Chateau Mortgage of Louisiana: Newsletter

Market Update 05/14/12

May 11th, 2012

Market Comment

Mortgage bond prices finished the week slightly higher helping rates improve. The market remained relatively stable. Political changes in France put into question the willingness of euro zone countries to continue austerity measures. Greece failed to put a coalition government in place and Spain stepped in to rescue one of their largest banks. This increased concerns that Greece will eventually leave the Euro. Flight to quality buying of US debt instruments continued as a result. The 30Y bond auction showed decent foreign demand. Mortgage interest rates finished the week better by about 1/8 of a discount point.

LOOKING AHEAD

Economic Indicator	Release Date & Time	Consensus Estimate	Analysis
Retail Sales	Tuesday, May 15, 8:30 am, et	Up 1.4%	Important. A measure of consumer demand. A smaller than expected increase may lead to lower mortgage rates.
Consumer Price Index	Tuesday, May 15, 8:30 am, et	Up 0.3%, Core up 0.1%	Important. A measure of inflation at the consumer level. Weaker figures may lead to lower rates.
Housing Starts	Wednesday, May 16, 8:30 am, et	610k	Important. A measure of housing sector strength. Weakness may lead to lower rates.
Industrial Production	Wednesday, May 16, 9:15 am, et	Up 0.2%	Important. A measure of manufacturing sector strength. A lower than expected increase may lead to lower rates.
Capacity Utilization	Wednesday, May 16, 9:15 am, et	77.2%	Important. A figure above 85% is viewed as inflationary. Weaker figure may lead to lower rates.
Fed Minutes	Wednesday, May 16, 2:00 pm, et	None	Important. Details of the last Fed meeting will be thoroughly analyzed.
Weekly Jobless Claims	Thursday, May 17, 8:30 am, et	425k	Important. An indication of employment. Higher claims may result in lower rates.
Philadelphia Fed Survey	Thursday, May 17, 10:00 am, et	-10.4	Moderately important. A survey of business conditions in the Northeast. Weakness may lead to lower rates.
Leading Economic Indicators	Thursday, May 17, 10:00 am, et	Up 0.2%	Important. An indication of future economic activity. A smaller increase may lead to lower rates.
10-year Treasury TIPS Auction	Thursday, May 17, 1:15 pm, et	None	Important. TIPS will be auctioned. Strong demand may lead to lower mortgage rates.

Industrial Production

The Federal Reserve releases the Industrial Production report each month. It is a real measure of output from manufacturing, mining, electric, and gas utilities. The data is significant in that it provides an indicator of the state of the economy. Analysts use the data to attempt to determine market direction. The Fed uses the data to help set the course for monetary policy. Generally the Fed likes to see steady growth in the economy with little price pressures.

Mortgage interest rates generally react favorably to weaker than expected industrial production data. In times of economic weakness investors often move out of stocks and into mortgage bonds. When things look good investors often move out of bonds and back into stocks. We have seen these patterns frequently in recent months. Floating into significant economic data always has some risk involved. Now is a great time to take advantage of mortgage interest rates at these historically low levels.

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Market Updated 05/07/12

May 4th, 2012

Market Comment

Mortgage bond prices finished the week slightly higher helping rates improve. The market was relatively stable after many weeks of volatile trading. We started the week on a positive tone as the PCE core index came in as expected. Trading was calm following the indication that inflation was in check. ISM Index data came in higher than expected which initially pressured rates but only slightly. The ADP employment figure was weaker than expected while the weekly jobs release was stronger than expected. The heavyweight employment report did little to settle the disparity as it was mixed. Mortgage interest rates finished the week better by about 1/4 of a discount point.

