Market Update 06/01/2009
Market Comment
Mortgage bond prices had the worst week in a very long time falling precipitously pushing mortgage interest rates considerably higher. Stronger than expected consumer sentiment data started the bond market off on the wrong foot. Debt supply concerns permeated throughout the financial markets with the US Treasury auctioning $100 billion of notes. Escalating oil prices added fuel to the fire. Fortunately it appeared the Fed finally stepped in to stop the bleeding towards the end of the week helping bonds recover a small portion of the large losses from earlier in the week. For the week interest rates rose by about 1 and 1/2 of a discount point.
The employment report Friday will be the most important release this week. If the data shows signs of economic recovery we could see rates pressured higher. However, signs of weakness may bode well for rate improvements.
LOOKING AHEAD
|
Economic |
Release |
Consensus |
|
| Personal Income and Outlays |
Monday, June 1, |
Down 0.2%, |
Important. A measure of consumers’ ability to spend. Weakness may lead to lower mortgage rates. |
| Construction Spending |
Monday, June 1, |
Down 1.8% |
Low importance. An indication of economic strength. A significant decrease may lead to lower rates. |
| ISM Index |
Monday, June 1, |
42.0 |
Important. A measure of manufacturer sentiment. A large decline may lead to lower mortgage rates. |
| ADP Employment |
Wednesday, June 3, |
-540k |
Important. A large decrease in payrolls may bring lower rates. |
| Factory Orders |
Wednesday, June 3, |
Up 0.3% |
Important. A measure of manufacturing sector strength. Weakness may lead to lower rates. |
| Revised Q1 Productivity |
Thursday, June 4, |
Up 1.2% |
Important. A measure of output per hour. Improvement may lead to lower mortgage rates. |
| Employment |
Friday, June 5, |
Unemp. @ 9.2%, |
Very important. An increase in unemployment or a large decrease in payrolls may bring lower rates. |
| Consumer Credit |
Friday, June 5, |
Down $6 billion | Low importance. A significantly large increase may lead to lower mortgage interest rates. |
ProductivityProductivity is the rate at which goods or services are produced. It is most commonly defined in terms of labor, which is the contribution of people to the process. Labor costs represent about two thirds of the value of the output produced. The Bureau of Labor Statistics of the US Department of Labor releases the most widely cited productivity statistics quarterly and annually. Increased productivity is often credited for economic growth with little signs of inflation.
Productivity is significant in that as it increases, businesses can produce more with the same or less input. This wealth building effect is vital to the US economy. As productivity increases, the US economy generally performs better. As productivity decreases, the economy generally suffers.
While the bond market generally favors signs of weakness in the economy, bonds tolerate growth as long as the economic environment shows little or no inflationary pressures. Unfortunately, inflation fears have escalated as of late.
Keep in mind that rates remain very favorable. Now is a great time to avoid the uncertainty surrounding continued market volatility.
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Market Update 05/25/2009
Market Comment
Mortgage bond prices fell last week pushing mortgage interest rates considerably higher. Inflation fears dominated trading. Philadelphia Fed President Plosser warned, “The economy may be at greater risk of inflation than conventional wisdom indicates.” A weaker US dollar, escalating oil prices, and concerns about the US debt rating also pressured mortgage bonds lower and mortgage interest rates higher.
Trading remained volatile throughout the week but most of the worsening occurred Thursday and Friday. For the week, interest rates rose by about 1/2 of a discount point.
The gross domestic product data Friday will be the most important release this week. The additional debt supply associated with the Treasury auctions will also play a critical role in any mortgage interest rate volatility this week.
