Market Update – October 28, 2009:
Nice rally today.  The  FNMA 4.5 issue is up +9 ticks to 101-00, and the FNMA 5.0 is up +8 ticks to 103-15.    A surprise drop in new home sales is boosting demand for the safety of U.S. debt.  Nice timing for Treasury, since today they happened to be holding a little auction for a record $41 billion in 5-year T- notes, resulting in a very healthy bid-to-cover ratio of 2.63, which was the best in over a year.  Amazing demand, which probably tells you something about the general outlook for the economy – – safety is still wildly popular.  Also of extreme importance is the willingness of foreign investors to keep buying our debt (watch out when this runs low on steam); indirect bidders scored 54.4% or $22.3 billion of the pool, and got 77.7% of what they bid on – so things continue to look strong.  For now.  The 10-year is at 3.41%, down from 3.49% yesterday.  The 2-year / 10-year spread and yield curve is slightly narrower/flatter at 247 bps, down from 250 bps yesterday.  

New home sales stumble.
Sales of new U.S. homes fell by a surprise -3.6% to an annualized pace of 402,000, well below even the lowest forecasts, according to the Commerce Department today.  This stokes fears that the economy is still on wobbly legs as it makes a stab at a recovery.  The expiration of a $8,000 tax credit may be having an impact.  Bloomberg news quoted Michael Feroli, an economist at JP Mortgage Chase in New York as saying that the unexpected drop in sales “does raise some questions about where the housing market is going to be in six months, arguably without any more support,” indicating that without more assistance, we may see another dip forming.  The sales level had been forecast to rise to 440,000 — last week the NAR reported that sales of existing homes rose over +9%, so an increase in new home sales had been widely expected.  Median prices of new homes were off significantly, from $225K last year, to just under $205K this year.  Inventories of new homes remained steady at 7.5 months’ supply.    Congress is considering a proposal to extend the first time homebuyer tax credit as part of an unemployment benefits package. 


Runaway success often stems from a unique approach to solving ordinary problems.

Durable goods orders up but still anemic
Orders for durable goods, big-ticket manufactured items, rose by +1% in September.  The advance was driven by a large jump in demand for machinery, which offset weakness in commercial aircraft and autos.  This marks the second advance in 3 months, but experts pointed out that the gains could largely be temporary benefits of stimulus spending.  Machinery orders rose nearly 8%, the best bump since March 2008.  Orders for non-defense capital goods, considered a good proxy for businesses’ investment plans for new equipment, rose just 2%; despite this, it marked the strongest advance since June.  The smallish size of the overall increase indicated that the road ahead will likely remain bumpy – – remember that August showed a decline of -2.6% and July showed an increase of +4.8%.  Another concern is that the jump in demand was driven also by orders for military equipment, rather than for private-sector items – defense aircraft orders, which were up +12.5%, more than offset a -2.1% drop for civilian commercial aircraft and a -0.1% drop in auto and auto parts orders.


Mortgage app activity slows for third week.
U.S. home loan demand slid for the third straight week, the Mortgage Bankers Association said on Wednesday, with purchase applications the weakest since mid-May and refinancing requests at a two-month low.  The downturn comes as the $8,000 first-time homebuyer tax credit faces extinction unless Congress soon agrees on an extension. The mortgage applications index fell -12.3% on a seasonally adjusted basis to 562.3, with purchase applications dropping -5.2% to 254.9 and refinancing demand falling -16.2% to 2,352.5.


On today’s date:  October 28…
1636:  Harvard University (Cambridge Mass) founded
1790:  New York gives up claims to Vermont for $30,000
1793:  Eli Whitney applies for a patent on cotton gin
1858:  Macy’s Department store opens in New York City
1886:  Statue of Liberty dedicated by President Grover Cleveland
1954:  Ernest Hemingway wins Nobel prize for literature
1965:  630 foot high Gateway Arch completed in St. Louis
1989:  Oakland A’s sweep San Francisco Giants in earthquake/BART series


The last word:
“So, where’s the Cannes Film Festival being held this year?” –Christina Aguilera