The Mortgage Guru

Matt Garnes
Mortgage & Real Estate Professional
Evofi One”The Evolution Of Mortgage Financing”
RE/MAX Advantage

Two Key Factors in Qualifying for a Home Loan When a lender makes a decision about a mortgage application, they consider two basic factors: 1) your ability and 2) your willingness to repay the loan.

Ability to repay the mortgage is determined by verifying your current employment and analyzing your total income. Lenders prefer for you to have been employed at the same place for at least two years, or at least be in the same line of work for a few years. Your proposed monthly payment will be compared to your monthly income and debt.

Willingness to repay is influenced by how you have paid previous loans and by examining how the property will be used. Willingness can be gauged by your credit report and previous commitments to pay rent and/or utility bills. There is also a greater tendency to stick with your payments if you live in a house as opposed to a rental property or vacation home.

It is important to remember that there are no set rules and each applicant is handled on a case-by-case basis. Many applicants come up a little short in one area, but make up for it with other strong points. These compensating factors may include a large down payment, solid employment, extensive educational background or overall financial health.

For applicants who need to make a lower down payment, mortgage insurance is protection for the lender in case you stop making payments. This allows low and moderate income families to become homeowners with low down payment programs.

Speed Up the Mortgage Process

Once complete, your application will be given to a processor in the mortgage company who will organize your paperwork and may verify your employment, bank balances, and other information.

Be sure to respond promptly to requests for information while processing is taking place.

Commonly requested items during processing that may not have been collected during the application include:

• The final purchase contract for the house (if applicable).
• If you’re self-employed, the mortgage company may require your personal and business tax returns for the previous two years and your company’s year-to-date Profit and Loss statement.
• Divorce settlement papers, if applicable
• Updated account statements for listed assets in the application that may have changed in value.
• Information about debts or credit report items that may have been delinquent or not accurate.
• Evidence of your mortgage or rental payments, such as canceled checks.
• An irrevocable gift letter if you are receiving a monetary gift from a relative.

The processor is collecting this information before presenting it to an underwriter. An underwriter reviews all the information in your loan file to determine if the application meets the lender guidelines. With approval, a lender should give you a letter of commitment, which is a promise from the lender to make a loan based on specific terms and conditions.

Market Commentary

Thursday: 03/27/08 10:30 AM EDT : Treasuries are down this morning as traders position for new supply. Stocks are lower on dim corporate earnings news.

As expected, the final report on gross domestic product (GDP) for the fourth quarter of last year was little changed from last month’s preliminary report.

GDP is the market value of all final goods and services produced by labor or property in the country in a year’s time. Quarterly data is adjusted and annualized and changes from quarter to quarter indicate the strength and direction of the economy.

Today’s report said that GDP grew at an annualized rate of 0.6% in the quarter, the same reading as in the preliminary and advance reports. But the report did include a positive item for both stocks and bonds. It said that the price index, a measure of inflation, rose by 2.4% instead of the 2.7% cited in last month’s report.

In addition, the price index for personal consumption expenditures (consumer spending), minus the volatile categories of food and energy, rose by 2.5% instead of the previously reported 2.7%. Nevertheless, the core PCE increase was still the largest since the second quarter of 2006.

A negative for stocks was the news that after-tax corporate profits were down by 3.3% in the fourth quarter after a flat reading (0.0%) in the third quarter.

The GDP news is somewhat dated, though, as the first quarter is coming to a close. Estimates for the current quarter range from a slight increase of 0.1% to a decline of 0.5%. The classical definition of a recession is two or more consecutive quarters of negative growth; however, no growth or very slight growth are seen as undesirable. But the bond market benefits from a weak economy since it promotes a low interest rate environment.

In the other economic release of the day the Labor Department reported that the seasonally adjusted level of initial claims for state unemployment benefits fell by 9,000 last week to 366,000. Today’s report reflected annual adjustments to the seasonal factors and the data series was revised back to the beginning of 2003. The average weekly change over that time was a slight reduction but it caused an average decline in the current year so far of 3,909.

