Market Update 08/24/09
Market Comment
Mortgage bond prices fell last week pushing mortgage interest rates higher. Inflation data remained bond friendly with the Producer Price Index data coming in lower than expected across the board. Rates seesawed with stocks. Severe stock weakness last Monday helped mortgage bonds start the week on a positive note. Unfortunately, a stock rebound Tuesday erased Monday’s gains and this pattern continued throughout the week. Fortunately, the Fed continued to purchase billions of dollars of mortgage-backed securities in an effort to keep rates relatively low. For the week, interest rates rose about 1/8 of a discount point.
The Treasury auctions will once again take center stage as record debt issuance continues. If signs of foreign demand falter, rates will likely suffer. Consumer confidence data may also move the market. Look for stocks to play a role as well
LOOKING AHEAD
|
Economic |
Release |
Consensus |
|
| Consumer Confidence |
Tuesday, Aug. 25, |
48.00 |
Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates. |
| 2-year Treasury Note Auction |
Tuesday, Aug. 25, |
None | Important. 42-billion of notes will be auctioned. Strong demand may lead to lower mortgage rates. |
| Durable Goods Orders | Wednesday, Aug 26, 8:30 am, et |
Up 3.2% |
Important. An indication of the demand for “big ticket” items. Weakness may lead to lower rates. |
| New Home Sales | Wednesday, Aug 26, 10:00 am, et |
390k |
Important. An indication of economic strength and credit demand. A decrease may lead to lower rates. |
| 5-year Treasury Note Auction | Wednesday, Aug 26, 1:00 pm, et |
None | Important. 39-billion of notes will be auctioned. Strong demand may lead to lower mortgage rates. |
| 7-year Treasury Note Auction | Thursday, Aug 27, 1:00 pm, et |
None | Important. 28-billion of notes will be auctioned. Strong demand may lead to lower mortgage rates. |
| Personal Income and Outlays |
Friday, Aug. 28, |
Up 0.1% |
Important. A measure of consumers’ ability to spend. Weakness may lead to lower mortgage rates. |
| U of Michigan Consumer Sentiment |
Friday, Aug. 28, |
64.8 |
Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates. |
Durable Goods Orders
Durable goods orders are generally believed to be a precursor of activity in the manufacturing sector because manufacturing must have an order before considering an increase in production. Conversely, a decrease in orders eventually causes production to be scaled back; otherwise the manufacturer accumulates inventories, which must be financed.
Unfortunately, durable goods orders data has many drawbacks. The first problem with the orders data is that they are extremely volatile. The volatility of the data usually is attributed to the civilian aircraft and defense components of the figure. For example, if Boeing has a big order for one of its jumbo jets, the civilian aircraft category can change by $3-4 billion. The same scenario is evident when an aircraft carrier is ordered, surges in the defense category result. The second problem with the data is that orders are continuously being revised. There are many times in the past when the advance report on durables showed an increase while a revision a week later showed a decrease. The revised data is found in the report on manufacturing orders, shipments, and inventories. Since the data is very volatile and difficult to forecast, there is quite often a huge disparity between the actual release and the initial projections. Be cautious heading into this release.
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Market Update 08/10/2009
Market Comment
Mortgage bond prices fell last week pushing mortgage interest rates higher. Stronger than expected data and positive stock movements pressured rates. The Institute for Supply Management (ISM), factory orders, weekly jobless claims, and employment report all came in stronger than expected. The personal income and outlays data was the only release that was even near expectations. Signs of recovery in the economy with continued record debt had many traders concerned about inflation implications. Inflation erodes the value of fixed income securities. For the week interest rates rose by about 2 full discount points.The record debt auctions will continue to pressure mortgage interest rates. If foreign demand does not falter then mortgage interest rates will likely stay neutral or improve. However, weak foreign demand would likely have the opposite effect.LOOKING AHEAD
|
Economic |
Release |
Consensus |
|
| Preliminary Q2 Productivity |
Tuesday, Aug. 11, |
Up 4.9% |
Important. A measure of output per hour. Improvement may lead to lower mortgage rates. |
| 3-year Treasury Note Auction |
Tuesday, Aug. 11, |
None |
Important. $37 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates. |
| Trade Data |
Wednesday, Aug. 12, |
$28.5 billion deficit |
Important. Affects the value of the dollar. A falling deficit may strengthen the dollar and lead to lower rates. |
| 10-year Treasury Note Auction |
Wednesday, Aug. 12, |
None |
Important. $23 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates. |
| Fed Meeting Adjourns |
Wednesday, Aug. 12, |
No change | Important. Few expect the Fed to change rates, but some volatility may surround the adjournment of this meeting. |
| Retail Sales |
Thursday, Aug. 13, |
Up 0.3% |
Important. A measure of consumer demand. A smaller than expected increase may lead to lower mortgage rates. |
| 30-year Treasury Bond Auction |
Thursday, Aug. 13, |
None | Important. $15 billion of bonds will be auctioned. Strong demand may lead to lower mortgage rates. |
| Consumer Price Index |
Friday, Aug. 14, |
Unchanged, |
Important. A measure of inflation at the consumer level. Lower figures may lead to lower rates. |
| Industrial Production |
Friday, Aug. 14, |
68.1% | Important. A measure of manufacturing sector strength. Weakness may lead to lower rates. |
| Capacity Utilization |
Friday, Aug. 14, |
Up 0.1% | Important. A figure above 85% is viewed as inflationary. Weakness may lead to lower rates. |
Employment SurpriseThe employment report is generally the most important data released each month. Last week’s employment report shocked analysts and the market when all three components came in better than expected. Unemployment came in @ 9.4%, stronger than the expected 9.6% mark. Non-farm payrolls fell 247k, not as weak as the expected 320k decline. Average hourly earnings rose 0.2%, stronger than the expected 0.1% increase. Unfortunately mortgage interest rates got worse by over 1/2 a discount point instantly following the release. Be cautious here as economic uncertainty continues. As we saw last week, lower rates are not a given.
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