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.

Market Comment


Mortgage bond prices fell last week pushing mortgage interest rates slightly higher. Most of the data early in the week was bond-friendly. Unfortunately, with the Fed reiterating that they are not purchasing bonds after the first quarter, bond prices tumbled Wednesday afternoon. This was followed by stronger than expected gross domestic product, employment cost index, and PCE price data Friday morning. Bonds were helped Friday afternoon as stocks remained jittery.

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

The employment report Friday will be the most important event this week. Income, outlays, ISM Index, productivity, and factory orders data may also move the market. The ADP payrolls data will be carefully watched as they are an important view of the employment situation.

ISM


The Institute for Supply Management (ISM), formerly the National Association of Purchasing Management (NAPM), releases the “Report on Business” on the first working day of each month. Part of this report is the “diffusion index,” which tracks the economy’s ups and downs fairly well.

In conducting this survey, the ISM questions purchasing executives from over 250 industrial companies, compiling data on production, orders, commodity prices, inventories, vendor performance, and employment. Each of the respondents is asked to rank the categories as “up” or “down.” Various weights are applied to the individual components to form the composite index.

A composite index reading of 50 can be thought of as a “swing point.” A reading above 50 implies an increase in economic activity, while a reading below 50 indicates a decline. As a general rule of thumb, when the index approaches 60, investors begin to worry about an overheated economy. A slide below 40 suggests that recession is at hand.

The ISM report is difficult for economists to forecast because there is little data upon which to base an educated guess. The report has a large “surprise factor” and can often prompt a significant market reaction. Be cautious going into the data.