Mortgage Rates Etc.

Mortgages rates, which were drifting during the week ended April 3 were virtually frozen during the week ending April 10 according to Freddie Mac’s Primary Mortgage Market Survey.

The 30-year fixed-rate mortgage (FRM) was unchanged at 5.88 percent although fees and points were down to 0.4 from 0.5.

The 15-year FRM had an average interest rate of 5.42 percent, identical to the week before although, again, fees and points went from 0.5 to 0.4.

Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) carried an average contract interest rate of 5.56 percent with 0.6 point, a bit of downward movement from the previous week when the average was 5.59 percent with 0.6 point.

Finally, the one-year Treasury-indexed ARM lost one basis point, averaging 5.18 percent for the week although fees and points moved upward to 0.7 from 0.5 point.

Frank Nothaft, Freddie Mac vice president and chief economist said, “Once again, mortgage rates held relatively steady this week amid release of subdued economic data. For example, pending existing home sales hit the lowest value since its (sic) introduction in January 2001, presaging additional weakness in single-family home sales over the upcoming months. Further, the economy lost 80,000 jobs in March, more than the market had anticipated, and the prior two months were revised downward as well.

“Meanwhile, house sales prices have fallen in most metropolitan areas, although there have been price gains in some areas. Just over half of the 150 large cities across the nation experienced negative annual house price growth in 2007, according the National Association of Realtors. The largest yearly drop of 18.8 percent occurred in Lansing, MI, while Cumberland, MD, experienced the strongest growth at 19.0 percent.”

The Weekly Mortgage Applications Survey conducted by the Mortgage Bankers Association showed rates to be essentially unchanged as well.

The average contract interest rate for 30-year FRMs decreased to 5.74 percent from 5.78 percent, with points, including the origination fee, decreasing to 1.05 from 1.11.

The rate for 15-year FRMs did have a noticeable change, decreasing to 5.27 percent from 5.39 percent with points increasing to 1.19 from 1.11. The average contract interest rate for one-year ARMs decreased to 7.02 percent from 7.06 percent, with points decreasing to 1.28 from 1.46.

Loan applications increased 2.5 percent on a seasonally adjusted basis from the previous week and 2.7 percent when unadjusted. The index measuring applications was up 16.4 percent from the same week in 2007.

Refinancing as a share of all mortgage activity increased slightly to 53.5 percent compared to 52.2 percent a week earlier but adjustable-rate mortgages garnered only 6.0 percent of the loan market based on applications. ARM applications had a 6.5 percent share the week before.

The Federal Reserve offered no explanation for the quarter-point cut in the discount rate on the day of the near-collapse of Bear Stearns in minutes of the March 16 meeting.

The minutes, released Tuesday, said Fed regional banks unanimously approved a 25 basis point reduction in the discount rate on March 16. The same day, Bear Stearns nearly collapsed and was taken over at $2 a share by JPMorgan.

Before March 16, the minutes said, six of the regional banks were in favour of cutting the primary rate by 50 basis points, one bank wanted a 75 basis point cut and three wanted no change. They later voted to reduce the rate by a collective 100 basis points - 25 points on March 16 and 75 points at the March 18 meeting.

By Adam Button, abutton@economicnews.ca, edited by Cristina Markham

©CEP News Ltd. 2008

A report from Wells Fargo and the National Association of Home Builders suggests the housing market was little changed from March to April, with their headline index coming in once again at a reading of 20, in line with the consensus.

In March and February the index was also at 20.

The present housing index for single family homes was 18 compared to the previous month’s reading of 20, while the future index jumped up to 30 compared to March score of 26.

In the last 12 months, the index has dropped a total of 13 points.

By Erik Kevin Franco and edited by Stephen Huebl

Fannie Mae and Freddie Mac have made considerable progress towards achieving financial stability, but more progress needs to be made, according to the Office of Federal Housing Enterprise Oversight’s annual report to Congress released on Tuesday.

“While they have made progress in fixing many of their systems, internal controls and risk management problems, they still have much work to do, especially with the continuing challenges of today’s mortgage market,” OFHEO Director James Lockhart said.

The report also noted an ongoing “significant supervisory concern” given the current volatility and uncertainty surrounding the U.S. mortgage market and renewed its calls for a stronger regulator of the system.

By Erik Kevin Franco and edited by Stephen Huebl

©CEP News Ltd. 2008

In spite of it all, the “it” being the stunning speed with which Bear Stearns hit rock bottom last month and the midnight ride rescue of the investment bank by J.P. Morgan Chase, Bear Stearns is still reporting a profitable first quarter.

