Mortgage bond prices fell last week applying slight upward pressure on home loan rates. The market remained very volatile within a narrow range. With the lack of data the first portion of the week, oil prices factored into trading. Oil remained above $80 a barrel, which reignited inflation concerns. The retail sales report released Friday was much stronger than expected, indicating the US economy may be getting stronger.

Rates rose about 1/8 of a discount point for the week.

The Fed meeting Tuesday afternoon will be the most important event this week. The inflation data from both the consumer and producer sides will also take center stage. Signs of inflation are generally not received well by the mortgage bond market. If inflation remains in check, mortgage bonds could benefit.

LOOKING AHEAD

Producer Price Index

The producer price index is a measure of prices at the producer level and is important because it is the first inflation report to be released each month. Investors are typically able to gain an initial indication of inflationary pressures from the release. If producer prices are increasing, there is a tendency for producers to pass the increases on to consumers in the form of higher priced goods. It is important to note that the PPI is only a measure of goods, while the consumer price index is a measure of goods and services. It is possible for the price of goods to remain stable, while the price of services increases. In this scenario PPI would do little to warn of a change in inflationary pressures, while the CPI report would provide an indication of the inflationary effects of the service component. This distinction between the two reports shows why most analysts view the CPI as a more accurate indicator of inflation. Nevertheless, market participants still gain valuable insight into potential volatility in the financial markets from the PPI release.

Be cautious heading into the inflation data and Fed meeting this week.
Copyright 2010. All Rights Reserved. Mortgage Market Information Services, Inc. www.ratelink.com The information contained herein is believed to be accurate, however no representation or warranties are written or implied.

Market Comment

Mortgage bond prices continued to rebound higher last week, which pushed mortgage interest rates lower. Stock gains kept mortgage bonds relatively in check but many of the data releases were very bond friendly. The core PCE inflation reading was unchanged compared to the slight increase expected by analysts. Q4 revised productivity rose 6.9%, much better than expected. Higher productivity means a company can produce more with less input helping to keep prices and thus inflation in check. Rates fell about 1/8 of a discount point for the week.

Expect stocks to factor into trading the early portion of the week with very little data on tap. The Treasury auctions will be the focus throughout the middle portion of the week. Strong foreign demand would likely help mortgage bonds also. The jobless figures and retail sales data will be the focus for the end of the week.

LOOKING AHEAD

Auctions

US Treasury bonds do not directly dictate fixed mortgage interest rate pricing however they do have an indirect impact. Both Treasuries and mortgage bonds often track in the same direction but this is not always the case. There are many times that Treasuries and mortgage bonds move inversely.

Despite the overwhelming size of the US economy, foreign investors can still have an effect on moving the financial markets. When foreign economies struggle foreign investors often purchase US based investments including mortgage bonds. This demand usually causes mortgage bond prices to rise and interest rates to fall. This flight to quality buying was one of the factors that helped mortgage interest rates to remain historically low in years past.

There is a real threat that continued global economic turmoil might keep foreign investors from purchasing mortgage bonds in the future. The Treasury auctions this week will be important in determining the current appetite of foreign investors for dollar denominated securities. If this week's auctions are poorly bid mortgage bond prices could fall pressuring mortgage interest rates higher.

Copyright 2010. All Rights Reserved. Mortgage Market Information Services, Inc. www.ratelink.com The information contained herein is believed to be accurate, however no representation or warranties are written or implied.

Market Comment

Mortgage bond prices rebounded last week pushing mortgage interest rates lower. The majority of the data came in bond friendly. Weaker than expected consumer confidence data Tuesday helped mortgage interest rates improve. The Treasury auctions showed decent foreign demand. The gross domestic product price deflator component showed a smaller price increase than expected while the consumer spending component also came in weaker than expected. Existing home sales fell a surprising 7.1%, considerably weaker than the expected 1% increase. Rates fell about 3/4 of a discount point for the week.

The employment report Friday morning will take center stage this week. Until then, look for the PCE inflation data to set the tone for the beginning of the week and the ADP employment report to set the tone for the mid portion of the week.

