Market Update 06/29/2009
Market Comment
Mortgage bond prices shot higher last week driving home loan rates lower. Mortgage rates found support from investors around the world following last week’s Treasury auctions. The Treasury sold bonds totaling 104B that were well received by foreign central banks. The indirect bidder participation, an indication of foreign demand, was near all-time highs. For the week interest rates fell by over a full discount point.
The employment report Thursday will be the most important release this week. The ADP employment report will give an earlier glimpse into the employment situation though the two reports are derived from different data so there could be some divergence. Strength in the other economic data will do little to help mortgage interest rates improve.
LOOKING AHEAD
|
Economic |
Release |
Consensus |
|
| Consumer Confidence |
Tuesday, June 30, |
55.1 |
Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates. |
| ADP Employment |
Wednesday, July 1, |
-363k |
Important. An indication of employment. A large decrease in payrolls may bring lower rates. |
| ISM Index |
Wednesday, July 1, |
44.00 |
Important. A measure of manufacturer sentiment. A larger decline may lead to lower mortgage rates. |
| Employment |
Thursday, July 2, |
9.6% -370k jobs |
Very important. An increase in unemployment or a large decrease in payrolls may bring lower rates. |
| Factory Orders |
Thursday, July 2, |
Up 0.2% |
Important. A measure of manufacturing sector strength. Weakness may lead to lower rates. |
| Market Holiday | Friday, July 3 | None | Important. Bond market closed in honor of Independence Day. |
GSEs
Government sponsored enterprises (GSEs) are financial services created by Congress. Two of the most important GSEs in the mortgage industry are Fannie Mae and Freddie Mac. These corporations are designed to make credit available to targeted borrowers in an efficient manor. Fannie and Freddie were completely privately owned. However actions by the Treasury and Congress within the last year now blur the ownership. The credit crisis resulted in Fannie and Freddie facing huge liquidity concerns. Their insolvency under fair value accounting resulted in drastic measures to prevent total failure. The Treasury placed the GSEs in conservator, increased the lines of credit to the GSEs, and infused both companies with $100 billion for an ownership stake of 79.9%. This US Government ownership of these companies leaves many unknowns. While conservatorship implies temporary control, the Treasury exit strategy remains unclear and has yet to be revealed.
The supply and demand characteristics of Treasury bonds and mortgage-backed securities (MBSs) issued by Fannie and Freddie traditionally differ. Treasury securities represent money needed to fund the operations of the US government. MBSs, on the other hand, represent borrowing by homeowners. Because homeowners can sell or refinance their homes, investors in 30-year mortgage-backed securities usually see principal repayment in significantly shorter periods of time. In terms of demand, Treasury securities are regarded as “risk free” investments, and often benefit from a “flight to quality” in times of financial crisis.
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Market Update 06/22/2009
Market Comment
Mortgage bond prices remained volatile in up and down trading last week. We started the week in positive territory only to have the gains erased as stronger than expected housing starts data shocked the market Tuesday and overshadowed the tame inflation data. Producer and consumer price data showed inflation remained in check however oil prices remained volatile. US debt concerns continued as the Treasury announced record auctions ahead. For the week interest rates remained near unchanged.
While the Fed meeting is usually the most important event it will likely be overshadowed by the record $104b Treasury debt auctions this week. Durable goods order, income, outlays, and consumer sentiment data may also cause mortgage interest rate volatility.
LOOKING AHEAD
|
Economic |
Release |
Consensus |
|
| Existing Home Sales |
Tuesday, June 23, |
Up 3.2% |
Low importance. An indication of mortgage credit demand. Significant weakness may lead to lower rates. |
| 2-year Treasury Note Auction |
Tuesday, June 23, |
None |
Important. $40 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates. |
| Durable Goods Orders |
Wednesday, June 24, |
Down 0.9% |
Important. An indication of the demand for “big ticket” items. Weakness may lead to lower rates. |
| New Home Sales |
Wednesday, June 24, |
Up 2.3% |
Important. An indication of economic strength and credit demand. Weakness may lead to lower rates. |
| 5-year Treasury Note Auction |
Wednesday, June 24, |
None |
Important. $37 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates. |
| Fed Meeting Adjourns |
Wednesday, June 24, |
No change |
Important. Few expect the Fed to change rates, but volatility may surround the adjournment of this meeting. |
| Q1 GDP final revision |
Thursday, June 25, |
Down 5.7% |
Moderately important. A measure of US economic production. Weakness may lead to lower rates. |
| 7-year Treasury Note Auction |
Thursday, June 25, |
None | Important. $27 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates. |
| Personal Income and Outlays |
Friday, June 26, |
Up 0.2%, |
Important. A measure of consumers’ ability to spend. Weakness may lead to lower mortgage rates. |
| U of Michigan Consumer Sentiment |
Friday, June 26, |
69.0 | Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates. |
Fed MeetingThe Fed’s chief policy tool is the manipulation of short-term interest rates. As of late, short-term rates have been so low that the Fed is limited with their options. The Obama administration is pushing for expanded Fed powers to supervise large banks, hedge funds, and consumer financial products. Both political parties express concerns about increasing the Fed’s role citing previous failures. However, most agree something needs to be done and many argue the Fed is best equipped to tackle the current problems. All eyes will be focused on the Fed meeting Wednesday. A cautious approach to float/lock decisions is prudent heading into the meeting. Market volatility is likely.
Market Update 06/15/2009
Market Comment
Mortgage bond prices had another volatile week pushing mortgage interest rates higher. US debt concerns played the biggest factor in rate swings as worries continued that countries would shift out of US dollar holdings. Russia indicated a willingness to move some reserves from US Treasuries to International Monetary Fund bonds. Retails sales rose 0.5% as expected but the positive figure reinforced the belief that the economy is turning. Oil prices continued to escalate hitting over $72/barrel. For the week interest rates rose by 1/4 of a discount point.
The consumer price index Wednesday will be the most important release this week. Strength in the other economic data will do little to help mortgage interest rates improve.
LOOKING AHEAD
|
Economic |
Release |
Consensus |
|
| Housing Starts |
Tuesday, June 16, |
Up 6.9% | Important. A measure of housing sector strength. Weakness may lead to lower rates. |
| Producer Price Index |
Tuesday, June 16, |
Up 0.4%, |
Important. An indication of inflationary pressures at the producer level. Lower figures may lead to lower rates. |
| Industrial Production |
Tuesday, June 16, |
Down 0.5% | Important. A measure of manufacturing sector strength. Weakness may lead to lower rates. |
| Capacity Utilization |
Tuesday, June 16, |
68.6% | Important. A figure above 85% is viewed as inflationary. Weakness may lead to lower rates. |
| Consumer Price Index |
Wednesday, June 17, |
Up 0.2%, |
Important. A measure of inflation at the consumer level. Lower figures may lead to lower rates. |
| Leading Economic Indicators |
Thursday, June 18, |
Up 0.9% | Important. An indication of future economic activity. A smaller increase may lead to lower rates. |
| Philadelphia Fed Survey |
Thursday, June 18, |
Down 16.4 | Moderately important. A survey of business conditions in the Northeast. Weakness may lead to lower 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 continue to weigh heavily upon the financial markets. The health of the economy remains uncertain. The Fed has itself in a precarious position of wanting to stoke the economy amid the real possibility of increased inflation.
Market participants expect the consumer price index to be critical heading into the Fed’s meeting next week. Inflation friendly data may lead to improvements in mortgage interest rates. However, unexpected consumer price spikes may push interest rates higher in the short-term. A cautious approach to float/lock decisions is prudent.
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