The bank, reported a profit of $.86 per share on revenues of $3.4 billion. During the first quarter of 2007 revenue was $4.8 billion; net income was down 79% to $115 million from $554 million of $3.82 a share. As an indication of just how swiftly things went bad at Bear Stearns, the first quarter ended February 29 and over the weekend of March 15 the Bush Administration strong armed an acquisition of Bear Stearns by J.P. Morgan at a fire sale price of $2 per share - subsequently renegotiated to $10.

But even with the welcoming arms of J.P. Morgan about to embrace it, Bear Stearns has substantial legal problems looming. The company announced on Monday that it had received a “Wells Notice” from the Securities and Exchange Commission back in February indicated that the company may face civil charges growing out of the bidding process for municipal derivatives that are sold to states, municipalities, and other issuers of tax-exempt bonds. Earlier actions dating back to municipal market transactions back in the early 1990s are being investigated by the Justice Department.

There is also a civil investigation by the Federal Trade Commission of Bear Stearns’ subsidiary EMC Mortgage Corporation seeking information on whether EMC and Bear violated (unspecified) consumer protection laws in carrying out its servicing activities.

Federal Reserve Governor Kevin Warsh (voter) said rate cuts and liquidity injections are working to partially offset the impact of the current market turmoil, but cautioned that there are limits to what the Fed’s monetary policy can accomplish and that a full recovery is going to take some time.

While speaking at the Global Economic Forum in New York City, Warsh said an indication that market function has returned is when the Fed’s supply of liquidity is replaced by private liquidity.

“Fed policy–both with respect to liquidity tools and monetary policy–is partially offsetting the consequences of the liquidity and credit pullback on real activity,” he said. “But we must be careful to not ask policy to do more than it is rightly capable of accomplishing.”

He noted the problems afflicting the financial markets have been “long-in-the-making,” and as such recovery is unlikely to be “swift or smooth.” However, he said the Fed has already cut the target rate by a cumulative 3% since August and has taken “significant actions” to support liquidity.

“Consistent with our dual mandate of promoting maximum employment and stable prices, we also need to be alert to risks to price stability,” he said, noting that increases in food and energy prices have pushed up overall consumer prices and are putting upward pressure on core inflation and inflation expectations.

“We will continue to monitor the inflation situation closely. And, more broadly, in my view, as financial intermediation channels reset, monetary policy will become still more efficacious.”

Also in his comments, Warsh said market function will only be restored when private firms resume their roles. He noted that share and dividend buyback cuts would help the economy.

He also said corporate bond risks have narrowed, the measures of secondary market function have improved and the labor and commercial paper spreads have elevated.

Speaking the recent volatility in markets, Warsh said volatility is “generally a friend, not foe” of market functioning. “It should not be treated as an externality from which we suffer. Volatility, absent destabilizing moves, should be allowed to effectuate change in the financial architecture of private markets,” he said. “Only then, I suspect, will a more robust recovery in market liquidity, investor confidence, and real economic activity be achieved.

In a Q&A session following his speech, Warsh said the best the Federal Reserve can do is “mitigate” the impact of the economic crisis and that, without the rate cuts delivered to date, the real economy would be in worse shape. He also noted that the Fed’s monetary policy tools “don’t work overnight,” saying policy-makers need to be patient.

He also said the Fed can’t be “indifferent” to the value of the U.S. dollar.

By Stephen Huebl and edited by Cristina Markham

©CEP News Ltd. 2008

The United States will hold most of the economic spotlight on Tuesday morning with the release of March’s producer price index along with the Empire Fed’s manufacturing and the NAHB’s housing price indexes, both for April. Markets will also hear some comments from the U.S. Treasury while the Bank of Canada is scheduled to conducts some bond operations.

At 7:45 a.m. EDT, ICSC will release chain store sales for the week ending April 12. In the previous week, sales rose 0.3% year-over-year.

At 8:30 a.m. EDT, the U.S. Bureau of Labor Statistics will release the producer price index for March. Economists are expecting a 0.6% month-over-month increase in PPI compared to the previous 0.3% gain. Annual PPI is expected to increase 6.2% following the previous month’s 6.4% annual rise. Core PPI is expected to post a 0.2% month-over-month gain after rising 0.5% in the prior month. Annual PPI is expected to rise 2.8%, above the previous month’s 2.4% gain.

Also at 8:30 a.m. EDT, the New York Federal Reserve will release its manufacturing survey for April. The headline index is expected to rebound to -17.0 compared to the previous month’s -22.2 level. Markets will also be paying attention to the new orders, prices paid and employment indexes, which were -4.69, 50.56 and 4.49 respectively in March.

At 8:55 a.m. EDT, Redbook will release chain store sales for the week ending April 12. In the previous week, sales rose 0.8% year-over-year.

At 9 a.m. EDT, the U.S. Treasury will release net long-term and total TIC flows for February. Economists are expecting a pullback in net long-term TIC flows to a level of $60.0 billion from January’s $62.0 billion. Total TIC flows are expected to come in at $72.5 billion compared to the previous month’s $37.4 billion.

