Market Update 02/15/2010

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.

GlobalizationEconomic 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.

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Market Update 02/08/2010

February 5th, 2010

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

Economic Indicator	Release Date & Time	Consensus Estimate	Analysis
3-year Note Auction	Tuesday, Feb. 9, 1:00 pm, et	None	Important. $40 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates.
Trade Data	Wednesday, Feb. 10, 8:30 am, et	$35 billion deficit	Important. Affects the value of the dollar. A falling deficit may strengthen the dollar and lead to lower rates.
10-year Note Auction	Wednesday, Feb. 10, 1:00 pm, et	None	Important. $25 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates.
Weekly Jobless Claims	Thursday, Feb. 11, 8:30 am, et	475k	Important. An indication of the employment situation. Higher claims could lead to lower rates.
Retail Sales	Thursday, Feb. 11, 8:30 am, et	Up 0.4%	Important. A measure of consumer demand. A smaller than expected increase may lead to lower mortgage rates.
Business Inventories	Thursday, Feb. 11, 10:00 am, et	Up 0.4%	Low importance. An indication of stored-up capacity. A significantly larger increase may lead to lower rates.
30-year Bond Auction	Thursday, Feb. 11, 1:00 pm, et	None	Important. $16 billion of bonds will be auctioned. Strong demand may lead to lower mortgage rates.
U of Michigan Consumer Sentiment	Friday, Feb. 12, 10:00 am, et	74.6	Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.

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 Update 02/01/2010

January 29th, 2010

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

Economic Indicator	Release Date & Time	Consensus Estimate	Analysis
Personal Income and Outlays	Monday, Feb. 1, 8:30 am, et	Income up 0.3%, Outlays up 0.2%	Important. A measure of consumers’ ability to spend. Weakness may lead to lower mortgage rates.
Construction Spending	Monday, Feb. 1, 10:00 am, et	Down 0.3%	Low importance. An indication of economic strength. A significant decrease may lead to lower rates.
ISM Index	Monday, Feb. 1, 10:00 am, et	56.7	Important. A measure of manufacturer sentiment. A larger decline may lead to lower mortgage rates.
ADP Employment	Wednesday, Feb. 3, 8:30 am, et	-90k	Important. A measure of employment. A large decrease in payrolls may bring lower rates.
Preliminary Q4 Productivity	Thursday, Feb. 4, 8:30 am, et	Up 5.9%	Important. A measure of output per hour. Improvement may lead to lower mortgage rates.
Factory Orders	Thursday, Feb. 4, 10:00 am, et	Up 1.5%	Important. A measure of manufacturing sector strength. A larger decrease may lead to lower rates.
Employment	Friday, Feb. 5, 8:30 am, et	Unemp. @ 10%, Payrolls +20k	Very important. An increase in unemployment or a large decrease in payrolls may bring lower rates.
Consumer Credit	Friday, Feb. 5, 3:00 pm, et	Down $9.2 billion	Low importance. A significantly large increase may lead to lower mortgage interest rates.

ISMThe 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.

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Market Update 01/25/2010

January 22nd, 2010

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

Economic Indicator	Release Date & Time	Consensus Estimate	Analysis
Existing Home Sales	Monday, Jan. 25, 10:00 am, et	Down 8.3%	Low importance. An indication of mortgage credit demand. A significant decrease may lead to lower rates.
Consumer Confidence	Tuesday, Jan. 26, 10:00 am, et	52.9	Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.
New Home Sales	Wednesday, Jan. 27,  10:00 am, et	Up 1.9%	Important. An indication of economic strength and credit demand. A decrease may lead to lower rates.
Fed Meeting Adjourns	Wednesday, Jan. 27, 2:15 pm, et	No rate adjustment	Important. Few expect the Fed to change rates, but some volatility may surround the adjournment of this meeting.
Durable Goods Orders	Thursday, Jan. 28, 8:30 am, et	Up 2.0%	Important. An indication of the demand for “big ticket” items. Weakness may lead to lower rates.
Q4 Advance GDP	Friday, Jan. 29, 8:30 am, et	Up 4.5%	Very important. The aggregate measure of US economic production. Weakness may lead to lower rates.
Q4 Employment Cost Index	Friday, Jan. 29, 8:30 am, et	Up 0.4%	Very important. A measure of wage inflation. Weakness may lead to lower rates.
U of Michigan Consumer Sentiment	Friday, Jan. 29, 10:00 am, et	73.0	Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.