LOOKING AHEAD

Economic Indicator	Release Date & Time	Consensus Estimate	Analysis
Consumer Credit	Monday, May 7, 3:00 pm, et	$8.8b	Low importance. A significantly large increase may lead to lower mortgage interest rates.
3Y Treasury Note Auction	Tuesday, May 8, 1:15 pm, et	None	Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates.
10Y Treasury Note Auction	Wednesday, May 9, 1:15 pm, et	None	Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates.
Weekly Jobless Claims	Thursday, May 10, 8:30 am, et	370k	Important. An indication of employment. Higher claims may result in lower rates.
Trade Data	Thursday, May 10, 8:30 am, et	$45.5b deficit	Important. Affects the value of the dollar. A falling deficit may strengthen the dollar and lead to lower rates.
30Y Treasury Bond Auction	Thursday, May 10, 1:15 pm, et	None	Important. Bonds will be auctioned. Strong demand may lead to lower mortgage rates.
Producer Price Index	Friday, May 11, 8:30 am, et	Up 0.1%, Core up 0.1%	Important. An indication of inflationary pressures at the producer level. Lower figures may lead to lower rates.
U of Michigan Consumer Sentiment	Friday, May 11, 10:00 am, et	76	Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.

Oil

Inflation fears tied to rising energy prices remain on the minds of traders. Inflation, real or perceived, erodes the value of fixed income investments such as mortgage-backed securities, causing prices to fall and rates to rise. Tensions with Iran over sanctions tied to their nuclear activities increase concerns that they will reduce their oil supplies to the world. Last week OPEC Secretary General Abdullah el-Badri indicated, “We’re working hard to bring down the price. We’re not comfortable.” OPEC indicates they are comfortable with oil around $100 per barrel. U.S. consumers are comfortable with price targets considerably lower than that. Unfortunately that doesn’t look to be a possibility at this time. OPEC blames rising prices on excessive speculation and noted they have been able to meet consumer needs.

Oil prices have fallen in the short term following signs of slowing US economic growth, reports that US inventory supplies are at record highs, and weakness in China’s demand. Falling energy prices are generally good for mortgage interest rates. The great news is that mortgage interest rates remain very favorable. Now is a good time to take advantage of these low rates to avoid any uncertainty with the future. The current rates are a sure thing while waiting for the possibility for lower rates is risky.

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Market Update 04/30/12

April 30th, 2012

Market Comment

Mortgage bond prices finished the week slightly higher helping rates improve. The up and down trading pattern continued throughout the week. Rates were better Monday morning tied to stock weakness. Those gains were erased after Spain and Italy had another round of relatively successful debt auctions Tuesday. Fortunately MBS prices bounced back Thursday following reports out of Europe that consumer confidence there continued to slip. This reignited some of the flight to quality buying of US debt instruments. The Treasury auctions generally showed strong foreign demand. Mortgage interest rates finished the week better by about 1/8 of a discount point.

LOOKING AHEAD

Economic Indicator	Release Date & Time	Consensus Estimate	Analysis
Personal Income and Outlays	Monday, April 30, 8:30 am, et	Up 0.1%, Up 0.6%	Important. A measure of consumers’ ability to spend. Weakness may lead to lower mortgage rates.
PCE Core Inflation	Monday, April 30, 8:30 am, et	Up 0.2%	Important. A measure of price increases for all domestic personal consumption. Weaker figure may help rates improve.
ISM Index	Tuesday, May 1, 10:00 am, et	53	Important. A measure of manufacturer sentiment. Weakness may lead to lower mortgage rates.
Construction Spending	Tuesday, May 1, 10:00 am, et	Up 0.1%	Low importance. An indication of economic strength. Significant weakness may lead to lower rates.
ADP Employment	Wednesday, May 2, 8:30 am, et	197k	Important. An indication of employment. Weakness may bring lower rates.
Factory Orders	Wednesday, May 2, 10:00 am, et	Up 0.8%	Important. A measure of manufacturing sector strength. Weakness may lead to lower rates.
Weekly Jobless Claims	Thursday, May 3, 8:30 am, et	390k	Important. An indication of employment. Higher claims may result in lower rates.
Preliminary Q1 Productivity	Thursday, May 3, 8:30 am, et	Up 0.3%	Important. A measure of output per hour. Improvement may lead to lower mortgage rates.
Employment	Friday, May 4, 8:30 am, et	8.3%, Payrolls +110k	Very important. An increase in unemployment or weakness in payrolls may bring lower rates.

