percent in January. Growth in the US was cut from +2.8% to +2.1%. We expect additional downward revisions from the Fed, the IMF and kicking and screaming from Wall Street firms. It is increasingly difficult now to paint the economy in rosy colors; no one wants to hear it or see it but as we noted yesterday afternoon the optimistic forecasts are now crashing into reality of low paying jobs, housing not recovering and consumers unwilling to increase spending much. The World Bank isn’t the best at forecasting, nor is the Fed and other central banks; that should be evident now with the Fed over the past year revising its outlook lower on each quarterly report. Fed officials meet June 17-18, anticipate raising their benchmark federal funds rate next year for the first time since 2006. They will release new forecasts for the economy and the outlook for the benchmark after next week’s meeting.
To add more confusion for the housing market, this morning’s MBA mortgage applications fly in the face of our weak housing outlook. Applications, after declining the last two weeks jumped strongly. The Market Composite Index, a measure of mortgage loan application volume, increased 10.3% on a seasonally adjusted basis from one week earlier. The Refinance Index increased 11% from the previous week. The seasonally adjusted Purchase Index increased 9% from one week earlier. The refinance share of mortgage activity increased to 54% of total applications from 53% the previous week. The adjustable-rate mortgage (ARM) share of activity remained unchanged at 8% of total applications. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) increased to 4.34 percent from 4.26 percent, with points increasing to 0.16 from 0.13 (including the origination fee) for 80% loans. The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,000) increased to 4.27 percent from 4.22 percent, with points increasing to 0.12 from 0.11 (including the origination fee) for 80% loans. The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA increased to 4.06 percent from 3.99 percent, with points increasing to -0.03 from -0.46 (including the origination fee) for 80% loans. The average contract interest rate for 15-year fixed-rate mortgages increased to 3.43 percent from 3.39 percent, with points increasing to 0.22 from 0.07 (including the origination fee) for 80% loans.
At 9:30 the DJIA opened -65, NASDAQ -17, S&P -7; 10 yr at 9:30 2.63% -1 bp, 30 yr MBS p[rice +8 bps from yesterday’s close.
This afternoon Treasury will auction $21B of 10 yr notes, re-opening the 10 issued in May. The demand will be interesting after the recent increase in the rate. The US 10 has the best yield compared to most key major economies. The stock market is weaker but we can’t glean anything significant in it. The World Bank forecast is causing the selling this morning but the key indexes haven’t had a down day since June 3rd.
This afternoon Treasury is expected to report the May budget had a deficit of $139B. Not much reaction is expected; the annual deficit is expected at about $490B the lowest since 2007.
Bloomberg reporting this morning that the Fed is unlikely to be selling any of its $4.3 trillion portfolio any time soon. That “is a widespread view in parts of the Fed, I think, and in financial markets,” Bullard said in an interview last week. While he disagrees with that perspective, it “won the day.” Minutes of their last meeting in April made no mention of asset sales. “Ambitious use of a central bank’s balance sheet to channel credit to particular economic sectors or entities threatens to entangle the central bank in distributional politics and place the bank’s independence at risk,” said Jeffery Lacker recently (Richmond Fed Pres.)
The bearish technical picture is still with us; even a better start for day isn’t going to change anything yet. Don’t expect much from the 10 yr or MBSs until at least 1:00 this afternoon when the results of the 10 yr auctions are reported.