Yet, despite the downward revisions and last week’s decline, the upward trend has not been changed and the latest claims level tied that of the last week in January as the second highest since October of 2005.

The four-week moving average, which smoothes out some of the short-term volatility, rose by 1,750 last week to 358,000 — the highest since October 2005. For the year-to-date, the average weekly initial claims reading has been 346,500, up from the average for all of 2007 of 321,442.

The report said that continuing claims for the week ending March 15 (continuing claims must be at least a week old) declined by 5,000 to 2.845 million. The four-week average rose by 25,250 to 2,824,250. The continuing claims reading was the second highest and the four-week average was the highest since October of 2005.

The average continuing claims reading for the year-to-date is 2,763,818. For all of 2007 it was 2,551,596.

Besides the weak corporate earnings indicated in the GDP report, stocks are being pressured by several corporate news items. Software giant, Oracle, reported after the bell yesterday and although earnings were in line with expectations last quarter, sales fell short of predictions and the stock is falling this morning. Weak ad-click growth reported on Google is also pressuring the tech sector. And negative analyst guidance on Merrill Lynch and Wachovia is weighing on the financial sector.

Bonds are being held back by the approach of more supply. This afternoon, the Treasury will conclude this month’s auction of 5-Year Notes. Last month’s was moderately successful. The bid-to-covering ratio was 2.29, up from January’s 2.16 but still below the twelve-month average of 2.45. Noncompetitive bids totaled $78 million, down from $81 million in January and below the twelve-month average of $131 million.

But foreign demand was a little better than in January with indirect competitive bids garnering 21.8% of the issue versus January’s 21.1%. This was still well below the twelve-month average of 25.9%.

Today’s issue is larger than usual. While last month’s had a face value of $16 billion, today’s issue has one of $18 billion, the largest since May of 2003.

Tags: Uncategorized by Matt Garnes
No Comments »

FHA Mortgages

With FHA attempting to assist with the housing crisis some homeowners are facing I have been receiving numerous questions from clients in regards to FHA loans, how they work and what the new guidelines and loan limit increases mean to them personally. I will attempt to shed some light on the subject and hopefully make your life a bit easier…

From HUD:

Nearly a quarter of a million more families could be eligible this year to purchase or refinance their homes using affordable, FHA-insured mortgages, thanks to the economic growth package signed into law by President Bush last month. The Economic Stimulus Act of 2008 will allow HUD’s Federal Housing Administration (FHA) to temporarily increase its loan limits and insure larger mortgages at a more affordable price in high cost areas of the country.

“The stimulus is providing immediate relief to homeowners,” said HUD Secretary Alphonso Jackson at a Greater Las Vegas Association of Realtors keynote speech. “It raises the Federal Housing Administration’s loan limits, enabling more families to qualify for a safe, affordable FHA mortgage. This is important. Families in high-cost states have been priced out of FHA-backed loans. This has created a vacuum, filled by exotic subprime loans. Families with home loans up to $729,750 will now qualify for an FHA loan, depending on where they live.”

Beginning today, HUD will offer temporary FHA loan limits that will range from $271,050 to $729,750. Overall, the change in loan limits will help provide economic stability to America’s communities and give nearly 240,000 additional homeowners and homebuyers a safer, more affordable mortgage alternative. The maximum amount of $729,750 will only be applicable to extremely high-cost metropolitan areas such as: New York, Los Angeles, San Francisco and Washington, D.C. HUD also calculated new limits for loans to be purchased by Government-Sponsored Enterprises (GSE) Fannie Mae and Freddie Mac.

“Many families all over the U.S. will benefit from this access to credit, and increasing these loan limits will inject much-needed liquidity into the housing market,” said FHA Commissioner/Assistant Secretary for Housing Brian Montgomery. “Even moderate-cost areas like those in the South and Southwest such as Dallas, Houston, Augusta and Tallahassee will be helped, with most loan limits there rising to $271,050.”

There are 75 areas in the U.S., out of a total of approximately 3200, that will be eligible for the highest loan limit of $729,750. Previously, FHA’s loan limits in these very high-cost areas were capped at $362,790.