LOOKING AHEAD

Fundamental Week

The abundance of fundamental data this week provides a good opportunity for mortgages to improve. If the data shows weakness in the economy with little or no inflationary pressures then it is possible for mortgage bonds to rally resulting in mortgage interest rate decreases. However, if the data shows that the economy is rebounding or any significant signs of inflation, mortgage bonds may fall pushing mortgage interest rates higher.

Mortgage interest rates remain favorable. Now is a great time to avoid the uncertainty surrounding continued market volatility.

Market Comment

Mortgage bond prices fell last week pushing mortgage interest rates considerably higher. The bond market took a hit as inflation concerns emerged after the stronger than expected producer price index data. Producer prices surged in January amid higher energy costs to almost double expectations. The Fed made a surprise rate hike to the discount rate that also resulted in mortgage rate increases. The only positive was the tame consumer inflation reading Friday morning but we were unable to rebound from the earlier losses. Unfortunately rates rose over a full discount point for the week.

The consumer confidence data Tuesday will set the tone for trading this week. New home sales, weekly jobless claims, and the gross domestic product data also may move the financial markets. The Treasury will auction $118B in 2/5/7-year notes starting Tuesday. The additional supply may cause interest rate volatility.

LOOKING AHEAD

Fed Action Causes Uncertainty

The Federal Reserve caught market participants by surprise with their 25 basis point discount rate hike last week. While analysts were split on whether the Fed would raise rates this year, that question has now been answered. The move resulted in volatility in most of the US financial markets.

The discount rate is the interest rate charged to commercial banks on loans they receive from the Fed. The rate hike is an effort to pull back the aid provided by extraordinary low rates amid the global economic decline. The Fed specifically noted the move was needed "in light of continued improvement in financial market conditions." Many analysts noted the earlier warnings from Fed Bernanke that rate hikes were coming but very few, if any, expected the move this soon.

While the rate hike resulted in mortgage bond price weakness in the short-term, the long-term outlook is less certain. Most analysts believe inflation remains in check, but at the same time the Fed purchasing of MBS will soon be over. A cautious approach to "float" and "lock" decisions is prudent taking the current market conditions into consideration.

Market Comment

Mortgage bond prices fell last week pushing mortgage interest rates slightly higher. The early part of the week saw a reversal of the recent flight to quality buying of US investments as talks hinted of a Greek bailout by Germany. German Chancellor Merkel dashed those hopes late in the week causing turmoil in the European Union. As a result global investor funds returned to the US bond market. Rates improved Friday morning, which helped recover some of the earlier losses. Unfortunately rates still rose overall for the week by about 1/8 of a discount point.

The consumer price index Friday will be the most important release this week. The other inflation data and the shortened trading week may also factor into mortgage interest rate changes. The typical back and forth movements of stocks and bonds will also likely take place as uncertainty continues to permeate the financial markets.

LOOKING AHEAD

Globalization

Economic globalization is the increasing interdependence of national economies through trade, finances, and technology. While economists debate the pros and cons of globalization, the fact remains that globalization is not new and continues to expand.

As a driving force in the global economy, the US often benefits when foreign economies struggle. A prime example is the concern of a Greek economic collapse. Unlike a corporation, a country cannot file for bankruptcy when they can't make debt payments. One remedy in situations like this has been restructuring the debt, which is mired in uncertainty for investors. The bigger global problem is the fear that a default by one member of the European Union could ripple throughout all the other eurozone countries. In times like this, investors often move funds to safe havens in what is called a "flight to quality." This is exactly what we saw Friday morning as US debt instruments saw an influx of foreign investment. Bond prices rose which caused mortgage interest rates to fall that morning. From a short-term perspective that is great for homebuyers and those refinancing. The long-term effects are less certain. A reversal could easily take place if the EU can prevent a default. This is a prime reason to take advantage of rate dips when they occur.

Market Comment

Mortgage bond prices rose last week pushing mortgage interest rates slightly lower. Reignited fear of a global economic meltdown sent money into the mortgage bond market in flight to quality buying. The news reports were permeated with worries about European debt payment defaults. Greece and a few other countries were noted as specific concerns. The employment report Friday morning was mixed with unemployment not as bad as expected but a larger than expected drop in payrolls. For the week interest rates fell by about 1/4 of a discount point.

