Market Comment


Mortgage bond prices fell sharply last week driving mortgage rates higher. Rates were under pressure from better than expected economic news and rising stocks. Retail sales, weekly jobless claims, and industrial production data were all better than expected. The improved economic outlook had investors flocking to buy stocks, which helped the Dow Jones index to close over 10,000.

For the week, interest rates rose nearly 7/8 of a discount point.

This Tuesday’s producer price index data release will be the most important data this week. Any signs of inflation will generally not bode well for mortgage bonds. The Fed “Beige Book” will factor into trading this week. Stock strength and dollar valuation will play a pivotal role in mortgage interest rates as well.

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. The housing market across the country is a vital component in sustaining the economy. For some time homeowners generally saw an increase in the value of their homes. Unfortunately now that has all changed. The softening of the housing market tied to credit concerns continues to have many worried. Most economists believe more pain is headed our way from the housing sector.

There is still uncertainty regarding the future state of the economy. Mortgage bonds have been volatile and improvements are not a given despite the recent Fed efforts to purchase mortgage bonds. The good news is that mortgage interest rates remain historically low.

Don’t forget to check for the word of the week on the PERL Mortgage Facebook page. The first email to perl@perlmortgage.com with the mystery word receives our weekly prize!

Market Comment
Mortgage bond prices fell last week, pushing mortgage interest rates higher. Producer Price Index (PPI) data release last Tuesday was much higher that expected and sparked inflation fears. That data set the tone for negative trading early in the week. Thankfully, the Consumer Price Index (CPI), a better gauge of overall inflation, was lower than expected, helping interest rates recover.

For the week, interest rates rose about 3/8’s of a discount point.

The record debt will once again take center stage this week. If foreign demand remains strong, rates should remain the same or even improve. The Fed meeting will be the most significant event this week. While no adjustments are expected, the Fed remarks will be carefully weighed.

New Home Sales
New Home Sales data is compiled monthly by the Department of Commerce’s Census Bureau and is gathered from builders throughout the country. The data represents new home sales for the nation, as well as four areas of the country: the Northeast, the Midwest, the South, and the West. Information on the average price of a home, the number of homes for sale, and the supply of unsold homes are also provided. A slowdown in new home sales tends to lead to a slowdown in housing starts, which will continue to affect other indicators. New Home Sales data is often difficult to predict. Most analysts look at a three-month average in order to see any trends in the growth rate. Surges in the release are often greeted with little more than an average reaction in the bond market. However, the data is significant in showing the condition of the housing sector of the economy.

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 rallied early in the week, only to give back the gains as stocks surged. The DOW eclipsed the 9000 mark. Ben Bernanke spoke of a “jobless recovery”, where employers use productivity to increase production without additional labor. This would maintain a high unemployment rate even after the economy is in recovery.

Existing home sales data came in higher than expected. For the week, interest rates rose by about 1/8 of a discount point.

The US Treasury will auction $115 billion of 2, 5, and 7-year notes this week. The additional debt supply may pressure rates. With so many data releases, expect the market to move.

Employment Cost Index
The employment cost index is a quarterly report issued by the Department of Labor. The report measures the growth of wages, salaries, and benefits costs over a certain period of time. Though ECI figures are usually weeks old, the data remains the best indicator of employment price pressures because it factors employees’ total compensation.

If wage pressures rise, expectations of inflation will increase. However, increasing compensation does not necessarily lead to increased inflationary pressures. Oftentimes, increased productivity enables employers to increase compensation without increasing the costs of their goods or services.

No single economic indicator can consistently predict the future of the economy. However, the employment cost index is a closely watched release. Most of the recent Fed releases and speeches indicate that inflation is a concern. Market participants remain cautious. Now is a good time to take advantage of mortgage interest rates at their current levels to avoid exposure to future market fluctuation.

Market Comment
Mortgage bond prices moved considerably this week with rates rallying midweek as additional Treasury debt was absorbed. Foreign demand for the shorter-term auctions was surprisingly strong, while the longer-term auction was average. The US Treasury auctioned $963 billion of debt the first half of this year and is expected to offer $1.1 trillion in the second half. Weekly jobless claims were better than expected, which did not help mortgage bond prices. However, falling oil prices eased inflation fears and enabled mortgage bond prices to increase, which pushed rates lower. Oil was under $60/barrel last Thursday morning.

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

The consumer price index data Wednesday will be the most important data this week. Signs of inflationary pressures from any of the data releases will not bode well for mortgage interest rates.

Fed Minutes
In December 2004, The Federal Open Market Committee decided to reduce the lag time between the open market committee meeting and the release of the minutes from six weeks to only three weeks. The minutes from the meeting have the ability to cause mortgage interest rate fluctuation because they provide more policy details than the standard post meeting release. Most importantly, the minutes provide the Fed’s complete economic analysis and various opinions of individual Fed members. There is typically an overwhelming consensus among the members. However, there can also be dissension, causing uneasiness in the financial markets. The release often comes and goes without much uproar but if any of the text seems troubling to analysts, you can expect market changes.

Mortgage interest rates remain at historic lows. Capitalizing on current levels is wise amid the recent economic instability across the globe. Inflation fears could be stoked with continued Middle East tension and hurricane season heading our way. Inflation, real or perceived, generally does not bode well for mortgage bonds and could cause rates to rise.