Market Comment
Mortgage bond prices fell last week applying slight upward pressure on home loan rates. The market remained very volatile within a narrow range. Oil remained above $80 a barrel, reigniting inflation concerns. The retail sales report released Friday was better than expected, indicating the US economy may be getting stronger.

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

The Fed meeting Tuesday afternoon will be the most important event this week. The inflation data from both the consumer and producer sides will also take center stage. If inflation remains in check, mortgage bonds could benefit.

Producer Price Index
The producer price index (PPI) is a measure of prices at the producer level and is important because it is the first inflation report to be released each month. Investors are typically able to gain an initial indication of inflationary pressures from the release. If producer prices increase, there is a tendency for producers to pass the increases on to consumers in the form of higher priced goods. It is important to note that the PPI is only a measure of goods, while the consumer price index (CPI) is a measure of goods and services.

It is possible for the price of goods to remain stable, while the price of services increases. In this scenario, PPI would do little to warn of a change in inflationary pressures, while the CPI report would provide an indication of the inflationary effects of the service component. This distinction between the two reports shows why most analysts view the CPI as a more accurate indicator of inflation. Nevertheless, market participants still gain valuable insight into potential fluctuation in the financial markets from the PPI release.

Be cautious heading into the inflation data and Fed meeting this week.

Market Comment
Mortgage bond prices rose last week, pushing mortgage interest rates lower. The bond market was buoyed by the announcement that US Treasury increased Fannie Mae and Freddie Mac credit lines to a total of $400 billion. This was a signal to investors that these entities are “too big to fail”, as viewed by the Treasury. We saw some weakness Thursday afternoon as retailers reported stronger than expected holiday sales. The employment report Friday was generally bond friendly.

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

The inflation data Friday will be the most important economic data this week. Signs of stronger than expected inflation would not be positive for mortgage interest rates. The Treasury auctions will also dominate trading. Stronger than normal foreign demand could bode well for the overall level of interest rates.

Employment Results
The December employment report came in relatively bond friendly. Unemployment came in at 10% as expected. However the payrolls component showed job losses of 85,000 compared to the 35,000 losses expected by analysts. The mortgage bond market had a generally positive reaction to the report but improvements in rates were tempered by concerns for some of the revised data from prior months. Revisions to the November figures showed a 4000-job increase as opposed to the original 11,000-job decrease.

Market Comment
Mortgage bond prices fell last week pushing mortgage interest rates higher. The bond market took a beating as stocks surged despite mixed data. Existing home sales in November rose a surprising 7.4%. However, revised gross domestic product figures showed the economy only grew 2.2%, which was weaker than the expected 2.8% mark. On a positive note, personal income and outlays data came in weaker than expected. Unfortunately, the thin trading conditions magnified the earlier losses and made it difficult to recover.

For the week, interest rates rose by about 1 3/8 discount points.

The Treasury auctions will take center stage next week. If foreign demand falters, we will likely see mortgage interest rates head higher. The bond market will close early Thursday in advance of New Year’s Day. The shortened trading week may result in market fluctuation due to thin trading.

Consumer Confidence Index
The Conference Board releases the Consumer Confidence Index on the last Tuesday of every month. The report details the levels of confidence individual households have in the performance of the economy. The data is derived from a survey of 5,000 households nationwide. The survey polls consumer opinions on current business conditions, their jobs, their incomes, and their future spending plans.

The consumer confidence index is significant in that 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, and housing market weakness, American consumers continue to spend. However, many analysts question whether consumers can continue to buoy the economy, especially amid rising unemployment and continued tight credit.

This week’s release will be eagerly anticipated. Look for any variation from estimates to cause mortgage interest rate movement. Signs of eroding consumer confidence could lead to improvements in mortgage interest rates. However, stronger than expected figures could spike rates higher. Mortgage interest rates tend to trend lower slowly, while increases tend to occur quickly. With mortgage interest rates relatively low, capitalizing on current levels is recommended to protect against future uncertainty.

Market Comment
Mortgage bond prices were near unchanged last week holding mortgage rates steady. Trade was extremely volatile with swings of 1/2% in discount points common. The Treasury auctions were not as well received by foreign accounts as traders had hoped. The US relies on foreign central banks such as China to fund our deficit spending. If China were to decrease or cease purchasing US bonds and notes, rates would rise.

Interest rates finished the week near unchanged.

The inflation data will be the most important releases this week. Inflation erodes the value of fixed income securities causing prices to fall and rates to rise. The Fed meeting will also take center stage. While no rates changes are expected the wording of the release will be very important.

Trading Conditions
As we all know, mortgage interest rates change on a daily and intra-day basis. With so much fluctuation, it is often difficult to make the right decision regarding floating or locking. However, there is a difference between gambling and taking a calculated risk when making mortgage interest rate decisions. Floating into an economic release such as the employment report is usually a gamble, as was evident with the rate spike the beginning of this month. In addition, floating over a span of more than a few days is also a gamble. Unforeseen events can cause instability in the financial markets that result in mortgage interest rate fluctuation. On the contrary, floating on a day of positive market movement with no economic data the following day, while such action is still vulnerable to market movements, can be considered a calculated risk. Taking advantage of rates at the current levels ensures a historically favorable interest rate and protects against uncertainty surrounding future interest rate developments.

Market Comment
Mortgage bond prices fell last week pushing mortgage interest rates significantly higher. We saw selling pressure almost the entire week as housing and factory orders data was stronger than expected, the Fed Chairman mentioned rate hikes, and weekly jobless claims beat estimates. To top the already negative week, the employment report came in stronger than expected causing rates to spike even higher Friday morning.

Interest rates finished the week worse by about 1 and 1/2-discount points.

The continued Treasury auctions will gain a lot of attention this week. If foreign demand for the debt is weak, we could see rates head higher. The first portion of the week is light regarding economic releases, but the trade data Thursday and retail sales data Friday have the potential to result in mortgage interest rate fluctuation. Be alert throughout the entire week.

Are Rate Hikes Coming?
The biggest fear of bondholders is inflation. Real or perceived, inflation erodes the value of fixed income securities causing prices fall and rates to rise. And the housing sector of the economy would certainly not benefit from escalating mortgage interest rates. Unfortunately comments from Fed Chairman Bernanke have many traders concerned that rate hikes are on the way. Bernanke indicated the Fed would follow a “rolling exit process”, in which special programs run down and ultimately implement a tightening policy. He went on to mention raising rates and indicated the Fed will cut back and close emergency lending programs as the markets normalize. The reaction to these remarks was fast and furious as mortgage interest rates shot higher.

While it is almost inevitable that the Fed will eventually raise rates, no one knows when that will occur. However, many traders took Bernanke’s remarks as a warning of things to come sooner rather than later.

Despite the recent rate increases last week, rates remain historically favorable. Lower rates are not guaranteed and floating in this environment is very risky.