The record debt issuance continues with billions of dollars worth of notes and bonds set for auction this week. Strong foreign demand will likely help the entire bond market. With the recent "revisions" to employment data the weekly jobless claims data will carry a bit more weight than usual. Retail sales figures will be the headline figure this week.

LOOKING AHEAD

Employment Revision

The employment report is one of the biggest, if not the biggest, data releases each month. Last week's employment report came with more twists than usual. Unemployment came in at 9.7%, a sharp drop from the expected 10% mark. Payrolls fell 20,000, weaker than the expected 15,000 increase. This divergence happens from time to time with the data derived from two completely different surveys. One piece of the report that caused major concern was the annual benchmark update, which showed the economy lost 930,000 more jobs than previously estimated in the 12 months ended March 2009. The revised number was very large and basically indicates 2009's employment situation was worse than most thought.

A few things that called into question the accuracy of the data influenced the report. Some analysts argued the hiring of temporary census workers threw the figures off. The data was received with a lot of uncertainty and resulted in some wild market swings immediately after the release. The initial reaction sent bond prices lower and interest rates higher. However, the bond market rebounded a bit after digesting the data for an hour or so. This was a prime example of the volatility that often occurs with major data releases.

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Market Comment

Mortgage bond prices fell last week pushing mortgage interest rates slightly higher. Most of the data early in the week was bond-friendly. Unfortunately the Fed's reminder that their purchases of mortgage bonds would cease after the first quarter sent bond prices tumbling Wednesday afternoon. This was followed by stronger than expected gross domestic product, employment cost index, and PCE price data Friday morning. Bonds were helped Friday afternoon as stocks remained jittery. Interest rates rose by about 1/8 of a discount point for the week.

The employment report Friday will be the most important event this week. Income, outlays, ISM Index, productivity, and factory orders data may also move the market. The ADP payrolls data will be carefully watched even though the release does not always reflect the results of the employment report. It still provides another view of the employment situation.

LOOKING AHEAD

ISM

The Institute for Supply Management (ISM), formerly the National Association of Purchasing Management (NAPM), releases the "Report on Business" on the first working day of each month. Part of this report is the "diffusion index," which tracks the economy's ups and downs fairly well.

In conducting this survey, the ISM questions purchasing executives from over 250 industrial companies compiling data on production, orders, commodity prices, inventories, vendor performance, and employment. Each of the respondents is asked to rank the categories as "up" or "down." Various weights are applied to the individual components to form the composite index.

A composite index reading of 50 can be thought of as a "swing point." A reading above 50 implies an increase in economic activity, while a reading below 50 indicates a decline. As a general rule of thumb, when the index approaches 60, investors begin to worry about an overheated economy. A slide below 40 suggests that recession is at hand.

The ISM report is difficult for economists to forecast because there is little data upon which to base an educated guess. The report has a large "surprise factor" and can often prompt a significant market reaction. Be cautious going into the data.

Market Comment

Mortgage bond prices rose last week pushing mortgage interest rates lower. The bond market rallied following crumbling stocks as the DOW fell 213 points Thursday. Weekly jobless claims came in higher than expected causing unemployment fears to cast a shadow over the state of the economy. In a consumer based economy it is difficult for people to spend money without a job. The producer price index was mixed as the headline figure was higher than expected but the core was lower than expected. For the week interest rates fell by about 1/4 of a discount point.

The Fed meeting Wednesday will be the most important event this week. The Treasury will continue the record auctions with 2-year notes on Tuesday, 5-year notes on Wednesday, and 7-year notes on Thursday. If foreign demand remains decent rates should hold near current levels. However, a drop in foreign demand will likely cause rates to head higher.

LOOKING AHEAD

Fed Focus

The United States central bank, the Federal Reserve, coordinates the borrowing and lending activities of federally chartered banks. The principal reason the Federal Reserve was created was to reduce severe financial crises. One way of accomplishing this goal is to control the amount of money that flows through the economy. By manipulating the US money supply, the Fed influences inflation, unemployment, and the level of US economic activity. The Fed has a variety of tools that it uses to control the money supply, but its chief policy tool is the manipulation of short-term interest rates.

