Market Comment


Mortgage bond prices continued to rebound higher last week, which pushed mortgage interest rates lower. Stock gains kept mortgage bonds relatively in check but many of the data releases were very bond friendly. The core PCE inflation reading was unchanged compared to the slight increase expected by analysts. Q4 revised productivity rose 6.9%, much better than expected. Higher productivity means a company can produce more with less input, helping to keep prices and thus inflation in check.

Rates fell about 1/8 of a discount point for the week.

Early in the week, expect stocks to factor into trading, with very little data on tap. The Treasury auctions will be the focus throughout the middle portion of the week. Strong foreign demand would likely help mortgage bonds. The jobless figures and retail sales data will be the focus for the end of the week.

Auctions
US Treasury bonds do not directly dictate fixed mortgage interest rate pricing, however they do have an indirect impact. Both Treasuries and mortgage bonds often track in the same direction but this is not always the case. There are many times that Treasuries and mortgage bonds move inversely.

Despite the overwhelming size of the US economy, foreign investors can still have an effect on moving the financial markets. When foreign economies struggle, foreign investors often purchase US based investments including mortgage bonds. This demand usually causes mortgage bond prices to rise and interest rates to fall. This flight to quality buying was one of the factors that helped mortgage interest rates to remain historically low in years past.

There is a real threat that continued global economic turmoil might keep foreign investors from purchasing mortgage bonds in the future. The Treasury auctions this week will be important in determining the current appetite of foreign investors for dollar denominated securities. If this week’s auctions are poorly bid, mortgage bond prices could fall, pressuring mortgage interest rates higher.

Market Comment
Mortgage bond prices rebounded last week, pushing mortgage interest rates lower. The majority of the data came in bond friendly. Tuesday’s weaker than expected consumer confidence data helped mortgage interest rates improve. The Treasury auctions showed decent foreign demand. The gross domestic product price deflator component showed a smaller price increase than expected. Consumer spending component also came in weaker than expected. Existing home sales fell a surprising 7.1%, considerably weaker than the expected 1% increase.

Rates fell about 3/4 of a discount point for the week.

The employment report Friday morning will take center stage this week. Until then, look for the PCE inflation data to set the tone for the beginning of the week and the ADP employment report to set the tone for the mid portion of the week.

Fundamental Week
The abundance of fundamental data this week provides a good opportunity for mortgages to improve. If the data shows weakness in the economy with little or no inflationary pressures then it is possible for mortgage bonds to rally resulting in mortgage interest rate decreases. However, if the data shows that the economy is rebounding or any significant signs of inflation, mortgage bonds may fall, pushing mortgage interest rates higher.

Mortgage interest rates remain favorable. Now is a great time to avoid the uncertainty surrounding continued market fluctuation.

Market Comment
Mortgage bond prices fell last week pushing mortgage interest rates considerably higher. The bond market took a hit as inflation concerns emerged after the stronger than expected producer price index data. Producer prices surged in January amid higher energy costs to almost double expectations. The Fed made a surprise rate hike to the discount rate that also resulted in mortgage rate increases. The only positive was the tame consumer inflation reading Friday morning, but we were unable to rebound from the earlier losses.

Unfortunately, rates rose over a full discount point for the week.

This Tuesday’s consumer confidence data will set the tone for trading this week. New home sales, weekly jobless claims, and the gross domestic product data may also move the financial markets. The Treasury will auction $118B in 2/5/7-year notes starting Tuesday. The additional supply may cause interest rate fluctuation.

Fed Action Causes Uncertainty
The Federal Reserve caught market participants by surprise with their 25 basis point discount rate hike last week. While analysts were split on whether the Fed would raise rates this year, that question has now been answered. The move resulted in fluctuation in most of the US financial markets.

The discount rate is the interest rate charged to commercial banks on loans they receive from the Fed. The rate hike is an effort to pull back the aid provided by extraordinary low rates amid the global economic decline. The Fed specifically noted the move was needed “in light of continued improvement in financial market conditions.” Many analysts noted the earlier warnings from Fed Bernanke that rate hikes were coming but very few, if any, expected the move this soon.
While the rate hike resulted in mortgage bond price weakness in the short-term, the long-term outlook is less certain. Most analysts believe inflation remains in check, but at the same time the Fed purchasing of MBS will soon be over. A cautious approach to “float” and “lock” decisions is prudent, given current market conditions.

Market Comment


Mortgage bond prices fell last week, pushing mortgage interest rates slightly higher. The early part of the week saw a reversal of the recent flight to quality buying of US investments, as talks hinted of a Greek bailout by Germany. German Chancellor Merkel dashed those hopes late in the week, causing turmoil in the European Union. As a result, global investor funds returned to the US bond market. Rates improved Friday morning, which helped recover some of the earlier losses.

Unfortunately rates still rose for the week by about 1/8 of a discount point.

The consumer price index Friday will be the most important release this week. The other inflation data and the shortened trading week may also factor into mortgage interest rate changes. The typical back and forth movements of stocks and bonds will also likely take place as uncertainty continues to permeate the financial markets.

Globalization


Economic globalization is the increasing interdependence of national economies through trade, finances, and technology. While economists debate the pros and cons of globalization, it continues to expand.

As a driving force in the global economy, the US often benefits when foreign economies struggle. A prime example is the concern of a Greek economic collapse. Unlike a corporation, a country cannot file for bankruptcy when they can’t make debt payments. One remedy in situations like this has been restructuring the debt, which is mired in uncertainty for investors. The bigger global problem is the fear that a default by one member of the European Union could ripple throughout all the other eurozone countries. In times like this, investors often move funds to safe havens in what is called a “flight to quality.” This is exactly what we saw Friday morning as US debt instruments saw an influx of foreign investment. Bond prices rose which caused mortgage interest rates to fall that morning. From a short-term perspective, it’s great for homebuyers and those refinancing. The long-term effects are less certain. A reversal could easily take place if the EU can prevent a default. This is a prime reason to take advantage of rate dips when they occur.

We Heart Nominees!

PERL is happy to announce an early Valentine’s Day surprise - over 20 nominees for the 2009 Illinois Association of Mortgage Professional Awards! Other professionals in the mortgage industry nominated these individuals, and the IAMP will honor nominees and award winners at the 14th Annual “Industry Awards” celebration on Tuesday, February 16, 2010.

Retail Loan Officer of the Year / Under 40 Million
• Matt Cochran
• Steve Dykeman
• Jeff Entratter
• Dan Fogel
• Alex Margulis
• Mary Markis
• Russell Martin
• Steve Neff
• Henry Pevitz
• Abby Polin
• Lou Rubin
• Deanna Willerman

Retail Loan Officer of the Year / 40-80 Million
• Jeff Fishman
• Shelley Malkin
• Ken Perlmutter

Retail Loan Officer of the Year / Over 80 Million
• Steve Laner
• Barry Schwartz
• Dean Vlamis

Retail Processor of the Year
• Tracie Cotter
• Mari Santiago

Retail Closer of the Year
• Joy Komoscar
• Delma Roman

The winners of over 20 different awards will be announced at this gala event, which will be held at The Diplomat West in Elmhurst, Illinois.

Congrats to all of PERL’s nominees!