LOOKING AHEAD
|
Economic |
Release |
Consensus |
|
| Consumer Confidence |
Tuesday, May 26, |
42.0 | Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates. |
| 2-year Treasury Note Auction |
Tuesday, May 26, |
None |
Important. $40 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates. |
| Existing Home Sales |
Wednesday, May 27, |
Up 1.7% |
Low importance. An indication of mortgage credit demand. Significant weakness may lead to lower rates. |
| 5-year Treasury Note Auction |
Wednesday, May 27, |
None |
Important. $35 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates. |
| Durable Goods Orders |
Thursday, May 28, |
Up 0.5% |
Important. An indication of the demand for “big ticket” items. Weakness may lead to lower rates. |
| New Home Sales |
Thursday, May 28, |
Up 1.9% |
Important. An indication of economic strength and credit demand. Weakness may lead to lower rates. |
| 7-year Treasury Note Auction |
Thursday, May 28, |
None |
Important. $26 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates. |
| Preliminary Q1 GDP |
Friday, May 29, |
Down 5.5% | Very important. The aggregate measure of US economic production. Weakness may lead to lower rates. |
| U of Michigan Consumer Sentiment |
Friday, May 29, |
68.0 | Moderately Important. An indication of consumers’ willingness to spend. Weakness may lead to lower rates. |
US Credit RatingThere are concerns all across the globe that the US will lose its AAA credit rating. Standard and Poor’s recently downgraded the UK from stable to negative. Many analysts expect the UK to lose its AAA credit rating. Market participants are concerned the US will follow as deficit spending continues. Bond guru Bill Gross said it would happen in “at least three to four years, if that, but the market will recognize the problems before the rating services – just like it did today.”
Just as in the case of a consumer, a lower credit rating would mean that the government would pay higher rates to borrow money. This is logical in that an investor requires more return for the additional risk of possibly not being paid on their investment. This would most likely result in interest rates rising on not only Treasuries but also mortgages. As warned last week, it is a great time to take advantage of rates at the current levels to avoid the uncertainty of where mortgage interest rates will be in the future.
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Market Update 05/18/2009
Market Comment
Mortgage bond prices rose last week helping mortgage interest rates fall. Most of the gains came early in the week prior to the surprise inflation data. Weaker than expected retail sales data along with concern about the health of the banking industry helped mortgage bonds improve. Unfortunately stronger than expected producer price and core consumer price data Thursday and Friday stoked inflation fears which erased some of the earlier gains. Trading remained volatile. For the week, interest rates improved by about 1/2 of a discount point.
The housing starts data will set the tone for trading this week. Leading economic indicators data may also result in some mortgage interest rate volatility.
LOOKING AHEAD
|
Economic |
Release |
Consensus |
|
| Housing Starts |
Tuesday, May 19, |
Up 0.4% | Important. A measure of housing sector strength. Weakness may lead to lower rates. |
| Fed Minutes |
Wednesday, May 20, |
None | Important. Details of the last Fed meeting will be thoroughly analyzed. |
| Weekly Jobless Claims |
Thursday, May 21, |
680k | Moderately important. An indication of unemployment. A significantly large increase may lead to lower rates. |
| Leading Economic Indicators |
Thursday, May 21, |
Up 0.6% | Important. An indication of future economic activity. A smaller increase may lead to lower rates. |
| Philadelphia Fed Survey |
Thursday, May 21, |
Down 18 | Moderately important. A survey of business conditions in the Northeast. Weakness may lead to lower rates. |
Inflation Concerns
Inflation is an increase in the level of prices of goods and services over a period of time. Mixed inflation signs do not generally bode well for mortgage bonds. Inflation erodes the value of fixed income securities generally causing bond prices to fall and interest rates to rise.
The mortgage bond market received mixed inflation data last week. The producer price index, a major gauge of inflation at the producer level, rose a surprising 0.3% in April. This figures was considerably higher than the expected 0.1% increase. However, the core rate, which excludes volatile food and energy, rose 0.1%. This figure was exactly as expected.
The relatively flat core producer price figure helps reinforce the belief that inflation remains in check. However, the higher than expected producer price figure supports the opposite conclusion. Unfortunately the consumer price index data did little to settle the score. Consumer prices were unchanged in April, as expected. However, the core, which excludes volatile food and energy prices, rose 0.3%, higher than the expected 0.1% increase. Higher core inflation readings are usually terrible for fixed income securities such as mortgage bonds. We saw an example of this Friday morning as bond prices fell and interest rates spiked higher erasing some of the recent improvements.