The Economic Stimulus Act of 2008 permits FHA to insure loans on amounts up to 125 percent of the area median house price, when that amount is between the national minimum ($271,050) and maximum ($729,750). The new minimum and maximum loan limits are based on 65 percent and 175 percent of the conforming loan limits for Government-Sponsored Enterprises in 2008, which is $417,000. The FHA used a combination of existing government data sets and available commercial information to determine the median sales price for each area, and released the data approximately two weeks after the President signed the stimulus bill. The change in loan limits are applicable to all FHA-insured mortgage loans endorsed after HUD publishes the increased loan limits today, and it lasts until December 31, 2008.

By increasing loan limits nationwide, FHA will provide much needed liquidity and stability to housing markets across the country. Already, as conventional sources of mortgage credit have been contracting, FHA has been filling the void. From September to December 2007, FHA facilitated more than $38 billion of much-needed mortgage activity in the housing market, more than $15 billion of which was through FHASecure, FHA’s refinancing product. By focusing on 30-year fixed rate mortgages, FHA helps homeowners avoid and escape the risks associated exotic subprime mortgage products, which have resulted in rising default and foreclosure rates.

In January 2009, FHA’s maximum loan limit will return to $362,790, unless the U.S. Congress approves bipartisan legislation to permanently increase loan limits as part of the FHA Modernization bill, which is still awaiting final approval on Capitol Hill.

“In January 2009 the loan limits will return to their previous setting,” Jackson said. “We need a more permanent solution. So our next step must be to modernize the 74-year-old FHA. Two years ago, before the downturn, we introduced an FHA modernization bill to Congress. Our plan offers flexible down payment requirements and higher loan limits. It would also enable the FHA to fairly price premiums, taking risk into account so the market makes rational decisions. We don’t want anyone caught by surprise again. FHA modernization could help a quarter of a million families this year alone. It passed the House and Senate in overwhelmingly bipartisan fashion. But a final bill has yet to reach the President. Congress must act-now!”

Jackson noted that the Administration could not wait for Congress to act. “Last August, the President and I introduced FHASecure. It helps responsible families who, having paid their bills on-time under the original interest rate, find themselves falling behind under the reset rate. For the first time, these delinquent families would be able to qualify for an FHA loan. ‘Underwater’ borrowers and those in the process of foreclosure may also qualify.” Since August, FHA has helped 110,000 homeowners who were current or past due on their loans refinance with an additional 200,000 expected by year’s end.

Jackson also discussed the Administration’s efforts with the Hope Now Alliance, and industry-led effort that has been reaching out to borrowers in trouble. Hope Now members have contacted over a half million homeowners. Their hotline now receives more than 4,500 calls a day. Industry has modified 1 million loans since the second half of last year, keeping homeowners in their homes.

“We can create the conditions for recovery,” Jackson said. “We can make the boom-bust cycle shorter and shallower. We can replace gimmicks and shortcuts with transparency and honesty. And we can take the necessary steps to prevent foreclosure. That’s right, foreclosure is not inevitable, it’s preventable. And we have the tools to prevent it.”

Discussing recent efforts in Congress to bail out lenders, which the Administration opposes, Jackson said” Americans are a fair people. They want to help. But they understand that the answer to an economic challenge must ultimately come from the people who drive the economy. They want the tools of recovery in their own hands. And they do not want to kill the spirit of opportunity that made this country great.”

FHA loan limits are based on the county in which the property is located. However, for properties located in metropolitan or micropolitan statistical areas, the limit is set at that of the county with the highest limit within the metropolitan or micropolitan area.

Hopefully this will help answer your FHA concerns; if not, as always, you can contact me direct at 702.526.3133 or mgarnes@garnesmortgage.com if you have more personalized questions and I will be more than happy to assist you.  And in case you were wondering the FHA loan limit for Clark county Nevada has risen to $400,000

See below for the daily market commentary:

Monday: 03/17/08 10:30 AM EDT: Treasuries are up on news of action by the Federal Reserve yesterday and the release of largely bond-friendly economic new this morning. Stocks opened lower but losses have been contained and the indices have been heading back toward unchanged.

