Market Update 08/03/2009
Market Comment
Mortgage bond prices rallied Friday pushing mortgage interest rates lower. Bond friendly Core PCE inflation data came in lower than expected. The Fed’s most recent estimates call for an increase in this figure by the end of the year. The fact that the data showed lower inflation helped mortgage bonds rally. Consumer confidence came in at a weaker than expected 46.6 mark. Analysts were looking for a reading of 48.7. The Treasury auctions were mixed. The 2 and 5 year note auctions received poor foreign demand while the 7 year auction showed strong foreign demand. For the week interest rates fell by about 3/4 of a discount point.
The employment report will be the most important release this week. With so many data releases expect the market to be very volatile.
LOOKING AHEAD
|
Economic |
Release |
Consensus |
|
| Construction Spending |
Monday, Aug. 3, |
Down 0.6% |
Low importance. An indication of economic strength. A significant decrease may lead to lower rates. |
| ISM Index |
Monday, Aug. 3, |
46.5 |
Important. A measure of manufacturer sentiment. Weakness may lead to lower mortgage rates. |
| Personal Income and Outlays |
Tuesday, Aug. 4, |
Down 1.0%, |
Important. A measure of consumers’ ability to spend. Weakness may lead to lower mortgage rates. |
| ADP Employment |
Wednesday, Aug. 5, |
Down 340k |
Important. An indication of employment. A larger decrease in payrolls may bring lower rates. |
| Factory Orders |
Wednesday, Aug. 5, |
Up 0.5% | Important. A measure of manufacturing sector strength. Weakness may lead to lower rates. |
| Employment |
Friday, Aug. 7, |
9.6%, |
Very important. An increase in unemployment or a large decrease in payrolls may bring lower rates. |
| Consumer Credit |
Friday, Aug. 7, |
Down $4.1 billion | Low importance. A significantly larger than expected increase may lead to lower mortgage interest rates. |
Personal Income & 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 wages and salaries decreased $12.4 billion. Future decreases may adversely affect consumer spending and the entire US economy. Decreased 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.
Now is a good time to take advantage of mortgage interest rates at their current levels to avoid exposure to future market volatility.
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Market Update 07/27/2009
Market Comment
Mortgage bond prices rallied the first portion of the week only to give back the gains as stocks surged. The DOW eclipsed the 9000 mark. Ben Bernanke spoke of a “jobless recovery”, a situation where employers use productivity to increase production without additional labor. This would basically be an environment where the unemployment rate remains high long after the economy is in recovery. There wasn’t much data but the existing home sales data did come in higher than expected. For the week interest rates rose by about 1/8 of a discount point.
The US Treasury will auction $115 billion of 2, 5, and 7-year notes this week. The additional debt supply may pressure rates. With so many data releases expect the market to be very volatile.
LOOKING AHEAD
|
Economic |
Release |
Consensus |
|
| New Home Sales |
Monday, July 27, |
355K | Important. An indication of economic strength and credit demand. Weakness may lead to lower rates. |
| Consumer Confidence |
Tuesday, July 28, |
48.7 |
Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates. |
| Durable Goods Orders | Wednesday, July 29, Â 8:30 am, et |
Down 0.5% |
Important. An indication of the demand for “big ticket” items. Weakness may lead to lower rates. |
| Fed “Beige Book” | Wednesday, July 29, Â 2:00 pm, et |
None |
Important. This report details current economic conditions across the US. Weakness may lead to lower rates. |
| Q2 Advance GDP |
Friday, July 31,8:30 am, et |
Down 1.5% |
Very important. The aggregate measure of US economic production. Weakness may lead to lower rates. |
| PCE Core Inflation |
Friday, July 31, |
Up 2.4% |
Important. A measure of price increases for all domestic personal consumption. Weaker figure may help rates improve. |
| Q2 Employment Cost Index |
Friday, July 31, |
Up 0.3% |
Very important. A measure of wage inflation. Weakness may lead to lower rates. |
Employment Cost Index
The employment cost index is a quarterly report issued by the Department of Labor. The report measures the growth of wages, salaries, and benefits costs over a certain period of time. Though ECI figures are usually weeks old, the data remains the best indicator of employment price pressures considering it factors employees’ total compensation.
If wage pressures become evident, higher expectations of inflation also tend to arise. However, increasing compensation does not necessarily lead to increased inflationary pressures. Oftentimes, increased productivity enables employers to increase compensation without increasing the costs of their goods or services.
