Good morning, the Dow flirts with record lows this week, not so good, but every cloud has a silver lining (right?) and this week’s good news is P. Obama’s Housing Plan. The plan includes very attractive (and potentially effective) incentives to prevent foreclosures which are at the core of this financial problem. I am personally glad that this administration is working on tackling the root of this problem.
We need more details on the plan but one of the most interesting points is the government’s effort to reduce certain mortgage payments to 31% of a homeowners income, “matching” this reduction from uncle Sam and the mortgage lender (like a reverse 401k). Really? Wow
Also, the plan is intended to:
1) Aid as many as 5 million homeowners refinance conforming loans by reducing their interest rate.
2) Help up to 4 million “at risk” homeowners avoid defaulting on their mortgages via incentives for both mortgage lenders and homeowners: Mortgage lenders would get $1,000 per refinanced loan (and 1,000 for 3 years if they remain current). Homeowners, on the other hand, would be eligible for $1,000 for 5 years if they continue to pay their mortgages.
3) Strengthen Fannie and Freddie by increasing its preferred agreement to $200 billion per GSE and modify their mortgage portfolio sizes to $900 million.
Have a good day/weekend
Rod
Have a good day/weekend
Rod
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Economic Commentary
by Rod Gonzalez
Wednesday turned out to be an interesting day for investors as a new housing plan and the FOMC’s minutes gave market participants much to digest. The Dow Jones ended the day practically flat as it gained only 3 points to close at 7,555 points. The 5-year Treasury note dropped 5/32s to yield 1.80% while the 10-year note and the long bond lost 30/32s and one point 7/32s to yield 2.76% and 3.55% respectively. President Obama unveiled his new Housing plan which includes several incentives aimed at mitigating foreclosures. The plan is intended to 1) Aid as many as 5 million homeowners refinance conforming loans by reducing their interest rate. 2) Help up to 4 million homeowners avoid defaulting on their mortgages via incentives for both mortgage lenders and homeowners: Mortgage lenders would get $1,000 per refinanced loan (and 1,000 for 3 years if they remain current). Homeowners, on the other hand, would be eligible for $1,000 for 5 years if they continue to pay their mortgages. 3) Strengthen Fannie and Freddie by increasing its preferred agreement to $200 billion per GSE and modify their mortgage portfolio sizes to $900 million.
The Minutes for the January 27-28 FOMC meeting, released at 1:00pm CST, continued to invigorate concerns about the magnitude of the economic slowdown as well as the time it will take for conditions to improve. According to the Minutes (and to not much surprise) there is now no expectation for any economic growth until 2010. GDP is expected to be -1.30 to -0.50% for this year. More interestingly, the FOMC has upwardly revised their expectation for the unemployment rate to north of 8%, also for 2010. Officials anticipate inflationary risk to be quite weak in the subsequent years as a lower demand of resources due to bleak economic conditions will keep prices relatively flat.
“In the forecast prepared for the meeting, the staff revised down its outlook for economic activity in the first half of 2009, as the implications of weaker-than-anticipated economic data releases more than offset an upward revision to the staff's assumption of the amount of forthcoming fiscal stimulus…The staff again expected that unemployment would rise substantially through the beginning of 2010 before edging down over the remainder of that year. Forecasts for core and overall PCE inflation in 2009 and 2010 were little changed, with growth in both core and overall PCE prices expected to be unusually low over the next few years in response to slack in resource utilization and relatively flat prices anticipated for many commodities and for imports.” FOMC Minutes Release Feb 18, 2009
Wednesday turned out to be an interesting day for investors as a new housing plan and the FOMC’s minutes gave market participants much to digest. The Dow Jones ended the day practically flat as it gained only 3 points to close at 7,555 points. The 5-year Treasury note dropped 5/32s to yield 1.80% while the 10-year note and the long bond lost 30/32s and one point 7/32s to yield 2.76% and 3.55% respectively. President Obama unveiled his new Housing plan which includes several incentives aimed at mitigating foreclosures. The plan is intended to 1) Aid as many as 5 million homeowners refinance conforming loans by reducing their interest rate. 2) Help up to 4 million homeowners avoid defaulting on their mortgages via incentives for both mortgage lenders and homeowners: Mortgage lenders would get $1,000 per refinanced loan (and 1,000 for 3 years if they remain current). Homeowners, on the other hand, would be eligible for $1,000 for 5 years if they continue to pay their mortgages. 3) Strengthen Fannie and Freddie by increasing its preferred agreement to $200 billion per GSE and modify their mortgage portfolio sizes to $900 million.
The Minutes for the January 27-28 FOMC meeting, released at 1:00pm CST, continued to invigorate concerns about the magnitude of the economic slowdown as well as the time it will take for conditions to improve. According to the Minutes (and to not much surprise) there is now no expectation for any economic growth until 2010. GDP is expected to be -1.30 to -0.50% for this year. More interestingly, the FOMC has upwardly revised their expectation for the unemployment rate to north of 8%, also for 2010. Officials anticipate inflationary risk to be quite weak in the subsequent years as a lower demand of resources due to bleak economic conditions will keep prices relatively flat.
“In the forecast prepared for the meeting, the staff revised down its outlook for economic activity in the first half of 2009, as the implications of weaker-than-anticipated economic data releases more than offset an upward revision to the staff's assumption of the amount of forthcoming fiscal stimulus…The staff again expected that unemployment would rise substantially through the beginning of 2010 before edging down over the remainder of that year. Forecasts for core and overall PCE inflation in 2009 and 2010 were little changed, with growth in both core and overall PCE prices expected to be unusually low over the next few years in response to slack in resource utilization and relatively flat prices anticipated for many commodities and for imports.” FOMC Minutes Release Feb 18, 2009
Treasury prices are reacting to this morning’s economic releases, with the 10-year Treasury note continuing yesterday’s price drop and currently trading 18/32s lower to yield 2.82%; the 30-year Treasury has dropped over 1 point 13/32s to yield 3.63%. On the economic front, the Producer Price Index was released this morning with higher than expected data. Demand for intermediate and long Treasuries, which are susceptible to inflationary expectations, is down as a higher than expected PPI may signal higher inflation and increase the erosion risk in the value of these maturities. The monthly Producer Price Index (PPI), a measurement of the change in prices received by domestic producers in all stages of processing (crude, intermediate materials and finished goods), rose more than expected in January to 0.80%, vs. the expected 0.30%. Core PPI, which excludes the volatile food and energy sectors increased 0.40% for the month; analysts were expecting this number to be 0.10%. PPI YoY dropped, but less than anticipated to -1.00% and core PPI YoY was higher than expected at 4.20% versus the estimated 3.80%.
Additionally, the Department of Labor released its weekly Initial Jobless Claims report this morning showing that first time claims were unchanged from the previous week to 627,000, beating analysts’ expectation of an increase of 620,000 for the week. Consequently, continuing claims were also higher than expected at 4.987 million versus the expected 4.830 million. The more stable 4-week average number of initial claims was reported to be 619,000 for the period (608,500 was reported the previous week). In other economic releases for the day, the Leading Economic Indicators, a (somewhat delayed) composite index of ten economic indicators designed to predict economic activity six to nine months in the future, will be released at 9 am CST. Analysts are forecasting the index to report a 0.10% change in Jan (attention would also be placed on last month’s revision as it showed the stronger reading of 2008 at 0.30%). The Philadelphia Fed will also be releasing its index at 9:00 am CST. Analysts are expecting a reading of -25.00.
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