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.

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Market Update 01/18/2010

January 15th, 2010

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

Economic Indicator	Release Date & Time	Consensus Estimate	Analysis
Martin Luther King Day	Monday, Jan. 18		Important. Shortened trading week may result in volatility when trading resumes Tuesday.
Producer Price Index	Wednesday, Jan. 20, 8:30 am, et	Unchanged, Core up 0.2%	Important. An indication of inflationary pressures at the producer level. Weaker figures may lead to lower rates.
Housing Starts	Wednesday, Jan. 20, 8:30 am, et	Up 1.0%	Important. A measure of housing sector strength. Weakness may lead to lower rates.
Weekly Jobless Claims	Thursday, Jan. 21, 8:30 am, et	445k	Moderately Important. An indication of employment. Higher figures may result in lower rates.
Leading Economic Indicators	Thursday, Jan. 21, 10:00 am, et	Up 0.5%	Important. An indication of future economic activity. Weakness may lead to lower rates.
Philadelphia Fed Survey	Thursday, Jan. 21, 10:00 am, et	18.2	Moderately important. A survey of business conditions in the Northeast. Weakness may lead to lower rates.

LEIThe 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.

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Market Update 01/11/2010

January 8th, 2010

Market Comment

Mortgage bond prices rose last week pushing mortgage interest rates lower. The bond market was buoyed by the announcement that US Treasury increased the credit lines of Fannie Mae and Freddie Mac a total of $400 billion. This was a signal to investors that those entities are “too big to fail” as viewed by the Treasury. We saw some weakness Thursday afternoon as retailers reported stronger than expected holiday sales. The employment report Friday was generally bond friendly. For the week interest rates fell by about 1/4 of a discount point.

The inflation data Friday will be the most important economic data this week. Signs of stronger than expected inflation would not be good for mortgage interest rates. The Treasury auctions will also dominate trading. Stronger than normal foreign demand could bode well for the overall level of interest rates. Weaker than expected bids would likely result in interest rate increases.

LOOKING AHEAD

Economic Indicator	Release Date & Time	Consensus Estimate	Analysis
Trade Data	Tuesday, Jan. 12, 8:30 am, et	$34.8 billion deficit	Important. Affects the value of the dollar. A falling deficit may strengthen the dollar and lead to lower rates.
3-year Treasury Note Auction	Tuesday, Jan. 12, 1:00 pm, et	None	Important. $40 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates.
Fed “Beige Book”	Wednesday, Jan 13,  2:00 pm, et	None	Important. This Fed report details current economic conditions across the US. Signs of weakness may lead to lower rates.
10-year Treasury Note Auction	Wednesday, Jan. 13, 1:00 pm, et	None	Important. $21 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates.
Retail Sales	Thursday, Jan. 14, 8:30 am, et	Up 0.4%	Important. A measure of consumer demand. A smaller than expected increase may lead to lower mortgage rates.
30-year Treasury Bond Auction	Thursday, Jan. 14, 1:30 pm, et	None	Important. $13 billion of bonds will be auctioned. Strong demand may lead to lower mortgage rates.
Consumer Price Index	Friday, Jan. 15, 8:30 am, et	Up 0.2%, Core up 0.1%	Important. A measure of inflation at the consumer level. Weaker figures may lead to lower rates.
Industrial Production	Friday, Jan. 15, 9:15 am, et	Up 0.6%	Important. A measure of manufacturing sector strength. A lower than expected increase may lead to lower rates.
Capacity Utilization	Friday, Jan. 15, 9:15 am, et	71.8%	Important. A figure above 85% is viewed as inflationary. Weakness lower mortgage interest rates.
U of Michigan Consumer Sentiment	Friday, Jan. 15, 10:00 am, et	73.8	Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.