It is important to note that no single economic indicator can consistently predict the future of the economy. However, the employment cost index is a closely watched release. Most of the recent Fed releases and speeches indicate inflation is a concern and market participants remain cautious. Now is a good time to take advantage of mortgage interest rates at their current levels to avoid exposure to future market volatility.
Market Update 07/20/2009
Market Comment
Mortgage bond prices fell pushing rates higher following stronger than expected inflation data last week. The producer price index and consumer price index both came in higher than expected fanning inflation fears. Inflation fears generally cause bond prices to fall and interest rates to rise, which we saw last week. Stronger than expected housing starts, retail sales, and industrial production data piled on to help equities rally at the expense of mortgage bonds. It appeared the Fed tried to step in Thursday to stem the losses. For the week interest rates rose by over a full discount point.
The leading economic indicators data will set the tone for trading this week. With so few data releases expect oil and stocks to factor into trading.
LOOKING AHEAD
|
Economic |
Release |
Consensus |
|
| Leading Economic Indicators |
Monday, July 20, |
Up 0.5% |
Important. An indication of future economic activity. A smaller increase may lead to lower rates. |
| Weekly Jobless Claims |
Thursday, July 23, |
540k |
Moderately important. A measure of employment. A larger increase in claims may bring lower rates. |
| Existing Home Sales |
Thursday, July 23, |
Up 0.6% |
Low importance. An indication of mortgage credit demand. Significant weakness may lead to lower rates. |
| Revised U of Michigan Consumer Sentiment |
Friday, July 24, |
64.6 |
Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates. |
Consumer Sentiment
In the US the consumer is often seen as the driving force of the economy. A large percentage of the total economic output is for personal use. Analysts attempt to predict the future spending patterns of consumers to gauge economic activity.
The Michigan consumer sentiment index is one piece of data used to measure consumer attitudes. The index is derived from a telephone survey, which gathers information on consumer expectations of the overall economy. The preliminary report is released around the 10th of each month and then is revised throughout the remainder of the month. It is significant in that it provides a precursor into consumers’ willingness to spend in the months ahead. However, many analysts point out that willingness to spend does not always convert to actual expenditures.
Despite economic uncertainty, liquidity issues, housing market weakness, and high energy costs, American consumers continue to spend. However, many analysts question whether consumers can continue to buoy the economy. The most recent sentiment data showed continued uncertainty. “Consumers concluded that the economic downturn would last longer and their personal finances would not recover as quickly as they had previously expected,” the University of Michigan Survey said in a statement
This week’s release will be eagerly anticipated. Look for any variation from estimates to cause mortgage interest rate volatility. Signs of eroding consumer confidence could lead to improvements in mortgage interest rates. However, stronger than expected figures could spike rates higher.
Remember that mortgage interest rates remaining historically favorable and are subject to change on a daily basis. Last week was a prime example of the danger of floating into the economic data. Rates worsened Tuesday and Wednesday with the higher than expected inflation figures. Capitalizing on current levels is wise.
Market Update 7/13/2009
Market Comment
Mortgage bond prices had another volatile week with rates rallying midweek as the additional Treasury debt was absorbed well. Foreign demand for the shorter-term auctions was surprisingly strong while the longer-term auction was average. The US Treasury auctioned $963 billion of debt the first half of this year and is expected to offer $1.1trillion in he second half. Weekly jobless claims were not as bad as expected which didn’t help mortgage bond prices. However, falling oil prices helped ease inflation fears and enabled mortgage bond prices to increase, which pushed rates lower. Oil was under $60/barrel last Thursday morning. For the week interest rates improved by about 1/2 of a discount point.
The consumer price index data Wednesday will be the most important data this week. Signs of inflationary pressures from any of the data releases will not bode well for mortgage interest rates.
