Market Update 01/05/2009
Market Comment
Mortgage bond prices remained volatile last week in thin trading conditions associated with the holiday. Daily movements in discount points often exceeded 1/2. Consumer confidence and ISM Index data showed continued economic weakness. However, weekly jobless claims were not as bad as expected. Stocks rallied mid-afternoon Friday on the first trading day of the year. Unfortunately this came at the expense of bonds, causing interest rates to spike higher. For the week, interest rates on government and conventional loans rose by 3/4 of a discount point.The employment report Friday will be the most important event this week. It will be interesting to see how trading resumes the first full trading week of the year following the holidays.LOOKING AHEAD
|
Economic |
Release |
Consensus |
|
| Construction Spending |
Monday, Jan. 5, |
Down 1.2% |
Low importance. An indication of economic strength. A significant decrease may lead to lower rates. |
| Factory Orders |
Tuesday, Jan. 6, |
Down 2.6% |
Important. A measure of manufacturing sector strength. A larger decrease may lead to lower rates. |
| Consumer Credit |
Thursday, Jan. 8, |
Up $0.5 billion |
Low importance. A significantly larger than expected increase may lead to lower mortgage interest rates. |
| Employment |
Friday, Jan 9, |
Unemp. @ 7%, |
Very important. An increase in unemployment or a larger decrease in payrolls may bring lower rates. |
Revised GDPFactory orders data is a monthly report released by the US Census Bureau. The release is officially referred to as The Advance Report on Durable Goods Manufacturers’ Shipments, Inventories, and Orders.
The manufacturing sector is a major component of the economy. Investors use the factory orders report to attempt to determine the direction of the economy in the future. Orders are generally believed to be a precursor to activity in the manufacturing sector because manufacturing typically has an order before considering an increase in production. Conversely, a decrease in orders eventually causes production to scale back; otherwise, the manufacturer accumulates inventories, which must be financed.
Total factory orders break down to approximately 55% durable and 45% non-durable. Durable goods are items such as refrigerators, cars, and aircraft. Non-durables are items such as cigarettes, candy, and soap. The report is often dismissed due to the timing of the release. Durable goods orders are typically reported a week earlier making a portion of the factory orders data “old news.” While some analysts dismiss the value of the factory orders data others point out the fact that the report provides a more complete picture than the initial durable goods release. Revisions to initial data along with non-durable figures are factored in providing a more accurate look at the condition of the manufacturing sector.
The stock market typically likes to see strong factory orders data indicating a surge in future production. On the other hand, bonds typically like weaker figures.
The manufacturing sector of the economy has been hit hard in the downturn. If the factory orders data shows a significant increase, stocks may rise on the data. This scenario is likely to pressure mortgage interest rates higher. However, a factory orders report showing continued weakness may help to push mortgage interest rates lower.
While the data is important, it may be overshadowed by developments in the Fed plan to systematically purchase mortgage bonds. Right now the Fed is saying the plan will take effect in early January but no definitive date was released as of this report. The Fed indicated the plan is to purchase up to $500 billion in agency mortgage bonds by the end of June.
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Market Update 12/29/2008
Market Comment
Mortgage bond prices remained nearly unchanged last week holding mortgage rates steady. Trading remained extremely volatile with daily movements in discount points often exceeding 1/2. The Treasury auctioned a total of $66B in two and five-year notes last week in the continuing effort to fund the massive bailout programs recently announced. While neither auction was “stellar,” the indirect bidder participation, an indication of foreign central bank demand for US securities, was “decent”. Traders remained concerned about the massive supply of new debt being created by the TARP program as the US Government battles the credit crisis. For the week, interest rates on government and conventional loans fell by 1/8 of a discount point.
The financial markets remain volatile amid uncertainty. Couple this with thin trading conditions and a shortened trading week and the up and down trading pattern is likely to continue.