The initial guidance for the markets was word that the Federal Reserve, through its Federal Open Market Committee (FOMC) decided yesterday to lower the discount rate (the rate charged to banks for loans directly from the Fed) by 0.25% from 3.50% to 3.25%. It is now just 0.25% above the Fed’s target for the fed funds rate, the rate banks charge each other for overnight loans necessary for the maintenance of daily reserve requirements.

In addition, the FOMC created a temporary (though extendable), short-term lending channel to primary securities dealers in order to shore up the credit market. The action came shortly after an announcement that JPMorgan Chase was buying Bear Stearns. The Fed move came just two days before the committee’s regularly scheduled policy meeting. (FED ANNOUNCEMENT)

Foreign stock markets plummeted on the news since it sparked a new round of fears that the credit market is crumbling. But U.S. stock traders have not been as skittish so far today, though the financial sector has been hit hard. The Fed action was dramatic but it also shows that the central bank will do whatever is required to prevent a meltdown in the financial markets.

Another support for stocks this morning is a major retreat in oil futures. In recent trade, the price of a barrel of light, sweet crude for April delivery was down by $3.63 to $106.58.

The economic news of the day was basically bearish, which keeps downward pressure on interest rates. The New York branch of the Federal Reserve reported that its index of the region’s manufacturing activity came in at -22.23 this month following a reading of -11.7 in February. Any reading below 0.0 indicates a general contraction of activity relative to the preceding month. Not only was the latest index much worse than the -5.5 that forecasters were calling for, but it was the weakest reading in the history of the data series going back to July of 2001.

More bearish news came when the Federal Reserve reported that industrial production — a gauge of output from the nation’s factories, mines, and utilities — fell last month by 0.5%. This was a larger contraction than the 0.1% that analysts had predicted. Output grew by just 0.1% in January.

While a portion of February’s decline was due to a 3.7% drop in the production index for the volatile utilities category, today’s report indicated that the large category of manufacturing saw a decline of 0.2% following a flat reading (0.0%) in January.

A plus for both stocks and bonds was a sharp drop in capacity utilization, the ratio of output to potential output. It came in at 80.9%, the lowest reading since November of 2005. Significantly, the ratio fell to 79.3% in the manufacturing sector, the lowest reading since October of 2005. The low figures mean there is more slack in the production process and a reduced threat of bottlenecks that drive up prices.

In other news, the Commerce Department said that the current account posted a deficit of $172.9 billion in the fourth quarter of last year. The current account balance is the difference between dollars leaving and entering the country and includes investment income and unilateral transfers (foreign aid and government pensions sent abroad) so the report is more comprehensive than the monthly reports on international trade of goods and services.

The fourth quarter gap was much narrower than the $185.0 billion that had been projected by forecasters. In addition, the initially reported third quarter deficit of $178.5 billion was revised down to $177.4 billion, though the figures for the first and second quarter were revised to show larger deficits.

The economic calendar for the remainder of the week is relatively light but there are only three trading days after today since the markets will be closed on Friday.

Tomorrow, the Producer Price Index (PPI), a gauge of inflation at the wholesale level, will be released. Though a key inflation indicator, its influence will be diminished by the fact that the more significant Consumer Price Index has already been released.

In the last report, the Labor Department said the PPI rose in January by 1.0% following a 0.3% decline in December. In November, the index surged by 2.6% but this was due primarily to an 11.4% jump in energy prices — the largest in almost eighteen years. Energy prices fell by 3.0% in December and rebounded by 1.5% in January. The index for food prices slipped by 0.2% in November but rose in December by 1.4% and in January by 1.7%.

The core index (ex-food and energy) was up by 0.4% in January, the biggest jump in eleven months. Moreover, on a year-over-year basis, the PPI was up by 7.4%, the largest rise since October of 1981. The core index was up by 2.3% Y/Y following 2.0% increases in November and December.

