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Market Comment
Mortgage bond prices rose last week pushing mortgage interest rates lower. The US Treasury auctions went well with relatively strong foreign demand for most issues. The gains came as the Fed continued to pour billions into mortgage bonds in an effort to keep rates low. The data was mixed as weekly jobless claims came in better than expected and the Fed “Beige Book” indicated that inflation remained in check.

For the week, interest rates fell by about 3/8 of a discount point.

The consumer price index will be the most important data this week. If inflation indications are tame, rates will likely hold steady or improve. However, if inflation increases, mortgage interest rates could spike.

Business Inventories


The report on business inventories gives a broader look at the durable goods, factory orders, and retail sales reports. Not only is this report an important part of the investment component of the GDP, it also provides a peek into the economy in the upcoming months. Business inventory changes slow down as the economy approaches a peak, and rise as the economy approaches the trough of a recession. Therefore, the change in business inventories is a leading indicator of GDP. The data for this report, published by the Department of Commerce’s Census Bureau, comes from a monthly survey of inventories, orders, and manufacturers’ shipments, as well as merchant wholesalers and retail trade surveys.

Only a small amount of attention is typically paid to this report because much of the data is already available and surprises are rare. The only new information in this report is retail inventories. However, in this environment, every piece of data has the potential to cause some volatility.

The future of mortgage interest rates remains uncertain. It’s wise to take advantage of the recent improvements in rates.

Market Comment
Mortgage bond prices rose last week, pushing mortgage interest rates lower. Relatively strong foreign demand for US debt, along with tame inflation data, helped rates improve. The consumer price index came in unchanged and the core, which excludes food and energy prices, rose 0.1% as expected. The Fed left rates unchanged and continued to purchase billions of dollars worth of mortgage-backed securities in an effort to keep rates relatively low.

For the week, interest rates fell more than a full discount point.

Tuesday’s producer price index will be the most important release this week, setting the tone for trading ahead. If signs of inflation emerge at the producer level, rates will likely suffer. Housing starts and leading economic indicators data may also move the market.

Market Analysis
The two traditional approaches to market forecasting are fundamental and technical analysis. Fundamental analysis is an attempt to predict future price movements based on the most current economic data. The data provides analysts with insight into how economic activity affects the supply of and demand for money, thereby impacting interest rates.

In contrast, technical analysis is an attempt to predict future market movements based on past price movement patterns. Technical analysts typically use charts and graphs to find patterns or trends into potential future market movements. Technical analysis is based on the assumption that actual changes in economic activity precede the release of the corresponding economic data. Thus, technical analysts attempt to reveal hidden supply and demand factors by reviewing price and volume movements that are not supported by the release of the most current economic data. Another important factor of technical analysis is market sentiment. Market sentiment measures the emotions and expectations of investors in the market. Sentiment, like most emotions, changes often in a short span of time and is impossible to predict accurately.

The inability to accurately predict the future makes it necessary to take a cautious approach to protect yourself against unfavorable market swings. When low rates are available, as they are today, it’s wise to lock in rather than wait and float.

Timing is one of the most important factors in success. Unfortunately, knowing the perfect time to lock in a loan is impossible until after it’s done. While analysts constantly try to predict the future, the bottom line is they continually fall short. The good news is that the Fed has done a relatively good job of keeping rates favorable, but not without some serious spikes here and there. Without the Fed pouring billions into mortgage bonds, rates would surely be higher.

Market Comment
Mortgage bond prices had the worst week in a very long time, falling precipitously and pushing mortgage interest rates considerably higher. Consumer sentiment data was stronger than expected, starting the bond market off on the wrong foot. Debt supply concerns permeated throughout the financial markets with the US Treasury auctioning $100 billion of notes. Escalating oil prices added fuel to the fire. Fortunately, the Fed stepped in to stop the bleeding toward the end of the week which helped bonds recover a small portion of the large losses.

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

Friday’s employment report will be the most important release this week. If the data shows signs of economic recovery, rates may rise. On the flipside, signs of weakness may bode well for rate improvements.

Productivity
Productivity is the rate at which goods or services are produced. It is most commonly defined in terms of labor, which is the contribution of people to the process. Labor costs represent about two thirds of the value of the output produced. The Bureau of Labor Statistics of the US Department of Labor releases the most widely cited productivity statistics quarterly and annually. Increased productivity is often credited for economic growth with little signs of inflation.

Productivity is significant in that as it increases, businesses can produce more with the same or less input. This wealth building effect is vital to the US economy. As productivity increases, the US economy generally performs better.

While the bond market generally favors signs of weakness in the economy, bonds tolerate growth as long as the economic environment shows little or no inflationary pressures. Unfortunately, inflation fears have lately escalated.

To avoid future uncertainty, now is an ideal time to take advantage of today’s still favorable rates.

Market Comment
Trading remained volatile with rates improving the first portion of week. However on Thursday and Friday, some of the data came in surprisingly better than expected, which caused mortgage bond prices to fall and rates to rise. The labor cost component of the productivity report along with the Fed Chairman’s concerns about possible future inflation caused steep price declines the latter portion of the week. Unfortunately, this eroded most the improvements from Monday and Tuesday.

Mortgage bond prices remained unchanged for the week keeping mortgage interest rates steady.

Market Conditions
There is a Chinese proverb that states, “May you live in interesting times.” It is often argued that the word interesting is meant to be a synonym for turbulent or dangerous. This phrase hits the bull’s-eye given the current state of the financial markets.

While stocks and bonds swing wildly, there is some good news. Interest rates for conforming and FHA/VA loans are still historically low by many standards.

However, low rates may be affected by escalating inflation fears. Oil prices rose most of last week and Fed Chairman Bernanke expressed concerns about “how to wind down the federal balance sheet” and “avoid inflation.” When a Fed official speaks of inflation, it can have a negative affect on bonds. Inflation, real or perceived, erodes the value of bonds causing bond prices to fall and rates to rise. With so much uncertainty, it is wise to act cautiously with float/lock decisions, especially heading into the inflation data this week.

Market Comment
Mortgage bond prices fell last week applying upward pressure on mortgage interest rates. Trading remained volatile with daily swings of 3/8 in discount points. The economic data released was mixed and gave no clear indication of the direction of the US economy. For the week, interest rates rose by about 5/8 in discount points.

The employment report to be released Friday will be the most significant data this week. Productivity data will be important as well. Additional debt supply hits the market this week with the Fed auctioning $71 billion of 3, 10, and 30 year Treasuries.

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 the state of the economy.