Market Comment
Mortgage bond prices rose pushing mortgage interest rates lower. Retail sales figures came in lower than expected with a 0.5% decrease. The Treasury auctions were mixed but didn’t result in much movement. Inflation generally remained in check as the producer price index fell 0.5%, lower than the expected 0.2% decline. Core consumer prices were slightly higher than expected with a 0.2% increase. Weekly jobless claims were not as bad as expected, but the increase in claims was positive for bonds.

Significant stock weakness on Friday helped mortgage interest rates improve. Rates fell by about 5/8 of a discount point for the week.

The most important data will be the housing starts Tuesday. Weekly jobless claims and leading economic indicators data will also be important. Be cautious in this normally lackluster mid-summer trading environment as stocks remain volatile and economic conditions remain uncertain.

Housing Starts
Housing starts data is a leading indicator of the state of our economy. This report, provided by the Bureau of the Census, takes into account data from both single-family homes and multi-family dwellings. Building permits are also released with the housing starts data. By knowing the number of permits issued monthly, analysts can attempt to estimate for the upcoming months. Normally, starts are 10% higher than permits since all locations are not required to have a building permit.

Housing starts and permits give a warning of future economic activity. In effect, a rise in housing starts can lead to a fall in the bond market and vice versa. Consumers tend to hold off on the purchase of new homes, new cars, and other big-ticket items if they are worried about the future of the economy. Housing is an important part of our economy. Continued declines in housing starts can lead to continued economic slowdown and essentially a deeper recession. On the other hand, increases in housing starts could signal a possible reversal.

From the opposite perspective, changes in interest rates often lead to changes in housing starts. High interest rates can cause a significant decline in home sales, which can lead to a drop in housing starts. Just the opposite happens when rates drop and is one of the additional reasons the Fed is trying to keep rates low. Low mortgage rates affect both home sales and housing starts.

There is still uncertainty regarding the future state of the economy. The Fed minutes indicate lower growth expectations. The Fed Chairman stated that the timing of an economic recovery was “highly uncertain.”

Mortgage interest rates continue to be historically low. While a spike in rates is not expected in the near future, it’s wise to take advantage of today’s favorable rates.

Market Comment
Mortgage bond prices were near unchanged, holding rates generally steady for the week. Unfortunately some considerable stock strength pressured mortgage bonds lower and rates higher mid week. The weekly jobless claims came in better than expected, which is unfavorable for rates.

Rates initially fell by about 1/8 of a discount point the beginning of the week only to have those improvements erased midweek.

The most important data will be the inflation releases the latter portion of the week. The Treasury will have another round of record auctions with a 3-year auction Monday, 10-year auction Tuesday, and a 30-year auction Wednesday. Foreign appetite for US debt will continue to play a key role in the ability of interest rates to remain low.

Retail Sales
Retail sales data is the first indication of weakness or strength in consumer spending released each month. The Bureau of the Census of the US Department of Commerce provides information on how much the consumer spends on the purchase of goods. This data provides the consumption part of the gross domestic product. Retail sales data represents merchandise sold for cash or credit by retailers. Durable goods, such as autos, make up 35% of the figure. The balance consists of non-durables such as gasoline, restaurants, and general merchandise.

There are several drawbacks to the report. The data covers purchases of goods only, not services. It is also not adjusted for inflation and is extremely volatile. Economists are concerned that the current economic uncertainty will continue to curtail consumer-spending habits. Consumers have generally been given credit for sustaining the economy even amid the economic turmoil.

Market Comment
Mortgage bond prices rose last week applying downward pressure on mortgage rates. Volatility in both the stock and bond markets remained high, with broad swings occurring on a daily basis. Mortgage rates moved lower following the release of weak housing data. The improvements seen earlier in the week were reversed following a weak 5-year Treasury auction on Wednesday. The movement seen this week is expected to continue until the future of the economy becomes clear.

Rates fell by about 3/8 of a discount point for the week.

Personal income and outlays will set the tone for trading this week. The employment report to be released on Friday will be the most important release this week. The focus lately has been on the payrolls component rather than the headline figure. If payrolls come in stronger than expected, mortgage interest rates may worsen.

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 factors the Federal Open Market Committee will use to make future rate decisions. An employment rebound may prompt the Fed to raise short-term interest rates. However, if employment remains weak, then the Fed may seriously consider keeping rates low.

Market Comment
Mortgage bond prices fell last week pushing mortgage interest rates higher. Trading was positive for the week through Wednesday’s close. The data was generally benign, causing no large mortgage bond market swings. Unfortunately, a strong 273-point jump in the DOW Thursday resulted in mortgage rates worsening by about 3/8 of a discount point that afternoon. Fortunately, bond prices recovered some Friday, as the stocks were unable to hold those gains.

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

The producer and consumer price index data will be the most important releases this week. If inflation remains tame, mortgage interest rates may improve. Expect global economies to continue to factor into trading.

Industrial Production
The Federal Reserve releases the Industrial Production report each month. It is a real measure of output from manufacturing, mining, electric, and gas utilities. The data is significant in that it provides an indicator of the state of the economy. Analysts use the data to attempt to determine market direction. The Fed uses the data to help set the course for monetary policy. Generally the Fed likes to see steady growth in the economy with little price pressures.

Mortgage interest rates generally react favorably to weaker than expected industrial production data. In times of economic weakness, investors often move out of stocks and into mortgage bonds. When things look good, investors often move out of bonds and back into stocks. We have seen these patterns frequently in recent months.

Floating into significant economic data always has some risk involved but the last release came in as expected and didn’t move the market much. However, now is a great time to take advantage of mortgage interest rates at these historically low levels to avoid future market movement.

Market Comment
Mortgage bond prices rose last week pushing mortgage interest rates lower. We were negative through Thursday, as stocks performed generally well until Friday’s data was released. Fortunately, bond prices surged higher Friday morning following the weaker than expected payrolls component of the employment report. In addition, news of a troubled Hungarian economy reignited global fears and resulted in flight to quality buying of US debt instruments. Stocks fell precipitously Friday.

Rates fell by about 1/2 of a discount point for the week.

The retail sales data will be the most important release this week. The US Treasury auctions will also factor into trading along with the global economic uncertainty. The Euro remains especially volatile. If additional countries announce economic trouble the flight to quality buying of US debt instruments could continue.

Warning of Higher Rates
Last week Atlanta Fed’s Lockhart said that the Fed might need to raise rates to counter inflation even with high unemployment. “Good policy, even in circumstances of unacceptable levels of unemployment, may incorporate higher interest rates. The time is approaching when it will be appropriate to consider recalibrating interest rate policy.” He added, “as the economy continues to improve and financial markets find firmer ground, extraordinarily low policy rates will not be needed to promote recovery and will become inconsistent with maintaining price stability.”

Lockhart noted inflation remained under control for now. Now is a great time to take advantage of mortgage interest rates at these historically low levels to avoid future market fluctuation, especially with the recent rate decline and Fed predictions.