A tamer report is expected for February. The estimate for the PPI is an increase of 0.3%. The core index is predicted to have risen by 0.2%

The report on housing starts for last month also comes out tomorrow morning. In the last report, the Commerce Department said the seasonally adjusted, annualized rate of new home starts edged up in January by 0.8% to 1.012 million. Though an improvement, it followed a two-month decline of 21.2% which left December’s 1.004 million the lowest since May of 1991. January’s reading was the second lowest since then.

A sign of further weakness was a 3.0% drop in the rate of building permit issuance to 1.048 million (seasonally adjusted, annualized). Though this was subsequently revised up to 1.061 million, it was still an eighth consecutive decline and the lowest level since March of 1993.

The starts pace is expected to have declined in February by 1.7% to 995,000. This would be the lowest rate since March of 1991. The rate of permit issuance is expected to have declined by 3.9% to 1.020 million, which would be the lowest since November of 1991.

But tomorrow’s news will be eclipsed by the results of the FOMC policy meeting. The meeting statement will be released at approximately 2:15 PM Eastern Time.

The Fed has already reduced the fed funds rate by 2.25% since last September and reduced the discount rate by 3.00% since last August. In addition, in December, the Fed instituted a Term Auction Facility (TAF), another means by which banks could obtain needed reserves. And, of course, it recently established a Term Securities Lending Facility (TSLF) and a Primary Dealer Credit Facility (PDCF), in order to provide funds to investment institutions.

However, economic data continues to paint a bleak picture. Mortgage foreclosure activity is at record high levels and nonfarm payrolls are shrinking. Statistics on both the manufacturing and services sectors have indicated recent contractions of activity. And financial institutions continue to disclose larger than predicted losses.

For these reasons, Fed watchers are anticipating another round of cuts tomorrow. The main question is how deep will the cuts be. Besides the extent of the expected cuts, traders will also look closely at the policy statement for any hints of what the Fed might do at the next meeting at the end of April.

There are no major releases on Wednesday so the markets will continue to react to the results of the Fed meeting. A couple of minor reports may offer guidance. The Mortgage Banker’s Association of America will release its application index data for last week but the news is likely to get less attention than the weekly oil inventories report.

On Thursday, the jobless claims report will direct attention to the employment situation once again. In last Thursday’s report, the Labor Department said the seasonally adjusted level of initial claims for state unemployment benefits were unchanged in the previous week at 353,000.

The reading was more bullish than expected since it followed a decline of 21,000 the week before — which had led forecasters to predict a partial rebound in the latest figure. The four-week moving average, which smoothes out some of the short-term volatility, fell by just 1,250 to 358,500.

Despite the lack of movement in the latest initial claims numbers, levels remain elevated. For the year to date, the average weekly reading has been 345,500. For all of 2007 it was 322,135.

The report said that the level of continuing claims rose by 7,000 to 2.835 million in the week ending March 1 (continuing claims must be at least a week old). This was the highest reading since September of 2005. The four-week average rose by 24,500 to 2,812,750, the highest reading since October of 2005. The average weekly reading for the year to date is 2,766,000. For all of 2007 it was 2,551,231.

Once again, a moderate increase is anticipated in last week’s initial claims figure.

Later on Thursday, the Conference Board, an independent research firm, will release its Index of Leading Economic Indicators for last month. In January, the index fell by 0.1%. This was a fourth consecutive contraction, suggesting that the economy is or will soon be contracting rather than growing. Another contraction of about 0.3% is expected for last month’s index.

The last major economic release of the week also comes out on Thursday morning. This is the regional index on manufacturing from the Philadelphia branch of the Federal Reserve. The index came in at -24.0 in February following a -20.9 reading in January and a -1.6 reading in December.

Like the New York index, any reading below 0.0 indicates a contraction of activity. The latest declines mark the first three-month contraction since early 2003 and February’s reading was the lowest since February of 2001. Another contraction reading of about -19.0 is predicted for this month’s index.

Tags: Uncategorized by Matt Garnes
No Comments »

Reverse Mortgages

A reverse mortgage is a special type of loan made to older homeowners to enable them to convert the equity in their home to cash to finance living expenses, home improvements, in home health care, or other needs.

