There are those who, not illogically, thought that the second interest rates start creeping up, that there would be a rush of mortgage activity to lock in rates as low as possible before 30 year mortgages roll ever higher. Of course, for that plan to work, one Benjamin Shalom Bernanke would need to have broad credibility among the general population, as he would need to be perceived as one who would not rush to purchase bonds in the future, should rates jump far too high, in the process impairing banks and PDs which still hold massive amounts of paper. If, however, that plan were to not work, then the latest recent attempt to force a rotation out of stocks and into bonds would have abysmal consequences on housing, as the entire mortgage issuance machinery would grind to a halt. Alas, it appears the latter has happened. Minutes ago we got the latest MBA Mortgage Application data and it was ugly. The broad Mortgage Application index collapsed by 7.4% in the week ending March 16, when rates experienced the bulk of the move downward, which was the 6th consecutive week of declines, following last week's 2.4% drop. And while refis have been down for 5 weeks in a row, with the index slamming 9.3% lower as higher rates have now obviously killed any interest in mortgages, so have purchase applications. MBA Purchasing index was down 4.4%, breaking a trend of 3 weeks of gains. Some other hard statistics: the Average 30 year fixed rate soared to 4.19% from 4.06% last week, while the refi % of number of loans dropped to 73.4% - the lowest since July 2011.
And so Ben Bernanke gives up on fixing the housing market, and his latest and only goal now is to boost the Russell 2000 as high as possible.
Some more on the overnight tone from UBS:
Mixed tone: Given the extensive ongoing rally ytd, a pause seemed in order as yesterday's market action was fairly subdued with early setbacks giving way to a mixed bag by day's end. To start the day, adverse headlines regarding potential softening Chinese demand (hard or soft landing) for basic materials (BHP seeing slowing steel production; Rio Tinto seeing China slowdown; China raising fuel prices), plus mixed US housing data (permits stronger, starts slightly softer) set a cautious tone early on. But, the balance of the day proved to be a recovery trade that left some noted divergences. Stock averages posted modest pullbacks (S&P500 -0.30%; Nasdaq -0.14%) while the CDX credit indices were mixed with IG the clear outperformer (IG17 -3 bp to 82.5 bp; HY17 -$0.12 to $98.88, equivalent to +3 to 528 bp). Yesterday's roll to the new IG18 series exemplified the progressive improvement for IG CDS as IG18 debuted in the morning at 92 bp, but closed at 87.75 bp. CDS outperformed cash as bonds were largely mixed and the calendar slowed (~$2bn of IG/HY) following Monday's robust pace (~$8bn). Although rates managed to edge lower (10-year Treasury -2 bp to 2.36%), rate volatility is poised to be an important focus for credit investors and issuers in the coming weeks.
Q1 earnings reports = next potential catalyst: Reduced trading volatility following substantial market gains ytd leave the credit markets well-supported near-term. Looking ahead, we believe that Q1 earnings season (Alcoa 'kicks off' on April 10) sets up to be the next major catalyst -- either promoting another leg tighter or challenging the ongoing rally. Although the last earnings season (Q4) also had positive market momentum as a lead-in, earnings expectations were softening then. As a result, even a lacklustre earnings beat ratio (62% vs. 68% average over past 8 years) ended up being well-received. This time around further market gains may require stronger results. But, it looks like we are setting up for solid reports. The economic backdrop has been encouraging as the UBS growth surprise index remains near a high. And, earlier this month, our equity strategists upped their S&P500 EPS forecasts (to $103 from $99 for 2012, $24 for Q1), citing better US data, less severe European headwinds, higher oil, and reduced financial sector stress. Yesterday, two early reporters provided a favorable preview to Q1 results. Tech benchmark Oracle reported solid results (EPS of 62c vs. 56c estimate; revenue modestly above consensus, $9.06bn vs. $9.02bn) on better-than-expected new software license sales while broker Jefferies posted a beat (33c vs. 29c estimate), supported by fixed-income trading revenue that more than doubled the prior quarter's total.