AAA Mortgage Market provides the "Daily Market Update" as market/industry analysis as a service to our clients for informational purposes only.

Daily Market Update

Interest rates are better this morning, it is technical as the market has become extremely oversold in the recent price declines. The outlook however remains bearish. The stock market is soft on low early volume. At 10:20 the DJIA is off 17, NASDAQ -4, S&P -1. 10 yr note +9/32, 5.20% -4 BP. Mortgage prices +6/32.

Market started better this morning and held support yesterday at 5.25% for the yield and 104.01 on the Sept 10 yr note; while the market is very oversold and one of these days we expect a bounce, the longer outlook continues to be quite bearish as inflation fears will not fade. Any price improvement now will set up selling once the run (if any) is over.

The London Financial Times has a headline this morning "Central banks warned on inflation"; the Bank of International Settlements, the central banks' banker, said central banks will have to move faster to increase interest rates because global inflationary pressures are rising and the economy remains vulnerable to a "bang" of market turbulence. It raises the specter of stagflation, a weakening economy while inflation increases. Malcolm Knight, BIS manager saying" It would be imprudent to count on the happy combination of strong growth and low inflation lasting indefinitely. At some point central bankers may well have to react more forcefully on policy rates than they have needed to do in the past few years". Yet one more institution lining up that interest rates will have to increase; the comments will increase the numbers in the camp of another 25 BPs at the August FOMC meeting.

Bond prices in the Europe are weaker following reports that investor confidence in Germany jumped to highs not seen in many years.

At 10:00 May existing home sales, expected to have declined 2.0% were down 1.2%; according to NAR there is a 6.5 month inventory based on current selling pace, that is up by one month from the supply reported last month.

Also at 10:00 the Conference Board's consumer confidence index, expected at 103.0 from 104.7 was 105.7; May was revised higher from 103.2 originally reported last month.

At 1:00 this afternoon Treasury will sell $22B of 2 yr notes, the same amount as last month and the demand is likely to be decent given the increase in interest rates; if not watch out, expect immediate selling across the curve.

Crude continues higher, as does the gold price this morning; gold boosted on the comments from the BIS (see above). The dollar is weaker in a quiet low volume trade.

Short-covering in a very near term oversold market is supporting the interest rate markets this after 9 days of falling prices and increased yields; it has been expected but don't get too excited, it isn't likely to last as traders are setting positions ahead of the FOMC statement at 2:15 Thursday. No doubt we will get an increase in the FF rate to 5.25% with prime moving to 8.25%; how the statement is deciphered will set the tone, we look for the statement to be generally more of the same---"data dependent" on what the Fed may or may not do at the August 8th meeting.

The two 10:00 economic releases didn't generate much initial reaction from levels prior to 10:00. The increase of unsold inventory of existing homes confirms the softening in the housing market. A lot of the inventory is second homes and spec buying that has turned very ugly. 1 yr ARMs and interest only loans on the condos and second homes is now squeezing many, and it is only going to get worse as buyers are now in control, especially in Florida, California and in the NE corridor.