With a reverse mortgage, the payment stream is “reversed.” That is, payments are made by the lender to the borrower, rather than monthly repayments by the borrower to the lender, as occurs with a regular home purchase mortgage.

A reverse mortgage is a sophisticated financial planning tool that enables seniors to stay in their home or “age in place” and maintain or improve their standard of living without taking on a monthly mortgage payment. The process of obtaining a reverse mortgage involves a number of different steps.

The first most widely available reverse mortgage in the United States was the federally insured Home Equity Conversion Mortgage (HECM), which was authorized in 1987.

A reverse mortgage is different from a home equity loan or line of credit, which many banks and thrifts offer. With a home equity loan or line of credit, an applicant must meet certain income and credit requirements, begin monthly repayments immediately, and the home can have an existing first mortgage on it. In addition, there is no restriction on the age of borrowers.

In general, reverse mortgages are limited to borrowers 62 years or older who own their home free and clear of debt or nearly so, and the home is free of tax liens.

Borrowers usually have a choice of receiving the proceeds from a reverse mortgage in the form of a lump sum payment, fixed monthly payments for life, or line of credit. Some types of reverse mortgages also allow fixed monthly payments for a finite time period, or a combination of monthly payments and line of credit. The interest rate charged on a reverse mortgage is usually an adjustable rate that changes monthly or yearly. However, the size of monthly payments received by the senior doesn’t change.

Some reverse mortgage products also involve the purchase of an annuity that can assure continued monthly income to the senior homeowner even after they sell the home.

The size of reverse mortgage that a senior homeowner can receive depends on the type of reverse mortgage, the borrower’s age and current interest rates, and the home’s property value. The older the applicant is, the larger the monthly payments or line of credit. This is because of the use of projected life expectancies in determining the size of reverse mortgages.

Seniors do not have to meet income or credit requirements to qualify for a reverse mortgage.

Unlike a home purchase mortgage or home equity loan, a reverse mortgage doesn’t require monthly repayments by the borrower to the lender. A reverse mortgage isn’t repayable until the borrower no longer occupies the home as his or her principal residence.

This can occur if the sole remaining borrower dies, the borrower sells the home, or the borrower moves out of the home, say, to a nursing home.

The repayment obligation for a reverse mortgage is equal to the principal balance of the loan, plus accrued interest, plus any finance charges paid for through the mortgage. This repayment obligation, however, can’t exceed the value of the home.

The loan may be repaid by the borrower or by the borrower’s family or estate, with or without a sale of the home. If the home is sold and the sale proceeds exceed the repayment obligation, the excess funds go to the borrower or borrower’s estate. If the sales proceeds are less than the amount owed, the shortfall is usually covered by insurance or some other party and is not the responsibility of the borrower or borrower’s estate. In general, the repayment obligation of the borrower or borrower’s estate can’t exceed the value of the property.

In general, a borrower can’t be forced to sell their home to repay a reverse mortgage as long as they occupy the home, even if the total of the monthly payments to the borrower exceeds the value of the home.

Market Commentary

Monday: 03/10/08 10:30 AM EST: Treasuries at the long end of the maturity spectrum are ahead this morning despite some stronger than expected economic news. Market commentators note that yield spread dynamics are guiding bond action so far this morning. In the stock market, the indices are chopping around unchanged levels.

Last Friday, the spread between the closing yields of the 10-Year Treasury Note and 30-Year Bond widened to over 100 basis points — the first time this has happened since July of 2003. The spread between the 2- and 10-Year Notes is in the neighborhood of 200 basis points — the largest spread since June of 2004. Traders are currently betting that the curve will flatten and the repositioning helps fulfill the prophesy.

In today’s only major economic release, the Commerce Department reported that the seasonally adjusted level of wholesale inventories rose in January by 0.8% following a 1.1% increase in December. The latest rise was larger than the 0.5% that analysts had predicted. December’s increase was the largest since August of 2006 but it was seen as a bearish indicator since the sales level fell by 0.5% — suggesting that the increase in inventory was due to the lack of outflow.