With the mixed data and President Obama recently stating that the US debt load is “unsustainable” the fear of inflation looms. If future data echoes that of the core consumer price data, then it is a real possibility that mortgage interest rates could push higher. However, if future data alleviates some of the recent concerns we could see rates hold steady or even push a little lower. Be aware that floating in this environment is risky. The good news is that mortgage interest rates currently are historically favorable. It is a great time to take advantage of rates at the current levels.
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Market Update 05/11/2009
Market Comment
Mortgage bond prices remained unchanged for the week keeping mortgage interest rates steady. Trading remained volatile with rates improving the first portion of week. However, some of the data came in surprisingly better than expected Thursday and Friday which caused mortgage bond prices to fall and rates to rise. The labor cost component of the productivity report along with the Fed Chairman’s concerns about the possibility of future inflation caused some steep price declines the latter portion of the week. Unfortunately this eroded most the improvements from Monday and Tuesday. For the week, interest rates finished near unchanged.
The consumer and producer price data will be the most significant economic events this week. Trade and retail sales data may also result in some mortgage interest rate volatility.
LOOKING AHEAD
|
Economic |
Release |
Consensus |
|
| Trade Data |
Tuesday, May 12, |
$29 billion deficit | Important. Affects the value of the dollar. A falling deficit may strengthen the dollar and lead to lower rates. |
| Retail Sales |
Wednesday, May 13, |
Down 0.1% |
Important. A measure of consumer demand. Weakness may lead to lower rates. |
| Business Inventories |
Wednesday, May 13, |
Down 1.1% |
Low importance. An indication of stored-up capacity. A significantly large increase may lead to lower rates. |
| Producer Price Index |
Thursday, May 14, |
Up 0.1%, |
Important. An indication of inflationary pressures at the producer level. Decreases may lead to lower rates. |
| Consumer Price Index |
Friday, May 15, |
Unchanged, |
Important. A measure of inflation at the consumer level. Decreases may lead to lower rates. |
| Industrial Production |
Friday, May 15, |
Down 0.5% |
Important. A measure of manufacturing sector strength. Weakness may lead to lower rates. |
| Capacity Utilization |
Friday, May 15, |
69% |
Important. A figure above 85% is viewed as inflationary. Weakness may lead to lower rates. |
| U of Michigan Consumer Sentiment |
Friday, May 15, |
65 | Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates. |
Market ConditionsThere is a Chinese proverb that states, “May you live in interesting times.” It is often argued that the word interesting is meant to be a synonym for turbulent or dangerous. This phrase hits the bull’s-eye given the current state of the financial markets.
While stocks and bonds are swinging around wildly there is some good news. Interest rates for conforming and FHA/VA loans are still historically low by many standards.
However, low rates are not a given considering the escalating inflation fears that reemerged recently. Oil prices rose most of last week and Fed Chairman Bernanke expressed concerns about “how to wind down the federal balance sheet” and “avoid inflation.” When a Fed official mentions inflation it is generally not positive for bonds. Inflation, real or perceived, erodes the value of bonds causing bond prices to fall and rates to rise. The last thing the economy needs now is rising mortgage interest rates. If inflation emerges that very well may happen despite the continued Fed efforts to keep rates low. With so much uncertainty, a cautious approach to float lock decisions, especially heading into the inflation data this week, would be wise.
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Market Update 05/04/2009
Market Comment
Mortgage bond prices fell last week applying upward pressure on mortgage interest rates. Trading remained extremely volatile with daily swings of 3/8’s in discount points a common occurrence. The economic data released was mixed with no clear indication of the direction of the US economy. The Federal Reserve met last week and the governing body indicated the pace of economic deterioration is slowing. For the week, interest rates rose by about 5/8’s in discount points.
The employment report to be released Friday will be the most significant data this week. Productivity data will be important also. Additional debt supply hits the market this week with the Fed auctioning $71 billion of 3, 10, and 30 year Treasuries. It will be interesting to see if the market can continue to absorb the additional debt.
