Stocks ran into a little headwind in early trading on Wednesday as the Fed floated a bit of a trial balloon to gauge the market’s reaction to roughly $500 billion in QE.  Just as Greenspan would use the WSJ’s former columnist Greg Ip to leak info, Jon Hilsenrath is Bernanke’s quasi PA system and his column on Tuesday night talked of a “few hundred billion dollars” in bond purchases over several months.  Since the market had seemingly become convinced that the program would be more substantial (even though NY Fed Bank President Dudley first floated the $500 billion figure a month ago), stocks sold off.  Still, something buoyed the market as the damage was mild thanks to a late-session rally. 

Tech and financial shares were the only of the major groups to close higher for the session.  Basic materials, industrials and energy were the biggest losers. 

The CRB (index that tracks a basket of commodities) declined as the metals pushed it back below that 300 mark we’ve been watching.  Oil was also down a bit, but even with the dollar higher for the session, agricultural goods prices rallied again.  

Volume came in 10% below the six-month average.

Back to Bernanke, he clearly saw expectations building regarding a higher level of QE wanted to tamp it down instead of shocking the market on Wednesday when they roll out the specifics of QE2.  In my view, not that I think it is good or that QE2 will be helpful, the market will get its $1.0-1.5 trillion in additional bond purchases, but not right away.  The Fed will likely start with $500 billion over six months, but as the jobless rate remains elevated (and maybe even increases to 10%) they’ll be “forced” to buy more (and maybe this likelihood is what saved the market from a substantial decline).  In any event, total market manipulation will be the outcome, and it’s ending an unhappy one in my opinion. 

While the short-term thinking Wall Street trader is jonesin’ for more of the Fed’s market crack, the withdrawal period is dysphoric – the Fed can’t prop asset prices up for a prolonged period.  Either things get better and the great unwind of this policy follows, or things don’t and confidence in the Fed collapses. 

Market Activity for October 27, 2010

Mortgage Apps

The Mortgage Bankers Association reported that its mortgage applications index rose 3.2% in the week ended October 22 as both refinancing and buying activity increased. 

Applications to refinance a mortgage rose 3.0%, following the previous week’s 11.2% slide, as the average contract interest rate on the 30-year fixed mortgage fell back to 4.25%.  Applications to purchase a home rose 3.9%, following the prior week’s 6.7% decline.

Interest rates have bounced again over the past few days so expect refinancings to decline again in next week’s report.  That doesn’t matter though, because there is likely to be a substantial refi wave sometime over the next six months as the Fed will do what they can to push rates lower again – frankly, I think they’ll target a 30-year mortgage rate of 4.00% -- we’ll see if they get it. 

On purchases, they remain at pathetic levels, and will continue to hover near the bottom until the job market recovers in durable fashion.  Of course, one can’t rule out another tax-credit scheme or some other short-term program to juice home sales again, but only meaningful job market repair – in such a manner that gives people much more confidence – will deliver consistently higher home sales.

Durable Goods Orders

The Commerce reported durable goods orders for September that were mixed in terms of expectations as the headline figure beat, while the ex-transportation figure missed.

Overall orders rose 3.3% last month (expected to be 2.0%) after August’s decline was revised up a bit to -1.0% from the -1.3% initially reported.  A 105% jump in commercial aircraft, an extremely volatile aspect of the report, delivered the big headline number – autos and parts orders were down 0.4% after August’s 5.1% decline and I see shipments are down over the past three reporting months, so the biggest boost to the inventory cycle is not going to be there for Q3 GDP.

Ex-transportation orders, which is always the figure to hone in on as it removes that most volatile component, fell 0.8% (a 0.5% increase expected) after the prior month’s 1.9% (revised down slightly from 2.0%) increase.  Since May, durable goods orders ex-transportation are flat. 

Non-defense capital goods ex-aircraft orders, the proxy for business spending, fell 0.6% in September after August’s 4.8% increase.  However, that 4.8% rise in August followed a 5.3% decline in July, so this figure is down by 1.4% for Q3.  If it’s not revised higher, the lack of business spending will be a problem for Q4 GDP.  It’s the shipments though, not the orders, that flow into the GDP report.  Thus, the nice results from May and June means higher shipments for Q3 GDP, but will drag on the following quarter due to the weaker orders of late. 

New Home Sales

The Commerce Department reported that new-home sales came in at a better-than-expected 307,000 units at a seasonally-adjusted annual rate (SAAR) for September – expected to come in at 300,000.  This is up 6.6% from the previous month’s 288,000 units but we’re talking about the worst annualized results in the history of this data over the past five months. 

On an unadjusted basis, 24,000 new homes sold in the U.S. last month, the lowest on record. 

The supply of new homes relative to the sales pace improved to 8.0 months worth from 8.8 in August.

The median price of a new home rose for the second-straight month, up 3.3% to $223,800.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900