Employment Results

The December employment report came in relatively bond friendly. Unemployment came in at 10% as expected. However the payrolls component showed job losses of 85,000 compared to the 35,000 losses expected by analysts. The mortgage bond market had a generally positive reaction to the report but improvements in rates were tempered by concerns for some of the revised data from prior months. Revisions to the November figures showed a 4000-job increase as opposed to the original 11,000-job decrease.

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Market Update 01/04/2010

January 4th, 2010

Market Comment

Mortgage bond prices fell last week pushing mortgage interest rates higher. The bond market was choppy most of the week as thin trading conditions magnified movements. We started the week with rates heading higher Monday. Fortunately there was a bit of a rally Tuesday and Wednesday as the Treasury auctions were decent. Those gains were short-lived as the weekly jobless claims figure wasn’t as bad as expected. The bond market closed early Thursday and was closed the entire day Friday. For the week interest rates rose by about 1/4 of a discount point.

ISM Index data will set the tone for trading this week. The employment report will be the most important release but it doesn’t arrive until Friday. This will be the first full week of trading this year. It will be interesting to see how traders react to the recent spike in rates following the various shortened trading sessions.

LOOKING AHEAD

Economic Indicator	Release Date & Time	Consensus Estimate	Analysis
Construction Spending	Monday, Jan. 4, 10:00 am, et	Down 0.5%	Low importance. An indication of economic strength. Weakness may lead to lower rates.
ISM Index	Monday, Jan. 4, 10:00 am, et	54.0	Important. A measure of manufacturer sentiment. Weakness may lead to lower mortgage rates.
Factory Orders	Tuesday, Jan. 5, 10:00 am, et	Up 0.5%	Important. A measure of manufacturing sector strength. Weakness may lead to lower rates.
ADP Employment	Wednesday, Jan. 6, 8:30 am, et	-75k	Important. A measure of employment. A larger than expected decrease in jobs may bring lower rates.
Employment	Friday, Jan. 8, 8:30 am, et	Unemp. @ 10%, Payrolls unchanged	Very important. An increase in unemployment or a large decrease in payrolls may bring lower rates.

The Year AheadThis year begins in a similar fashion to last year. Last year at this time 30 year fixed rate mortgage interest rates were historically low. Most pundits predicted little or no opportunities for additional refinancing. Mortgage interest rates did spike higher from time to time throughout the year but overall the Fed did an excellent job of keeping rates in check. Unfortunately now the Fed’s $1.25 trillion mortgage backed securities (MBS) purchasing program is nearing the end and the future remains uncertain. The good news is that 30 year fixed rate mortgages remain low but once again future predictions are all over the board.

What will occur in the future, economic recovery or additional weakness will continue to be debated. There is no certainty in predictions. Data can be used to support both sides of the debate. What we can be certain of is the fact that until the economy gains some stability, mortgage interest rates are likely to be volatile. Historically, mortgage interest rates seem to improve slowly. In contrast, when rates increase, it is often fast and furious. One negative day often erases a week of positive improvements.

It is possible for mortgage interest rates to push lower considering the Fed still has a few hundred billion dollars of MBS purchasing left. However, we are in unprecedented times. The Fed has clearly signaled they want rates to remain low but also want to exit the market. The Fed isn’t the only player in the mortgage bond market and there are many others buying and selling the securities. Remember that the Fed does not directly dictate that mortgage interest rates will be at a certain percentage. Rates are determined by the supply and demand for mortgage-backed securities.

The Fed kept rates in check for 2009. The big unknown is how they will exit the market without causing major disturbances this year. While there have been signs of improvement in the housing sector, the last thing we need is higher rates. Without the Fed buying mortgage bonds rates may very well head considerably higher. Now is a great time to take advantage of favorable rates.

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