LOOKING AHEAD
|
Economic |
Release |
Consensus |
|
| 3-year Treasury Note Auction |
Tuesday, May 5, |
None | Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates. |
| ADP Employment |
Wednesday, May 6, |
Down 643k | Important. An indication of the employment situation. Weakness may lead to lower mortgage rates. |
| 10-year Treasury Note Auction |
Wednesday, May 6, |
None | Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates. |
| Preliminary Q1 Productivity |
Thursday May 7, |
Up 0.9% | Important. A measure of output per hour. Improvement may lead to lower mortgage rates. |
| 30-year Treasury Bond Auction |
Thursday, May 7, |
None | Important. Bonds will be auctioned. Strong demand may lead to lower mortgage rates. |
| Consumer Credit |
Thursday, May 7, |
Down $3.3 billion | Low importance. A significantly large increase may lead to lower mortgage interest rates. |
| Employment |
Friday, May 8, |
Unemp. @ 8.9%, |
Very important. An increase in unemployment or a larger decrease in payrolls may bring lower rates. |
Employment
The employment report provides an abundance of information for almost every sector of the economy. Not only does the employment report give basic employment payroll statistics for the major working sectors, it also provides the average hourly earnings and the average workweek. Using this information provided by the Bureau of Labor Statistics (BLS) of the U.S. Department of Labor, economists estimate many other economic indicators such as industrial production, personal income, housing starts, and GDP monthly revisions. Since there is little data for economists to base their estimates on, the margin of error for the estimates tends to be high. As a result, the employment report can cause substantial market movements. The BLS compiles data from two unrelated surveys that they conduct, the household survey and the establishment survey, in order to complete the employment report. This explains why sometimes there is an unexpected divergence between the unemployment rate and payrolls figures each month. This week’s employment data will provide valuable insight into the state of the economy.
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Market Update 04/27/2009
Market Comment
Mortgage bond prices remained near unchanged holding mortgage interest rates relatively steady for the week. There was very little data the first portion of the week and rates improved slightly as the DOW was down 183 points at one point Monday morning. Unfortunately the durable goods orders and new home sales data were not as weak as expected which helped stocks rally at the expense of bonds the latter portion of the week. For the week, interest rates on government and conventional loans were unchanged.
The Treasury auctions will factor heavily in trading this week. It will be interesting to see how the additional debt supply is absorbed. The gross domestic product and employment cost index data will be the most important releases. No surprises are expected from the Fed but the meeting may still result in some mortgage interest rate volatility.
LOOKING AHEAD
|
Economic |
Release |
Consensus |
|
| 2-year Treasury Note Auction |
Monday, April 27, |
None | Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates. |
| Consumer Confidence |
Tuesday, April 28, |
28 |
Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates. |
| 5-year Treasury Note Auction |
Tuesday, April 28, |
None |
Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates. |
| Q1 Advance GDP |
Wednesday, April 29, |
Down 4.9% | Very important. The aggregate measure of US economic production. Weakness may lead to lower rates. |
| 7-year Treasury Note Auction |
Wednesday, April 29, |
None |
Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates. |
| Fed Meeting Adjourns |
Wednesday, April 29, |
No change |
Important. Few expect the Fed to change rates, but some volatility may surround the adjournment of this meeting. |
| Personal Income and Outlays |
Thursday, April 30, |
Down 0.2%, |
Important. A measure of consumers’ ability to spend. Weakness may lead to lower mortgage rates. |
| Q1 Employment Cost Index |
Thursday, April 30, |
Up 0.5% | Very important. A measure of wage inflation. Weakness may lead to lower rates. |
| U of Michigan Consumer Sentiment |
Friday, May 1, |
61.3 | Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates. |
| Factory Orders |
Friday, May 1, |
Down 0.7% | Important. A measure of manufacturing sector strength. A larger decrease may lead to lower rates. |
| ISM Index |
Friday, May 1, |
38.0 | Important. A measure of manufacturer sentiment. A larger decline may lead to lower mortgage rates. |
Relevant DataThis week brings significant data. However, the results of some of the releases may be muted a bit considering they take place after the Fed meeting adjourns Wednesday. Nonetheless, the inflation release still has the potential to result in market swings so caution is the key. Remember that market direction can turn very quickly as has been evident of late. It is a safe bet that nobody wants to get caught behind the market if it does make a huge correction following a release.
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