Financial Market Affects June 29, 2015

This past week the bond market went on a rollercoaster ride driven by two major events, the seemingly never-ending Greek debt crisis and the June Employment Situation Summary (Jobs Report) from the Department of Labor.

The bond market began the week by spiking higher in a flight-to-safety buying spree while the U.S. stock market joined a global equity market sell-off as Greece moved closer to defaulting on its debt.  Greece was unable to agree to a cash-for-reform deal to resolve its sovereign debt with its creditors and has technically defaulted on a 1.6 billon euro ($1.73 billion) loan installment due to the International Monetary Fund.  This technical default could eventually lead Greece to a full default on its entire 323 billion euro ($360 billion) debt load, and should this happen; the consequences could shock the European banking sector to its very core.  The world will know more this week whether or not the Greek people will accept a creditor cash-for-reform proposal following the results of Sunday’s Greek referendum on the matter.

So… what would likely happen with a full-blown Greek default?  First, around $5 billion worth of credit default swaps (CDS) that investors in Greek bonds took out to protect themselves from a default would come into play.  The financial institutions that issued the CDS would be required to pay the face value of the bonds immediately, erasing some profits from their bottom lines.  Also, foreign banks holding Greek government debt would need to write down or possibly write off the entire value of that debt due to the default.  This scenario is very similar to what happened in 2008 when the banks were forced to write down billions of dollars in mortgage-backed securities as a result of the housing bust.

European banks have considerable exposure to Greek government debt with their holdings of $54.2 billion in Greek bonds.  German lenders are the largest foreign owners of Greek government debt with a total of about $22.7 billion in bonds.  French lenders have about $15 billion worth of Greek government debt exposure.  Also, in reference to the Greek private debt category, Moody’s recently issued credit warnings for three large French banks: BNP Paribas, Societe Generale and Credit Agricole.  These banks hold a combined $65 billion in public and private Greek debt, and if they have to write down an amount this large it could lead to greater chaos in the global financial system.

In economic news, the National Association of Realtors reported its seasonally adjusted Pending Home Sales Index increased 0.9% to 112.6 in May, climbing to its highest level in more than nine years.  The consensus forecast had called for the Index to rise 1.4%.  The index increased 10.4% over the past 12 months to put it just below the April 2006 level.

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Also in the housing sector, the S&P/Case Shiller Index for April showed home prices continued to rise, but at a slower rate than the prior month of March.  The 20-city Index increased 4.9% year-over-year, but the rate of annual price gains slowed in urban areas.  The consensus forecast had called for a rise of 5.6%.  The 10-City Composite Index gained 4.6% year-over-year while the National Home Price Index, covering all nine U.S. census divisions, recorded a 4.2% annual gain in April 2015 versus a 4.3% increase in March 2015.

Furthermore, the Commerce Department reported U.S. Construction Spending increased 0.8% to a seasonally adjusted annual rate of $1.036 trillion in May versus the consensus forecast for a 0.3% gain, reaching its highest level since October 2008.  Economists at RDQ Economics in a note to clients stated “Construction spending looks set to add significantly to second-quarter GDP growth, while upward revisions to the first quarter could add as much as a half-percentage point to real GDP growth.”

In the mortgage industry, the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending June 26, 2015 showed the Market Composite Index, a measure of mortgage application volume, fell -4.7% from a week earlier.  The Refinance Index dropped 5% from the previous week to its lowest level since December 2014.  Meanwhile, the seasonally adjusted Purchase Index declined 4% from a week earlier.  The refinance share of mortgage activity declined to 48.9% of total applications from 49.0% the prior week.  The adjustable-rate mortgage share of activity remained unchanged at 7.0% of total applications.  The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balance increased to 4.26%, its highest level since October 2014, from 4.19%, with points paid dropping to 0.33 from 0.38.

The week ended with bond prices moving higher following data from the June Employment Situation Summary (Jobs Report) showing a stumbling labor market that cast doubts about whether the Federal Reserve would begin to hike interest rates sometime during the fourth quarter.

The Labor Department reported employers added 223,000 workers in June which was less than the 230,000 consensus forecast.  It also downgraded its jobs numbers from April and May resulting in 60,000 fewer jobs created than previously reported.  Another poor data point was the absence of any wage growth.  The 0.0% hourly earnings number should disappoint the Fed which has counted on growing wages to help support consumer spending and move inflation toward their 2% target.

Meanwhile, bond traders who were worried about Greece’s Sunday referendum regarding austerity programs in exchange for another bailout, bought safe haven U.S. treasuries ahead of the three-day Independence Day weekend.

For the week, the FNMA 3.5% coupon bond gained 54.7 basis points to end at $102.77 while the 10-year Treasury yield fell 9.0 basis points to end at 2.39%.  Stocks ended the week with the NASDAQ Composite losing 71.30 points to close at 5,009.21.  The Dow Jones Industrial Average dropped 216.57 points to end at 17,730.11, and the S&P 500 fell 24.71 points to close at 2,076.78.

To date for 2015, and exclusive of any dividends, the NASDAQ Composite has gained 5.45%, the Dow Jones Industrial Average has lost 0.52%, and the S&P 500 has increased 0.86%.  The national average 30-year mortgage rate fell to 4.13% from 4.20% while the 15-year mortgage rate decreased to 3.29% from 3.37%.  The 5/1 ARM mortgage fell to 3.11% from 3.15%.  FHA 30-year rates dropped to 3.75% from 3.85% and Jumbo 30-year rates decreased to 3.92% from 3.98%.