All eyes will be focused on the Federal Open Market Committee meeting Wednesday. No rate changes are expected. However, many analysts and traders believe rate hikes are on the horizon. Futures contracts show traders are pricing in a 77% chance the Fed will raise rates by November. Others argue those positions will be wrong because the economy isn't strong enough for the Fed to change rates.

A cautious approach to float/lock decisions is prudent heading into the Fed meeting this week. Be prepared for potential market volatility.

Market Comment

Mortgage bond prices rose last week pushing mortgage interest rates lower. The bond market rallied nicely Tuesday following moves by China to curb growth. Oil prices fell almost immediately providing a much-needed reprieve following the recent run up in prices tied to severe cold weather across the US. The consumer price index data showed tame inflation, which also helped rates improve. For the week interest rates fell by about 1/2 of a discount point.

The inflation data Wednesday will be the most important economic release this week. Signs of stronger than expected inflation would not be good for mortgage interest rates. The bond market is closed Monday in honor of the Martin Luther King holiday. Interest rates may be volatile Tuesday as trading resumes following the extended holiday weekend.

LOOKING AHEAD

LEI

The index of leading economic indicators (LEI) is a weighted average of eleven economic variables that "lead" the business cycle. It is constructed for forecasting future aggregate economic activity. The eleven variables that make up the LEI measure workers' hours, initial unemployment claims, new factory orders, vendor performance, contracts and orders for plant and equipment, new housing permits, changes in unfilled orders, prices of raw materials, stock prices, money supply and consumer expectations.

Each of the variables that comprise the index has a tendency to predict (or lead) economic activity. For example, new orders for manufactured goods, new orders for plant and equipment, and new building permits are all direct measures of the amount of future production being planned for the economy.

Analysts monitor the LEI in an effort to predict future economic growth. When the LEI report is up, mortgage market participants expect credit demand to increase and inflationary pressures to build. Thus, when the LEI report is rising, interest rates tend to rise as well.

The LEI report is a valuable forecasting device that correctly predicts most economic turning points. The percentage change in the LEI is reported monthly and is an indication of the activity that will occur within the next three to six months. The LEI tends to turn down before peaks in the business cycle. Continuous declines are generally accepted as evidence that a recession continues.

Nine of the eleven components that make up this index are known before the release of the report, so the index is easy for economists to predict. Thus, although this is important predictive data for market participants, surprises are not common with the release of this data.

Market Comment

Mortgage bond prices rose last week pushing mortgage interest rates lower. The data was mixed with stronger than expected consumer sentiment and a disappointing 5-year Treasury note auction. Fortunately the Fed meeting resulted in some positive mortgage interest rate movements and strong foreign demand for the 7-year Treasury auction helped rates improve. For the week interest rates fell by about 1/4 of a discount point.

The employment report will take center stage this week. Consumer confidence, ADP employment, income, outlays, ISM Index, and factory orders data have the potential to move the financial markets. The recent economic data has been mixed. Remember that the bond market typically likes to see weaker figures with very little price pressures.

LOOKING AHEAD

Good News

The housing sector of the economy has been hit hard during these troubled economic times. In an effort to stabilize things the Federal Reserve implemented a system to keep mortgage interest rates low through the purchasing of $1.25 trillion of mortgage-backed securities throughout this year. Few can argue the Fed has not been effective with rates at historically favorable levels. However uncertainty still looms regarding the future of mortgage interest rates after the Fed program stops.

The Fed provided some good news last week when they indicated the purchasing of mortgage bonds would be extended into the first quarter of 2010. Prior to the meeting all indications were the program would stop the end of this year. The bad news is that they have not increased the amount to be spent as of yet. This still leaves much uncertainty and some view it as just a delay. The Fed also indicated that long term inflation expectations were stable. This is great news for fixed income securities and the stability of mortgage interest rates. Remember, the current goal of the Fed is to keep mortgage interest rates relatively low and stable. They appear to be content with rates in the current historically favorable range.

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Copyright 2009. All Rights Reserved. Mortgage Market Information Services, Inc. www.ratelink.com The information contained herein is believed to be accurate, however no representation or warranties are written or implied.