At 10 a.m. EDT, Sandra Braustein, director of the Fed’s Division of Consumer and Community Affairs, will testify before the House Financial Services Committee on financial literacy and education.

At 10:30 a.m. EDT, the Bank of Canada will sell C$5.6 billion in 2008.07.24, C$2.2 billion in 2008.10.16 and C$2.2 billion in 2009.04.16 bills.

At 11 a.m. EDT, European Central Bank President Jean-Claude Trichet and Bundesbank President Axel Weber will speak at a ceremony in Frankfurt commemorating the release of a book by former ECB chief economist Otmar Issing.

At 11:30 a.m. EDT, U.S. Treasury Secretary Henry Paulson and Assistant Secretary for Financial Markets Anthony Ryan will release the President’s Working Group’s Private Sector Committees’ best practices research.

Also at 11:30 a.m. EDT, the U.S. Treasury will sell $20 billion in a six-day cash management auction.

At 12:30 p.m. EDT, Special Envoy for China and the Strategic Economic Dialogue Alan Holmer will deliver remarks to the Global Business Dialogue at the National Press Club in Washington, D.C.

At 1 p.m. EDT, the National Association of Home Builders will release the housing market index for April, which economists expect to remain unchanged from March’s reading of 20.0.

At 1:15 a.m. EDT, the Bank of Canada will repurchase C$1.0 billion in various paper.

At 1 p.m. EDT, the U.S. Treasury will sell $20.0B in four-week bills.

At 5 p.m. EDT, markets will receive the ABC consumer confidence index for the week ending April 13. The index currently stands at -34.

8:30 US Producer Price Index (M/M) March Exp: +0.6% Prior: +0.3%

8:30 US PPI Ex Food & Energy (M/M) March Exp: +0.2% Prior: +0.5%

8:30 US Producer Price Index (Y/Y) March Exp: +6.2% Prior: +6.4%

8:30 US PPI Ex Food & Energy (Y/Y) March Exp: +2.8% Prior: +2.4%

8:30 US Empire Manufacturing April Exp: -17.0 Prior: -22.2

9:00 US Net Long-term TIC Flows FEB Exp: +$60.0 Prior: +$62.0B

9:00 US Total Net TIC Flows FEB Exp: $72.5 Prior: +$37.4B

10:30 CA BOC Conducts Bond Auction

11:00 EU ECB’s Trichet, ECB’s Weber speaks in Frankfurt

11:15 CA BOC Conducts a Cash Management Repurchase Operation

11:30 US TSY to sell $20B in 6-Day Cash Management Bills

13:00 US to Sell $8B 4-Week Bills

13:00 US NAHB Housing Market Index April Exp: 20 Prior: 20

13:30 EU ECB’s Tumpel-Gugerell holds speech in Athens

17:00 US ABC Consumer Confidence 13-Apr Prior: -34

By Erik Kevin Franco andedited by Nancy Girgis

©CEP News Ltd. 2008

The U.S. Labor Department’s headline measure of producer price inflation grew at 1.1% in March, up from February’s 0.3% gain and higher than forecasts for a 0.6% gain. The core measure of producer price inflation, which excludes cost increases in food and energy, edged up by 0.2%, in line with economists’ calls for a 0.2% increase in the month.

From a year ago, the core measure of producer price inflation was up 2.7%, a tick below forecasts for a 2.8% rise. The annual headline rate came in at 6.9%, higher than the consensus forecast of 6.2% for the 12-month period ending in March.

The total price of intermediate goods rose 2.3% on the month and posted a 10.5% gain from the same time a year ago. Excluding food and energy, the rise was 1.1% month-over-month and 5.5% on the year.

The cost of total crude goods rose 8.0% in March from February, while the year-over-year increase stood at 31.4%. Excluding food and energy, the rise was 3.5%, or 16.8% on the year.

Food prices jumped 2.0% in the month while energy increased 13.4%.

Prior to the release, economists from Bank of America said the headline PPI reading would largely reflect rising gasoline, fuel oil and natural gas prices. “This will push the headline CPI increase to an estimated 4.1% yoy. While lagged intermediate cost pressures will boost the core finished goods index, slowing economic activity will begin to put downward pressure on core consumer prices,” they noted.

Jennifer Lee from BMO Capital Markets noted that the release would be closely watched given the current worries about surging grain, dairy prices and oil prices.

By Stephen Huebl and edited by Nancy Girgis,

©CEP News Ltd. 2008

Wachovia has joined the parade of commercial and investment banks announcing first quarter losses and an intent to raise capital to carry it through the looming months of credit reversals.