Mortgage Rate Forecast with Chart

The FNMA 30-year 3.5% coupon bond ($102.77, +54.7 bp) traded within a 94 basis point range between a weekly intraday low of $102.22 and a weekly intraday high of 103.16 before closing at $102.77 on Thursday in a volatile, holiday shortened week.  The mortgage bond market was weak on Tuesday and Wednesday, but bounced back strongly on Thursday following a disappointing June Jobs Report.

Thursday’s strong showing resulted in the formation of a two-day bullish engulfing lines candlestick pattern, a moderately strong buy signal.  Furthermore, the slow stochastic oscillator is now “in sync” with this candlestick buy signal with its buy signal from a positive stochastic crossover.  Overhead resistance is now defined by the 25-day moving average at $103.06 while technical support remains at the 50% Fibonacci retracement level located at $102.36.  If Thursday’s upward momentum can be maintained this coming week, we should see a slight improvement in mortgage rates.  The wild card for the week remains the Greek debt crisis and whether or not a deal can be struck between the Greek government and its many European Union creditors.

Chart:  FNMA 30-Year 3.5% Coupon Bond

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Economic Calendar – for the Week of July 6

The economic calendar quiets down this week and features the ISM Services Index for June on Monday; Crude Oil Inventories and the Federal Reserve’s FOMC Minutes on Wednesday; and the weekly Initial Jobless Claims report on Thursday.  Economic reports having the greatest potential impact on the financial markets this coming week are highlighted in bold.

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Road Signs – Get Interrupted Less, Achieve More

By Jeff Davidson

With office and workplace interruptions on the rise, career professionals everywhere are experiencing monumental struggles to stay focused.  By some studies, today’s typical worker is interrupted every 11 minutes and then takes another 25 minutes to return to the original task because of all the other distractions along the way.

The more often you can keep interruptions at bay, stay focused on the task at hand, and allow yourself to do your best work, the more you’ll get done in a day.  If the position for which you are hired requires that you be interrupted all day long, that’s one thing.  Most of us, most of the time, have options when it comes to safeguarding our workspace and allowing us to have some uninterrupted stretches of time where we can concentrate on the project or task before us.

Why do so many of us, invite interruptions, or short of that, not vigilantly keep them at bay?  Of many possible explanations for this phenomenon, three stand out:

  1. Social media has enveloped the world, aided and abetted by mobile devices. Today, too many people are more fixated on the next communication they receive than staying focused on the task at hand. ’Nuff said.
  1. Television, radio, movies, and all other forms of news, information, and entertainment have inexorably increased the pace at which they disseminate their messages.

The average camera angle on television changes every 3.5 seconds.  Radio announcers now speak at faster paces than their counterparts of a generation ago.  The typical movie plot and pacing is noticeably faster than movies of generation ago.

While we speak at about 125 words a minute, we can listen and intake information at three times that rate.  Unless we train ourselves to slow down our focus on the message before us, and not be mentally drifting ahead, the swirl of communication that surrounds us pushes us to absorb information faster and faster.

Conversely, our professional tasks often require a slow pace.  Our concentration often cannot be rushed.  It takes a rare individual today to maintain separation between the rate at which he or she absorbs information from popular media, versus the rate at which he or she can understand, say, technical instructions, plotting a new strategy, or absorbing an internal staff report.

  1. Reading is not pretty. Much of the work that you do in the course of a given day involves reading. By some studies, career professionals typically read between two to four hours a day, including emails, email attachments, other forms of electronic messaging, and traditional print documents.  When you read, you’re just sitting there, looking at a page or a screen.  To those passing by, say in the hallway, it may appear that you’re not doing too much.

By contrast, walking to the copier, posting a note on the wall, or conducting a meeting with others, requires some form of action.  Who among us would rather sit and study, versus taking some sort of action?  As human beings, we are predisposed to take action.  Sitting and concentrating requires discipline.  Contemplating new instructions or new tasks requires mental consternation which can be accompanied by mental angst.

The ability to communicate with anybody at any time from any place around the world; the global media that bids us to pay attention to its ever-rapid dissemination of information, communication, and entertainment; and our inbred predisposition to take action rather than sit and contemplate, makes it seem as if the deck is stacked against you.

Yet, trailblazers in every industry and profession understand the importance of safeguarding their workspace from interruptions and distractions that would take them off course and render them from being less productive than they otherwise could be.

Such blessed individuals understand the need for quiet time.  They are willing to barricade themselves from the outside world, if that’s what it takes, to achieve mental clarity.  Once having done so, they can perform at their best.  They can make effective decisions.  They are better able to lead.

In which camp will you choose to be?  Will you join the masses who are buffeted daily by all manner of temptation resulting in less than stellar work performance?  Or will you have the mental and emotional resolve to join the winners?  Interruptions are the antithesis of concentration.  To be at your best, you and you alone must take the steps necessary to safeguard your work environment.  No one is coming to help you.

The choice is up to you.

Jeff Davidson is “The Work-Life Balance Expert®,” is a preeminent time management authority, has written 59 mainstream books, and has been widely quoted in the Washington Post, Los Angeles Times, Christian Science Monitor, New York Times, and USA Today.  Cited by Sharing Ideas Magazine as a “Consummate Speaker,” Jeff believes that career professionals today in all industries have a responsibility to achieve their own sense of work-life balance, and he supports that quest through his websites www.BreathingSpace.com and www.Work-LifeBalance.net and through 24 iPhone Apps at www.itunes.com/apps/BreathingSpaceInstitute.