Anthony Hood
Equity Investment Capital
Office: 949-891-0067
Email: tony@equityinvestmentcapital.com
website: www.equityinvestmentcapital.com

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Wednesday, January 05, 2011

Prior to 8:15 this morning the interest rate markets were trading better; at 8:15 markets turned and selling pushed rates up and prices lower on treasuries and mortgages. The Dec ADP employment data was widely expected to show an increase of 100K jobs in the month; a blow out number, ADP said new jobs jumped 297K. Treasuries and mortgage prices immediately turned lower, the 10 yr note at 9:00 after being up 9/32 traded -17/32 with its yield up 7 basis point from yesterday’s close, mortgage prices at 9:00 -12/32 (.37 bp). The ADP data was strong across the spectrum; small business jobs increased 141K, manufacturing jobs +26K and service sector up 270K. It was the largest increase on ADP data since ADP began reporting 22 months ago. Analysts immediately began revising estimates for the BLS data on Friday; prior to the ADP markets were expecting non-farm jobs on Friday to be up 132K with non-farm private jobs up 142K. Over the 22 months ADP has been reporting jobs only 5 times has the ADP estimate exceeded the BLS data. The only anomaly in the report this morning, it covered 5 weeks instead of the normal 4 weeks and may be over-stated with holiday hirings; nevertheless it was a huge surprise.

The reaction to the huge jobs jump sent interest rates up as you would expect; the 10 yr is still however confined to its 25 basis point range that has kept rates relatively stable for most of the last month. Mortgages getting slammed this morning, at 9:15 testing the first support at 98-31/32 (98.96 bp). The equity markets didn’t get any traction on the jobs data, the key indexes opened lower at 9:30. Equity markets were very strong in Dec, likely anticipating better economic growth. After the strong moves in stocks investors are taking a breather but with today’s ADP report it won’t take long before more buying begins again.

At 10:00 the Dec ISM service sector index, expected at 55.7 frm 55.0, jumped to 57.1 the highest index read since early ’06. New orders component increased to 63.0 frm 57.7, prices pd increased to 70.0 from 63.2 and employment index did fall to 50.5 frm 52.7. With interest prices already lower there was no additional selling on the 10:00 report.

The MBA released its Weekly Mortgage Applications Survey for the weeks ending December 24, 2010 and December 31, 2010. For the week ending December 24, 2010, the Market Composite Index decreased 3.9%. For the week ending December 31, 2010, this index increased 2.3%. Both week’s results include an adjustment to account for the Christmas and New Year Day holidays. For the week ending December 24, 2010, the Refinance Index decreased 7.2% from the previous week and the seasonally adjusted Purchase Index increased 3.1% from one week earlier. The following week, the Refinance Index increased 3.9% and the seasonally adjusted Purchase Index decreased 0.8%. The refinance share of mortgage activity for the week ending December 31, 2010 was 71.0 percent, an increase from 70.3 percent for the week ending December 24, 2010. For the week ending December 24, 2010, the average contract interest rate for 30-year fixed-rate mortgages increased to 4.93% from 4.84%, with points decreasing to 0.63 from 0.96 (including the origination fee) for 80% loans. For the week ending December 31, 2010, the average contract interest rate for 30-year fixed-rate mortgages decreased to 4.82% with points increasing to 1.11. For the week ending December 24, 2010, the average contract interest rate for 15-year fixed-rate mortgages remained unchanged at 4.22%, with points increasing to 1.34 from 1.19 (including the origination fee) for 80% loans. For the week ending December 31, 2010, the average contract interest rate for 15-year fixed-rate mortgages increased to 4.23% with points decreasing to 1.00.

The ADP report this morning, if supported by the BLS data on Friday, will likely cap any significant improvements in interest rates. The economy is improving, most every economic report has been stronger than economists and analysts’ forecasts. The rate markets will have a difficult time overcoming the economic improvement. We suggest homebuyers make their deals at these rates, the outlook for much lower interest rates is dimming daily.