The nation’s fourth largest bank announced Monday that it lost $350 million in the first quarter or $.20 per share, a loss that analysts had not expected. The bank had earned $2.3 billion - $1.20 per share - in the first quarter in 2007. The first quarter loss was caused by $2 billion in asset write-downs and $2.1 billion in provisions against credit losses.

The bank said that it will cut its dividend (currently $0.64) by 41 percent for a savings of $2 billion and will raise $7 billion through the sale of $350 billion in common and another $350 billion in preferred stock.

In addition to losing a chunk of their dividend, common stockholders will have their equity in the company diluted by an approximate 14% discount from Friday’s closing price. Preferred stock will pay a 7.5 percent dividend and it will be convertible into common stock at $31.20 a share. Wachovia had sold $3.5 billion in preferred stock two months ago.

The stock was trading at $24.97 during late morning trading on Monday, down 10.18 percent from the Friday close. Within the last year the stock has traded as high as $56.90.

The company’s problems began when it purchased Golden West a California bank and mortgage lender for $25.5 billion two years ago. Wachovia had coveted Golden West’s branch network but the acquisition exposed Wachovia to aggressive mortgage lending activities which included a heavy emphasis on interest only loans and Option ARMs - adjustable rate mortgages where the borrower can choose to pay the full amount of the monthly payment, interest only, or any amount in between.

The bank also announced plans to cut investment banking positions by 12 percent during the second quarter. This will bring job losses over the last year to about 25 percent of the bank’s employers.

The bank has not only been hit by a high rate of delinquencies in mortgages, especially in California, but by losses in its auto, credit card, and home equity businesses. And it may face problems in its commercial real estate division where it holds about $12 billion in construction loans.

Monday’s release of better-than-expected U.S. retail sales data for March did little to sway economists’ views of deteriorating consumer spending and possibility a recessionary U.S. economy.

“U.S. retail sales were marginally above consensus forecasts in March (and February’s figures were revised slightly higher), but the fact that the data beat the markets’ low expectations should not distract from the bigger picture: consumer spending is already soft, and the slump in consumer confidence suggests it will weaken further,” said Julian Jessop, chief international economist from Capital Economics.

U.S. retail sales rebounded in March according to a report from the Commerce Department, which showed a 0.2% month-over-month rise in sales following the previous month’s revised 0.4% pullback. Economists had been expecting a flat reading. Prior to revisions, retail sales were down 0.6% in February.

Economists at Bear Stearns agreed with the negative outlook, writing in a note to clients that, “These data in no way affect our judgment that the economy slipped into recession in December, which is largely based on labor market related data.”

Rob Carnell, chief U.S. economist at ING Financial wrote, “Whilst this release might be viewed as slightly more upbeat than expectations, with Easter falling at an unusually early time this year we have concerns about the accuracy of the seasonal adjustment right now.”

He noted that what is really happening with consumer spending and retail sales may not be evident for another month of two. “But, taking our cues from indicators of consumer confidence, we believe that household spending is turning decisively down and will register growth of less than 1% in 1Q08,” he said.

Excluding automobiles, retail sales rose 0.1% after shedding a revised 0.1% in February. The consensus was for a 0.1% month-over-month rise. Unrevised retail sales excluding autos fell 0.2% in February.

Meanwhile, retail sales excluding auto and gas showed no change compared to the previous month’s 0.1% decline.

The report came as a surprise to economists who had regarded weakness in February as broad based. “Major chain store reports were generally quite weak, unit auto sales fell to a two and a half-year low, retail payrolls contracted again, and consumer confidence plunged,” said Adrienne Warren from Scotia Capital. “Falling home prices, a stagnant job market, soaring gas prices and tighter credit conditions will keep U.S. consumers on the sidelines for some time.”

Among the leading the gains were a 0.2% rebound in motor vehicles and parts following the previous month’s 1.2% pullback and a 1.1% rebound in gasoline station sales, after February’s 0.5% pullback. Food and beverage sales also posted a 0.4% increase following the previous month’s unchanged reading.

Building materials fell 1.6% after falling 0.1% previously, and general merchandise fell 0.6% after rising 0.3% in February.

“This minimal gain in consumer spending will do little to prevent overall GDP growth from recording another flat reading in Q1 and does not augur well for preventing a decline in Q2 in the face of falling housing activity,” said Paul Ferley, assistant chief economist RBC Capital Markets. “To ensure that negative GDP growth does not extend into the second half of the year, we expect that the Fed will continue to lower Fed funds by 50 basis points at the end of this month followed by another 25 basis points in June.”

Markets nevertheless took the news positively with futures on the Dow Jones industrial average up 55 points to 12315 in the twenty minutes following the release, while two-year U.S. Treasury notes picked up 6 bps to 1.725% and 10-year notes up 3 bps to 3.455%. The US Dollar was relatively unchanged by the release.

By Erik Kevin Franco and edited by Stephen Huebl

©CEP News Ltd. 2008