Market Comment
Mortgage bond prices rose last week, which helped mortgage interest rates improve. Oil prices continued to fall early in the week. Fortunately, mortgage bonds rallied nicely amid the tame inflation environment. However, that trend reversed mid week as oil prices spiked due to a report which indicated a supply decline. Stocks also surged higher as earnings reports generally pleased investors. The DOW easily eclipsed the 11,000 mark.

Despite this, rates still managed to improve by about 1/4 of a discount point for the week.

Today’s leading economic indicators data will set the tone for trading this week. The producer inflation data will be the most important release. If inflation pressures emerge mortgage interest rates may be pressured higher.

Durable Goods Orders
Durable goods orders are generally believed to be a precursor of activity in the manufacturing sector because manufacturing must have an order before considering an increase in production. Conversely, a decrease in orders eventually causes production to be scaled back; otherwise the manufacturer accumulates inventories, which must be financed.

Unfortunately, durable goods orders data has many drawbacks. The first problem with the orders data is that it is extremely volatile. This is usually attributed to the civilian aircraft and defense components of the figure. For example, if Boeing has a big order for one of its jumbo jets, the civilian aircraft category can change by $3-4 billion. The same scenario is evident when an aircraft carrier is ordered, surges in the defense category result. The second problem with the data is that orders are continuously being revised. There have been many times when the advance report on durables showed an increase, while a revision a week later showed a decrease. The revised data is found in the report on manufacturing orders, shipments, and inventories.

Since the data is difficult to forecast, there is quite often a huge disparity between the actual release and the initial projections. If the durable goods report is much stronger than expected, look for mortgage interest rates to push higher. If favorable, the data may help interest rates remain steady or even push lower.

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