PCE

The US Department of Commerce’s Bureau of Economic Analysis releases the core PCE price index. The report provides the average increase in costs for personal consumption expenditures excluding food and energy. As of July 2009 the figure now includes food services in the figure.

The report is significant in that the Fed uses the PCE in determining inflation as opposed to the prior use of the consumer price index. The reports vary in that the CPI in that the PCE includes the price of spending for and on behalf of households. This includes health care spending paid for a household by a business. The CPI only reflects out of pocket expenses paid directly by consumers.

The Fed noted last week that inflation in the short term has escalated. However, they also indicated that long term inflation projections show tame expectations.

Mortgage interest rates will likely spike higher in the short term if the PCE core reading is higher than expected. A reading in line with expectations will likely help rates stay in check.

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Market Update 04/23/12

April 20th, 2012

Market Comment

Mortgage bond prices finished the week near unchanged keeping rates in check despite some up and down trading throughout the week. Rates were slightly better Monday morning tied to continued euro zone debt fears. Those gains were erased after Spain had a relatively successful debt auction. However, concerns remained due to the fact the Spanish auction came with higher yields needed to lure investors. Most of the data was rate friendly with higher than expected weekly jobless claims, weaker than expected housing starts, and weaker than expected Philadelphia Fed data. Mortgage interest rates finished the week near unchanged despite the volatility.

LOOKING AHEAD

Economic Indicator	Release Date & Time	Consensus Estimate	Analysis
Consumer Confidence	Tuesday, April 24, 10:00 am, et	70	Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.
New Home Sales	Tuesday, April 24, 10:00 am, et	315k	Important. An indication of economic strength and credit demand. Weakness may lead to lower rates.
2-year Treasury Note Auction	Tuesday, April 24, 1:15 pm, et	None	Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates.
Durable Goods Orders	Wednesday, April 25, 8:30 am, et	Up 2.4%	Important. An indication of the demand for “big ticket” items. Weakness may lead to lower rates.
Fed Meeting Adjourns	Wednesday, April 25, 12:30 pm, et	No rate changes	Important. Few expect the Fed to change rates, but some volatility may surround the adjournment of this meeting.
5-year Treasury Note Auction	Wednesday, April 25, 1:15 pm, et	None	Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates.
Weekly Jobless Claims	Thursday, April 26, 8:30 am, et	387k	Important. An indication of employment. Higher claims may result in lower rates.
Q1 Advance GDP	Thursday, April 26, 8:30 am, et	Up 2.8%	Very important. The aggregate measure of US economic production. Weakness may lead to lower rates.
7-year Treasury Note Auction	Thursday, April 26, 1:15 pm, et	None	Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates.
Q1 Employment Cost Index	Friday, April 27, 8:30 am, et	Up 0.3%	Very important. A measure of wage inflation. Weakness may lead to lower rates.
U of Michigan Consumer Sentiment	Friday, April 27, 10:00 am, et	75	Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.

Bernanke Press Conference The Fed meets with results Wednesday afternoon. In an effort to increase transparency Fed Chairman Bernanke will hold a press conference following the results. This was a major change in Fed protocol implemented last year. Prior meetings had the Fed announce the results with only a brief statement. Bernanke’s foreign counterparts regularly hold press conferences. However, many analysts and even Fed officials themselves have concerns about this press conference. The worry is that while the Fed is expected to keep things in check, Bernanke may unintentionally say something that rattles the financial markets. Bernanke will try his best not to cause instability but the press conference will definitely be an event to watch carefully.