But January’s inventory increase is seen as a bullish economic indicator since the sales level rose that month by 2.7%, the largest jump since March of 2004. The developments caused the inventory-to-sale (I/S) ratio to slip from December’s 1.09 to 1.07.

The I/S ratio is the value of stocks on hand at the end of a month divided by the value of sales for the month. It indicates how many months it would take to entirely deplete existing inventory at the prevailing sales pace. The faster the turnover rate, the more pressure there is to replenish wholesale stocks. January’s ratio matches last November’s as the lowest on record.

Although the inventory news is a plus for stocks, other news is weighing against the market. The financial sector is being pressured by word that Countrywide financial is under investigation by the FBI and that Lehman Brothers is making deep staff cuts. Negative analyst guidance on Citigroup is also holding back the market.

Looking ahead: Tomorrow, the report on international trade for January comes out. December’s report surprised observers by indicating that the seasonally adjusted value of imports exceeded that of exports by just $58.8 billion. Analysts had been anticipating a larger deficit of $62.0 billion. The report said the value of imports shrank by 1.1% between November and December while exports rose by 1.5%.

Despite the import decline, December’s level was still the second highest on record. The level of exports was a tenth consecutive record high. For all of 2007, the trade deficit was $711.6 billion. This was down from the record $758.5 billion deficit posted in 2006 — the first time the deficit has been smaller than the preceding year’s since 2001.

The smaller than expected deficit caused forecasters to raise their predictions of gross domestic product growth in the fourth quarter. However, their predictions were not fulfilled in the Commerce Department’s revised GDP report, which showed no change from the 0.6% cited in the initial estimate. Though the revised GDP report did indicate an improved net export reading, this was offset by weaker inventory growth than had been originally reported.

The price of oil (a large import component) rose in January so a somewhat larger trade deficit is anticipated for the month. Current predictions are for a gap of about $59.5 billion.

On Wednesday afternoon, the Treasury will release its latest budget figures. In February of last year, receipts exceeded outlays by $120.0 billion. Due to shrinking revenues and increased outflows, a larger gap of about $140.0 billion is predicted for last month.

If this estimate is accurate, it would push the running total for the current fiscal year to date (begun last October) to a deficit of $227.7 billion, a much larger gap than the $162.2 billion for the same period in the last fiscal year. In fact, it would be the worst deficit reading for the first five months of a fiscal year since 2004.

High deficit figures are a negative for Treasuries since it means the government will have to issue more debt securities (Treasuries) in the future to cover operating expenses and interest on existing debt. The increased supply projections dilute the value of those securities already in the market.

On Thursday, the jobless claims report will be reviewed for the latest insights on the labor situation. In last Thurday’s report, the Labor Department said that the seasonally adjusted level of initial claims for state unemployment benefits fell the week before by 24,000 to 351,000. The decline was larger than forecasters were predicting after an increase in the previous week of 21,000 (originally reported as 19,000). The four-week moving average, which smoothes out some of the short-term volatility, fell by just 1,500 to 359,500.

However, levels remained elevated. The average weekly claims level for the year to date is 344,556. The average for all of 2007 was 322,135.

The report said that the level of continuing claims rose by 29,000 to 2.831 million in the week ending February 23 (continuing claims must be at least a week old). This was the highest reading since September of 2005. The four-week average rose by 12,750 to 2,789,000, the highest reading since October of 2005. The average weekly reading for the year to date is 2,757,750. For all of 2007 it was 2,551,231.

Since the last reported initial claims reading fell further than expected, a partial rebound of between 5,000 and 10,000 is predicted for last week.

One of the month’s heavyweight releases also comes out on Thursday. This is the report on retail sales for last month. In January, the seasonally adjusted level of sales rose by 0.3% following a 0.4% contraction in December. A large but volatile category is that comprised of autos and light trucks. Sales there grew by a stronger than expected 0.6% in January following a 1.1% decline in December. But even excluding the category, sales were up by 0.3% after declining in December by 0.3%.

The data series has been volatile lately but the average monthly change in overall sales in the last twelve months has been an increase of 0.5%. Excluding the auto category, the average change has been an increase of 0.6%.

