Economic Update 3/23

Unchanged early this morning in the bond and mortgage markets. No real driving news overnight and at 10:00 Feb existing home sales on tap. The stock index trading at 8:30 had the three key indexes unchanged. At 9:00 the DJIA +15, 10 yr note unchanged and mortgage prices +1/32 (.03 bp)---still very flat. At 9:30 the DJIA opened +20, the 10 yr note unchanged and mortgages +1/32 (.03 bp).

Here's yesterday's chart:

Pretty steady increase all day long with few dips. Rates have opened up better this morning for the lenders who didn't reprice yesterday afternoon.

Pres Obama is scheduled to sign the health care bill into law today at 11:15 this morning. And let the law suits start, 13 state attorney generals are filing law suits already, attempting to have the bill declared unconstitutional on the grounds that the bill mandates people to buy health care insurance. Under the health care bill, by 2014 most Americans would be required to have health insurance or pay a fine, with the exception of low-income Americans. Employers would also be required to provide coverage to their workers, or pay a fine of $2,000 per worker. Companies with fewer than 50 employees, however, are exempt from this rule. The mandated requirement had met with Republicans and independents declaring it unconstitutional when it was first proposed. How far in the court system will the suits travel; maybe to the Supreme Court? Any health care bill would have met with fear and concern, no matter the content, given that not many have any idea what the details in the 2000 pages have in them.

China may be feeling the heat of the global recession. Top Chinese officials have in recent days said trade numbers for March could show China imported more than it exported this month—which would mark its first monthly deficit since April 2004. The US and China have been jawing recently over China's unwillingness to devalue its currency, giving China an unfair trade advantage against the US and other exporting countries. Chinese officials counter by pointing out that their nation's trade surplus has declined sharply in the past year, and argued that China's large stimulus program helped it keep buying from the rest of the world, thereby supporting global economic growth. It is however, unlikely China will continue to run deficits and will likely have a surplus on an annual basis. On Apr 15th the Treasury Dept is scheduled to rep[ort its semi-annual report on currencies; many are pressing Treasury to declare China a currency manipulator. If this heats up look for Congress to push for legislation that may lead to a trade war. Congress is already moving down that slippery slope, Pres Obama must resist it; a trade war with China will be an economic calamity for the US.

At 10:00 the House Financial Services Committee will begin testimony on Fannie's and Freddie's future that will likely end eventually with the two agencies either gone or changed so no one will recognize them in their past condition. Sec of Treasury Geithner will testify, saying “Private gains can no longer be supported by the umbrella of public protection, capital standards must be higher and excessive risk-taking must be appropriately restrained.” Now that the Obama administration has its health care legislation it is past time to deal with the mortgage and housing industry, and lets not overlook the economy that has been pushed aside in favor of health care. Geithner will also say the Administration will not disrupt the market for Fannie Mae and Freddie Mac’s debt and mortgage-backed securities. He said investors should not doubt the U.S. government’s commitment to backstop the obligations of the two companies, which have been in conservatorship since 2008. Geithner will say that the government has “few viable alternatives” to its extensive support of Fannie Mae and Freddie Mac because the two companies are so central to the housing market. Private capital isn’t available in sufficient strength to fund the mortgage market and make credit widely available.

Feb existing home sales, expected to be down 1.0%, were down 0.6%. Not good however; the unsold inventory increased by 9.5% leaving an 8.6 month supply, in Jan the supply was 7.8 month and in Dec supply was at 7.2 months. The median sales price was $165,100, down 1.8% yr/yr. For all that talk that has been floating around and regurgitated by most every expert, the housing sector continues to deteriorate even with the homebuyers tax credit that will run out at the end of April. We don't want to be the town crier of bad news, but we have warned for months that the housing sector is nowhere near rebounding, and in the coming months there will be another binge of foreclosures hitting the inventories. Believe it or not; the equity market got a bounce higher off the housing data, because----the headline was expected to be down 1.0% but was only off 0.6%.

At 1:00 Treasury will auction $44B of 2 yr notes as it does each month at this time. The demand for US debt has been very strong and it is expected to remain strong even with the exploding federal deficits. The 2 yr always gets strong demand; it is the 5 yr tomorrow and the 7 yr note on Thursday that, although unlikely, if demand softens will spike interest rates higher.
At 3:00 this afternoon SF Pres Janet Yellen will be talking. Yellen is the front runner to fill the vice chairman's position at the Fed.