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Market Update 04/16/12

April 17th, 2012

Market Comment

Mortgage bond prices finished the week slightly higher helping mortgage interest rates improve. Rates were considerably better Monday morning tied to stock weakness. Spain debt worries reignited some flight to quality buying of US debt instruments and helped rates extend the improvements Tuesday morning. Unfortunately those improvements were wiped away Wednesday as stocks rebounded and news out of Italy and Spain eased default concerns. Higher than expected core producer inflation readings were offset by higher than expected weekly jobless claims which kept rates relatively in check Thursday. Mortgage interest rates finished the week better by about 1/8 of a discount point.

LOOKING AHEAD

Economic Indicator	Release Date & Time	Consensus Estimate	Analysis
Retail Sales	Monday, April 16, 8:30 am, et	Up 1.2%	Important. A measure of consumer demand. A smaller than expected increase may lead to lower mortgage rates.
Business Inventories	Monday, April 16, 10:00 am, et	Up 0.2%	Low importance. An indication of stored-up capacity. A significantly larger increase may lead to lower rates.
Housing Starts	Tuesday, April 17, 8:30 am, et	705k	Important. A measure of housing sector strength. Weakness may lead to lower rates.
Industrial Production	Tuesday, April 17, 9:15 am, et	Up 0.1%	Important. A measure of manufacturing sector strength. A lower than expected increase may lead to lower rates.
Capacity Utilization	Tuesday, April 17, 9:15 am, et	78.2%	Important. A figure above 85% is viewed as inflationary. Weaker figure may lead to lower rates.
Weekly Jobless Claims	Thursday, April 19, 8:30 am, et	387k	Important. An indication of employment. Higher claims may result in lower rates.
Existing Home Sales	Thursday, April 19, 10:00 am, et	4.6m	Low importance. An indication of mortgage credit demand. Significant weakness may lead to lower rates.
Philadelphia Fed Survey	Thursday, April 19, 10:00 am, et	10.9	Moderately important. A survey of business conditions in the Northeast. Weakness may lead to lower rates.
Leading Economic Indicators	Thursday, April 19, 10:00 am, et	Up 0.5%	Important. An indication of future economic activity. A smaller increase may lead to lower rates.

Retail Sales

Retail sales data is the first indication of weakness or strength in consumer spending released each month. The Bureau of the Census of the US Department of Commerce provides information on how much the consumer spends on the purchase of goods. This data provides the consumption part of the gross domestic product. Retail sales data represents merchandise sold for cash or credit by retailers. Durable goods, such as autos, make up 35% of the figure. The balance consists of non-durables such as gasoline, restaurants, and general merchandise.

There are several drawbacks to the report. The data covers purchases of goods only, not services. It is also not adjusted for inflation and is extremely volatile. Economists are concerned that the current economic uncertainty will continue to curtail consumer-spending habits. Consumers have generally been given credit for sustaining the economy even amid the economic turmoil.

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Market Update 04/09/12

April 6th, 2012

Market Comment

Mortgage bond prices finished the week higher helping mortgage interest rates improve. Rates were initially pushed significantly higher following the Fed minutes Wednesday. The Fed basically put on hold any prospect of additional stimulus for now. In addition, some members argued that “the current highly accommodative stance of monetary policy over the medium run could erode the stability of inflation expectations and risk higher inflation.” Fortunately, rates were able to recover the earlier losses and then some following the employment report Friday morning. The payrolls component was weaker than expected which sent mortgage interest rates lower. Mortgage interest rates finished the week better by about 1/4 of a discount point. LOOKING AHEAD