Predictions for February’s headline number range from no change to another gain of 0.3%. The ex-auto estimates range from flat to 0.2%.

Another release on Thursday is the report on import and export prices for last month. In January, the index of import prices rose by 1.7%. With the exception of November’s extraordinary spike of 3.1%, January’s was the largest increase since May of 2006. Like November’s jump, a main contributor to January’s was a rise in the category of imported petroleum products. Prices there rose by 12.4% in November and by 5.5% in January. But even excluding the category, January’s prices were up by 0.6%, twice as high as the twelve-month average.

Export prices were also up in January. They surged by 1.2% following a 0.4% rise in December. The large but volatile category of agricultural products rose by 5.0%, but even excluding the category, prices were up by 0.8%, twice the twelve-month average increase of 0.4%.

Forecasters are looking for a tamer import price change in February. Predictions are for an increase of between 0.6% and 1.0%.

The report on business inventories for January will be released a little later on Thursday morning. In December’s report, the Commerce Department said that the seasonally adjusted level of inventories rose by 0.6%, a ninth consecutive increase and the largest jump since May of 2006. But sales were down by 0.5%, the largest decline in eleven months. This pushed the inventory-to-sales (I/S) ratio up to 1.26 from November’s record low of 1.25.

The latest report on factory orders said that manufacturers’ inventories rose by 1.3% in January, the largest increase in three years. According to today’s Wholesale report, inventories there rose by 0.8%. This leaves the retail sector and it averaged monthly gains of 0.2% in 2007. Using these figures, the overall business inventory level is predicted to have risen by 0.7% or 0.8%. The I/S ratio is not expected to have remained at 1.26.

Also on Thursday, the Treasury will be offering an additional amount of last month’s initial issue of 10-Year Notes. The arrival of new supply usually keeps bond prices down until the market has a chance to begin digesting the inventory. Traders who will be making bids refrain from pushing prices up prior to an auction in order to keep yields up (bids are for yield — the higher, the better for the auction participants). Other traders also avoid purchasing the soon-to-be off-the-run issue since the new one will have greater liquidity. They also assume a wait-and-see posture until the results of the sale are known.

The last reopening auction of 10-Year Notes was in December and the issue met with weak demand. Bids exceeded the $8 billion offer amount by 2.23 to 1, the lowest bid-to-cover ratio for the maturity in two years. Noncompetitive bids, a gauge of individual investor demand, were relatively strong as they totaled $27 million — above the average of $19 million for the twelve reopenings preceding December’s.

But foreign demand was almost nonexistent. Indirect competitive bids, which include those from foreign central banks, garnered just 6.6% of the offering, the lowest award portion since March of 2006.

This month’s reopening issue is expected to have the same face value as the last eleven such offerings: $8 billion. The deadline for competitive bids is 1:00 PM Eastern Time. The deadline for noncompetitive bids is noon.

Friday brings a major inflation indicator, the Consumer Price Index (CPI). This gauge of price changes at the retail level rose in January by 0.4%, matching December’s increase. A key contributor to the latest increase was a 0.7% rise in the volatile category of energy. Yet, the increase there was the smallest since a decline was posted last August.

Another volatile category is food and its price index also rose by 0.7% — the biggest gain since a same-sized increase in February of last year. But even excluding both food and energy, the so-called core index was up by 0.3%. Though this is only slightly above the 0.2% trendline over the last decade, it is still the highest reading since June of 2006. Moreover, on a year-over-year basis, the core index was up by 2.5%, the largest Y/Y margin since last March.

For February, forecasters are looking for a slightly smaller increase in the overall index of 0.3%. The core increase is also expected to be a bit tamer at 0.2%

The last news item of the week is the preliminary read on consumer sentiment from the twice-monthly surveys conducted by the University of Michigan. The final index for February came in at 70.8. While this was an improvement over the month’s preliminary reading of 69.6, it was still the lowest in sixteen years. January’s final index was 78.4.

Little change is anticipated for this month’s initial sentiment index.

Tags: Uncategorized by Matt Garnes
No Comments »