Happy Monday! Here’s a quick look at market movement and the week ahead. Become a fan of PERL Mortgage on Facebook and get our secret “word of the week”. The fifth email to the PERL Mortgage Prize Team with the secret word wins our special prize! Congratulations to last week’s winner, Julie Weix! She won a PERL plant pot, PERL hand sanitizer and a pack of gum (who doesn’t like gum?)

Market Update
Mortgage bond prices fell last week pushing mortgage interest rates higher. The gains we had mid week were basically erased as stocks remained strong. The DOW rose despite continued signs that the labor market remained weak. Fortunately, news reports indicated that the Fed may continue the purchase of mortgage bonds into 2010.

For the week, interest rates rose about 1/4 of a discount point.

The employment report Friday will be the most important data this week. ISM Index data and revised productivity data may also move the market. Continued stock strength may also pressure rates.

Change is in the Air
The recent fluctuation in mortgage interest rates has been escalated by the increased Fed purchasing of mortgage bonds.The Fed’s goal of keeping mortgage interest rates relatively low has been a challenge. Analysts called the recent ramp up in purchasing “surprising”, as amounts have exceeded recent averages. This year, the Fed purchased almost $800 billion of mortgage bonds, with the goal of spending $1.25 trillion on the program by the end of 2009.

Different Fed officials have come out recently with what could be interpreted as conflicting positions on the program. Richmond Fed President Lacker told reporters recently, “Whether there is a so-called cliff effect or any disruption due to discontinuous change in our purchases is up in the air.” Lacker also indicated, “I will be evaluating carefully whether we need or want the additional stimulus that purchasing the full amount authorized under our agency mortgage-backed securities purchase program would provide.” On a slightly different note Atlanta Fed President Lockhart indicated the Fed would probably extend the timeframe of MBS purchases beyond the end of the year. The remarks leave many questions:

Will the Fed spend all of the slated money? Will the purchases take place before the end of the year or will they extend into 2010?

With so much uncertainty, even among Fed officials, mortgage interest rate fluctuation is likely. The good news is that despite ups and down, rates have stayed at historic lows.

Market Comment
Following last week’s stronger than expected inflation data, mortgage bond prices fell and pushed rates higher. The producer and consumer price index both came in higher than expected, fanning inflation fears. Stronger than expected housing starts, retail sales, and industrial production data helped equities rally at the expense of mortgage bonds. On Thursday, the Fed tried to step in 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.

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 try 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 is then revised throughout the remainder of the month. 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. The University of Michigan Survey stated, “Consumers concluded that the economic downturn would last longer and their personal finances would not recover as quickly as they had previously expected”.

This week’s release will be eagerly anticipated. Look for any variation from estimates to cause mortgage interest rate fluctuation. Signs of eroding consumer confidence could lead to improvements in mortgage interest rates. However, stronger than expected figures could spike rates higher.
Overall, mortgage interest rates remain 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. It is wise to capitalize on current levels.

Market Comment
Mortgage bond prices remained volatile in up and down trading last week. We started the week in positive territory only to have the gains erased; stronger than expected housing starts data shocked the market Tuesday and overshadowed the tame inflation data. Producer and consumer price data showed inflation stability, however oil prices fluctuated. US debt concerns continued as the Treasury announced record auctions ahead.

For the week, interest rates barely changed.

While the Fed meeting is usually the most important event, it will likely be overshadowed by the record $104b Treasury debt auctions this week. Durable goods order, income, outlays, and consumer sentiment data may also cause mortgage interest rate fluctuation.

Fed Meeting
The Fed’s chief policy tool is the manipulation of short-term interest rates. As of late, short-term rates have been so low that the Fed is limited with their options. The Obama administration is pushing for expanded Fed powers to supervise large banks, hedge funds, and consumer financial products. Both political parties express concerns about increasing the Fed’s role, citing previous failures. However, most agree something needs to be done and many argue the Fed is best equipped to tackle the current problems. All eyes will be focused on the Fed meeting Wednesday. A cautious approach to float/lock decisions is prudent heading into the meeting.

Market Comment
Mortgage bond prices had another terrible week pushing mortgage interest rates considerably higher. Personal income, outlays, construction spending, ISM Index, and payrolls data came in stronger than expected. This did little to help the already shattered bond market. Oil prices continued to escalate hitting over $70/barrel. The Fed’s attempts to keep rates in check were not effective as selling pressure continued. Bernanke tried to calm the markets by reiterating forecasts of tame inflation, but his words fell on deaf ears among bond traders.

For the week, interest rates rose by about 1 and 1/2 of a discount point.

Payrolls
Last week was a prime example of the divergence between the unemployment rate and payrolls figure along with the risk of floating into important data. Unemployment came in at 9.4%, higher than the expected 9.2%, while non-farm payrolls fell 345,000, not as much as the expected 520,000 decline. Mortgage bond prices fell and rates spiked higher. Bond traders hoped the report would provide a solid indication that the labor market remained weak. Unfortunately it left more uncertainty. The unemployment figure is derived from a household survey while the payrolls number comes from an employer report.

Energy prices rose considerably, stoking inflation fears amid record debt levels. As a result, the record-low mortgage interest rates that everyone assumed would hold steady, have gone away. The Fed continues to purchase mortgage bonds in an effort to keep mortgage interest rates low but faces a daunting task as the selling pressure continues. The Fed still has over $700b marked for purchasing additional mortgage bonds. The question remains whether that will be enough to help rates turn lower. So far, it appears that additional measures are needed.