Economic Indicator	Release Date & Time	Consensus Estimate	Analysis
3-year Treasury Note Auction	Tuesday, April 10, 1:15 pm, et	None	Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates.
10-year Treasury Note Auction	Wednesday, April 11, 1:15 pm, et	None	Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates.
Fed “Beige Book”	Wednesday, April 11, 2:00 pm, et	None	Important. This Fed report details current economic conditions across the US. Signs of weakness may lead to lower rates.
Weekly Jobless Claims	Thursday, April 12, 8:30 am, et	350k	Important. An indication of employment. Higher claims may result in lower rates.
Producer Price Index	Thursday, April 12, 8:30 am, et	Up 0.3%, Core up 0.2%	Important. An indication of inflationary pressures at the producer level. Weaker figures may lead to lower rates.
Trade Data	Thursday, April 12, 8:30 am, et	$49b deficit	Important. Affects the value of the dollar. A falling deficit may strengthen the dollar and lead to lower rates.
30-year Treasury Bond Auction	Thursday, April 12, 1:15 pm, et	None	Important. Bonds will be auctioned. Strong demand may lead to lower mortgage rates.
Consumer Price Index	Friday, April 13, 8:30 am, et	Up 0.3%, Core up 0.2%	Important. A measure of inflation at the consumer level. Weaker figures may lead to lower rates.
U of Michigan Consumer Sentiment	Friday, April 13, 10:00 am, et	75	Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.

Consumer Price Index The Consumer Price Index is widely accepted as the most important measure of inflation. The CPI is a measure of prices at the consumer level for a fixed basket of goods and services. The National Statistics Office and the Bureau of Agricultural Statistics of the Department of Agriculture collect price data for the computation of the CPI. Since it is an index number, it compares the level of prices to a base period. By comparing the level of the index at two different points in time, analysts can determine how much prices have risen in that period. Unlike other measures of inflation, which only factor domestically produced goods; the CPI takes into account imported goods as well. This is important due to the ever-increasing reliance of the US economy upon imported goods. Analysts primarily focus on the core rate of the CPI which factors out the more volatile food and energy prices. High oil prices remain a concern from an inflation perspective. Record debt levels continue to weigh heavily upon the financial markets as well. Inflation, real or perceived, erodes the value of fixed income securities such as mortgage bonds. Rates have a better chance of falling with lower than expected CPI figures.

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Market Update 04/02/12

March 30th, 2012

Market Comment

Mortgage bond prices finished the week higher helping mortgage interest rates improve. Rates were negative Monday morning but got a boost later that day as Italian Prime Minister Monti suggested that Spain may soon become the epicenter of the European debt crisis. This reignited the flight to quality buying of US debt as fears grow that Italy and Spain will need a bailout like Greece. Unfortunately for Europe, the economies of Italy and Spain are considerably larger than Greece. Rates were helped later in the week when the durable goods orders data came in weaker than expected and weekly jobless claims were higher than expected. Mortgage interest rates finished the week better by about 1/4 to 3/8 of a discount point.

LOOKING AHEAD

Economic Indicator	Release Date & Time	Consensus Estimate	Analysis
ISM Index	Monday, April 2, 10:00 am, et	52.8	Important. A measure of manufacturer sentiment. Weakness may lead to lower mortgage rates.
Construction Spending	Monday, April 2, 10:00 am, et	Up 0.2%	Low importance. An indication of economic strength. Significant weakness may lead to lower rates.
Factory Orders	Tuesday, April 3, 10:00 am, et	Up 0.1%	Important. A measure of manufacturing sector strength. Weakness may lead to lower rates.
Fed Minutes	Tuesday, April 3, 2:00 pm, et	None	Important. Details of the last Fed meeting will be thoroughly analyzed.
ADP Employment	Wednesday, April 4, 8:30 am, et	225k	Important. An indication of employment. Weakness may bring lower rates.
Weekly Jobless Claims	Thursday, April 5, 8:30 am, et	355k	Important. An indication of employment. Higher claims may result in lower rates.
Employment	Friday, April 6, 8:30 am, et	8.4%, Payrolls +210k	Very important. An increase in unemployment or weakness in payrolls may bring lower rates.
Consumer Credit	Friday, April 6, 3:00 pm, et	$12b	Low importance. A significantly large increase may lead to lower mortgage interest rates.