LOOKING AHEAD
|
Economic |
Release |
Consensus |
|
| Producer Price Index |
Tuesday, July 14, |
Up 0.7%, |
Important. An indication of inflationary pressures at the producer level. Lower figures may lead to lower rates. |
| Retail Sales |
Tuesday, July 14, |
Up 0.5% | Important. A measure of consumer demand. A smaller than expected increase may lead to lower mortgage rates. |
| Consumer Price Index |
Wednesday, July 15, |
Up 0.6%, |
Important. A measure of inflation at the consumer level. Lower figures may lead to lower rates. |
| Industrial Production |
Wednesday, July 15, |
Down 0.6% | Important. A measure of manufacturing sector strength. Weakness may lead to lower rates. |
| Capacity Utilization |
Wednesday, July 15, |
67.9% | Important. A figure above 85% is viewed as inflationary. Weakness may lead to lower rates. |
| Fed Minutes |
Wednesday, July 15, |
None | Important. Details of the last Fed meeting will be thoroughly analyzed. |
| Philadelphia Fed Survey |
Thursday, July 16, |
None | Moderately important. A survey of business conditions in the Northeast. Weakness may lead to lower rates. |
| Housing Starts |
Friday, July 17, |
Down 0.1% | Important. A measure of housing sector strength. Larger than expected decrease may lead to lower rates. |
Fed Minutes
The Federal Open Market Committee decided in December of 2004 to reduce the lag time between the open market committee meeting and the release of the minutes from six to eight weeks to only three weeks. The minutes from the meeting have the ability to cause mortgage interest rate volatility because they provide more policy details than the standard post meeting release. Most importantly the minutes provide the Fed’s complete economic analysis and the various opinions of individual Fed members. There is typically an overwhelming consensus among the members. However, there can also be dissension, which often causes uneasiness in the financial markets. The release often comes and goes without much uproar but keep in mind that if any of the text seems troubling to analysts you can see market volatility.
Remember that mortgage interest rates remaining historically favorable. Capitalizing on current levels is wise amid the recent economic instability across the globe. Inflation fears could be stoked with continued Middle East tension and hurricane season heading our way. Inflation, real or perceived, generally does not bode well for mortgage bonds and could cause rates to rise.
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Market Update 07/06/2009
Market Comment
Mortgage bond prices had another volatile week with rates pushing higher the beginning of the week only to bounce back towards the end. Thursday’s employment report was mixed. Non-farm payrolls fell 467,000 in June and the unemployment rate stood at 9.5%. Estimates were for jobs to decline 365,000 and the unemployment rate to stand at 9.6%. Fortunately the payrolls figure gained most of the attention along with falling oil prices and we recovered about 1/2 of a discount point Thursday morning. Oil was under $67/barrel Thursday morning, which helped alleviate inflation fears. The bond market was closed Friday for the holiday. For the week interest rates were near unchanged.
The additional debt supplied tied to the US Treasury auctions will be the most important data this week. The trade data may also move the financial markets.
LOOKING AHEAD
|
Economic |
Release |
Consensus |
|
| 3-year Treasury Note Auction |
Tuesday, July 7, |
None | Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates. |
| 10-year Treasury Note Auction |
Wednesday, July 8, |
None | Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates. |
| Consumer Credit |
Wednesday, July 8, |
Down $7.5 billion | Low importance. A significantly large increase may lead to lower mortgage interest rates. |
| 30-year Treasury Bond Auction |
Thursday, July 9, |
None | Important. Bonds will be auctioned. Strong demand may lead to lower mortgage rates. |
| Trade Data |
Friday, July 10, |
$30 billion deficit | Important. Affects the value of the dollar. A falling deficit may strengthen the dollar and lead to lower rates. |
| U of Michigan Consumer Sentiment |
Friday, July 10, |
71.0 | Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates. |
Weather
The mortgage interest rate markets are subject to an enormous number of factors. Most analysts agree that weather can have an effect on market activity. Although the effects are seldom long lasting, they can be quite significant.
The United States is the world’s largest exporter of corn. Last year, relatively rainy weather across the Midwest portions of the United States delayed the planting of corn. This caused corn prices to escalate. This year corn farmers planted more acres of corn than analysts expected. Larger corn crops recently caused prices to fall. This is one bright spot amid heightened inflationary fears. Lower corn prices likely will result in lower food prices for some items.
The weather also has the potential to directly alter fuel prices. As we enter the hurricane season, many oil and gas fields in the Gulf along with refineries along coasts are susceptible to damage. If this were to occur, oil prices would almost surely rise sharply. Rising oil prices would do little to help mortgage bond prices already pressured by inflationary fears and competition for investor funds from record debt levels. The result would most likely be higher rates.
The economic effects of various weather occurrences may cause only temporary changes in economic activity. However, those times of change can have a lasting impact on people obtaining mortgages. Despite the rate volatility seen recently, mortgage interest rates remain historically favorable for borrowers. Now is a great time to take advantage of rates at these levels.
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