ADP Employment

The ADP employment report is a measure of employment derived from data of roughly 500,000 US businesses. The survey focuses on the private sector of the economy. In contrast, the Bureau of Labor Statistics releases the regular employment report which includes both private and government employment statistics.

The ADP employment report has gained more prominence lately in that it is delivered prior to the Friday employment report. This gives analysts an improved forecast heading into the payrolls component of the employment report later in the week.

The Fed is usually focused on keeping inflation in check. Tightening employment conditions can result in wage inflation. The ADP report provides solid data on these conditions. Despite this, the data still can diverge from the regular employment report. The employment report is derived from a household survey and an establishment survey. These surveys often differ from one another and from the ADP employment report in that they are based on different data sets. There are no guarantees that the most important employment report the first Friday of each month will mirror the ADP report released 2 days prior. With this in mind floating into the data is always very risky. Now is a great time to take advantage of mortgage interest rates at these historically favorable levels to avoid future market volatility.

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Market Update 03/26/12

March 26th, 2012

Market Comment

Mortgage bond prices finished the week higher helping mortgage interest rates improve. Rates were positive Monday morning but quickly whipsawed higher Monday afternoon and Tuesday morning. Trading swung back positive again Wednesday and Thursday following weaker than expected existing home sales data and reports that Chinese manufacturing weakened. Oil prices bounced around initially falling on consumption worries tied to the Chinese weakness, which eased some of the recent inflation fears. Prices spiked a bit higher Friday afternoon following reports that Iranian oil exports fell. Mortgage interest rates finished the week better by about 1/4 to 3/8 of a discount point despite the tremendous volatility. LOOKING AHEAD

Economic Indicator	Release Date & Time	Consensus Estimate	Analysis
Consumer Confidence	Tuesday, March 27, 10:00 am, et	70.5	Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.
Treasury Auctions Begin	Tuesday, March 27, 1:15 pm, et	None	Important. 2Y Notes on Tuesday, 5Y Notes on Wednesday, and 7Y Notes on Thursday.
Durable Goods Orders	Wednesday, March 28, 8:30 am, et	Up 2.2%	Important. An indication of the demand for “big ticket” items. Weakness may lead to lower rates.
Weekly Jobless Claims	Thursday, March 29, 8:30 am, et	352k	Important. An indication of employment. Higher claims may result in lower rates.
Q4 GDP Third Estimate	Thursday, March 29, 8:30 am, et	Up 3%	Important. The aggregate measure of US economic production. Weakness may lead to lower rates.
Personal Income and Outlays	Friday, March 30, 8:30 am, et	Up 0.3, Up 0.4%	Important. A measure of consumers’ ability to spend. Weakness may lead to lower mortgage rates.
PCE Core Inflation	Friday, March 30, 8:30 am, et	Up 0.1%	Important. A measure of price increases for all domestic personal consumption. Weaker figure may help rates improve.
U of Michigan Consumer Sentiment	Friday, March 30, 10:00 am, et	74	Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.

Income and OutlaysThe personal income and outlays release is a monthly report issued by the Bureau of Economic Analysis (BEA). The data is important because it is thought to provide a solid indication of future consumer demand. The personal income component is primarily a measure of wages and salaries. The outlays component is primarily a measure of spending on goods and services. Together the figures provide analysts valuable insight into consumer economic standing and consumption. The prior release showed an income increase but not as much as analysts expected. Generally stagnant wages coupled with tighter borrowing restrictions make it difficult for consumers to spend money. It is important to note that no single economic indicator can consistently predict the future of the economy. However, the personal income and outlays report is a closely watched release. The consumer remains a vital component of the US economy. The data this week has the potential to cause mortgage interest rate volatility. Now is a great time to take advantage of low rates.

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Market Update 03/19/12

March 16th, 2012

Market Comment

Mortgage bond prices finished the weak sharply lower pushing mortgage interest rates higher. Rates were positive the beginning of the week following reports that China’s growth remained a concern. The positive movements were quickly erased Tuesday following better than expected data and strong stocks in which the DOW surged 218 points higher that day. The Fed meeting added fuel to the selling pressure of mortgage bonds in which they indicated economic conditions were improving. Tuesday’s stress test results of US banks showed strength, which also resulted in a sell-off of bonds and buying of stocks. All the weakness resulted in mortgage interest rates rising by over a full discount point for the week.

LOOKING AHEAD

Economic Indicator	Release Date & Time	Consensus Estimate	Analysis
Housing Starts	Tuesday, March 20, 8:30 am, et	705k	Important. A measure of housing sector strength. Weakness may lead to lower rates.
Existing Home Sales	Wednesday, March 21, 10:00 am, et	3.8m	Low importance. An indication of mortgage credit demand. Significant weakness may lead to lower rates.
Weekly Jobless Claims	Thursday, March 22, 8:30 am, et	353k	Important. An indication of employment. Higher claims may result in lower rates.
Leading Economic Indicators	Thursday, March 22, 10:00 am, et	Up 0.2%	Important. An indication of future economic activity. Weakness may lead to lower rates.
10-year TIPS Auction	Thursday, March 22, 1:15 pm, et	None	Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates.
New Home Sales	Friday, March 23, 10:00 am, et	325k	Important. An indication of economic strength and credit demand. Weakness may lead to lower rates.

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.

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Market Update 03/12/12

March 9th, 2012

Market Comment

Mortgage bond prices finished the weak near unchanged keeping mortgage interest rates relatively in check. Rates were positive the beginning of the week following reports that Greece would not make the deadline to persuade bondholders to restructure the debt they held. That all reversed by the end of the week when a large majority of bondholders looked to be on board. Greece was required to restructure the debt in order to obtain bailout funds from the European Union and the International Monetary Fund. Despite progress, there was still some uncertainty heading into the weekend. Most analysts agree that Greece still has challenges even if they obtain the bailout funds. Future instability in Greece could benefit our interest rates by reigniting the flight to quality buying that has factored into our low rates.

LOOKING AHEAD

Economic Indicator	Release Date & Time	Consensus Estimate	Analysis
Retail Sales	Tuesday, March 13, 8:30 am, et	Up 0.3%	Important. A measure of consumer demand. A smaller than expected increase may lead to lower mortgage rates.
Fed Meeting Adjourns	Tuesday, March 13, 2:15 pm, et	No rate changes	Important. Few expect the Fed to change rates, but some volatility may surround the adjournment of this meeting.
Weekly Jobless Claims	Thursday, March 15, 8:30 am, et	355k	Important. An indication of employment. Higher claims may result in lower rates.
Producer Price Index	Thursday, March 15, 8:30 am, et	Up 0.2%, Core up 0.2%	Important. An indication of inflationary pressures at the producer level. Weaker figures may lead to lower rates.
Philadelphia Fed Survey	Thursday, March 15, 10:00 am, et	8.8	Moderately important. A survey of business conditions in the Northeast. Weakness may lead to lower rates.
Consumer Price Index	Friday, March 16, 8:30 am, et	Up 0.2%, Core up 0.2%	Important. A measure of inflation at the consumer level. Weaker figures may lead to lower rates.
Industrial Production	Friday, March 16, 9:15 am, et	Up 0.1%	Important. A measure of manufacturing sector strength. A lower than expected increase may lead to lower rates.
Capacity Utilization	Friday, March 16, 9:15 am, et	78%	Important. A figure above 85% is viewed as inflationary. Weaker figure may lead to lower rates.
U of Michigan Consumer Sentiment	Friday, March 16, 10:00 am, et	70.3	Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.

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 this week.

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