LOOKING AHEAD
|
Economic |
Release |
Consensus |
|
| Consumer Confidence |
Tuesday, Dec. 30, |
45.2 | Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates. |
| Weekly Jobless Claims |
Wednesday, Dec. 31, |
None | Moderately Important. A measure of unemployment. An increase in jobless claims may bring lower rates. |
| New Year’s Day | Thursday, Jan. 1 | None | Important. Shortened trading week and likely thin trading conditions may lead to volatility. |
| ISM Index |
Friday, Jan. 2, |
35.4 | Important. A measure of manufacturer sentiment. A large decline may lead to lower mortgage rates. |
The Year Ahead
This year begins in a similar fashion to last year. Last year at this time 30 year fixed rate mortgage interest rates were historically low. Most pundits predicted steady interest rate increases with little or no opportunities for additional refinancing. Mortgage interest rates did spike higher as oil prices and inflationary fears hit all-time highs this past summer. Then the global economic turmoil hit full force and economies across the world stumbled. The housing market continued to weaken and the Fed and US Treasury had to step in to buy mortgage-backed securities in an effort to push mortgage interest rates lower. Now, 30 year fixed rate mortgages remain low and once again future predictions are all over the board.
What will occur in the future, economic recovery or additional weakness will continue to be debated. There is no certainty in predictions. But most of the recent signs show the economy continues to struggle at least in the short-term. Data can be used to support both sides of the debate. What we can be certain of is the fact that until the economy gains some stability, mortgage interest rates are likely to be volatile. Historically, mortgage interest rates seem to improve slowly. In contrast, when rates increase, it is often fast and furious. One negative day often erases a month’s worth of improvements.
It is possible for mortgage interest rates to push lower considering the Fed continues to purchase mortgage bonds. However, we are in unprecedented times. While the Fed is trying to push rates lower there are no guarantees. The Fed isn’t the only player in the mortgage bond market and there are many others buying and selling the securities. Remember that the Fed does not directly dictate that mortgage interest rates will be at a certain percentage. Rates are determined by the supply and demand for mortgage-backed securities. As of late, every time the Fed comes in to purchase mortgage bonds, rates have headed lower, only to jump back up as others sell into the Fed buying.
Only time will tell if the Fed can accomplish the goal. With mortgage interest rates relatively low, capitalizing on current levels protects against future volatility.
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Market Update 12/22/2008
Market Comment
Mortgage bond prices rose last week, which helped mortgage interest rates improve, but only slightly. We saw a huge rally following the Fed rate cut Tuesday. Unfortunately the gains were short-lived and most were erased the following day. Trading remained volatile throughout the remainder of the week. The White House stepped in to help the troubled auto industry Friday, which sent stocks higher that morning at the expense of mortgage and Treasury bonds. For the week, interest rates on government and conventional loans fell by about 1/8 to 1/4 of a discount point.
The Treasury auctions will set the tone for trading this week. Foreign demand for dollar denominated assets will be the focus. The bond market will close early Wednesday ahead of the Christmas holiday Thursday. Trading will resume Friday. This shortened trading week may lead to mortgage interest rate volatility.
LOOKING AHEAD
|
Economic |
Release |
Consensus |
|
| 2-year Treasury Note Auction |
Monday, Dec. 22, |
None |
Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates. |
| Q3 GDP final revision |
Tuesday, Dec. 23, |
Down 0.5% |
Important. The aggregate measure of US economic production. A larger decrease may lead to lower rates. |
| Existing Home Sales |
Tuesday, Dec. 23, |
Down 1.0% |
Low importance. An indication of mortgage credit demand. A significant decrease may lead to lower rates. |
| U of Michigan Consumer Sentiment |
Tuesday, Dec. 23, |
None |
Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates. |
| New Home Sales |
Tuesday, Dec. 23, |
Down 3.0% | Important. An indication of economic strength and credit demand. A decrease may lead to lower rates. |
| 5-year Treasury Note Auction |
Tuesday, Dec. 23, |
None | Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates. |
| Durable Goods Orders | Wednesday, Dec. 24, 8:30 am, et |
Down 3.1% | Important. An indication of the demand for “big ticket” items. Weakness may lead to lower rates. |
| Personal Income and Outlays | Wednesday, Dec. 24, 8:30 am, et |
Income unchanged, |
Important. A measure of consumers’ ability to spend. Weakness may lead to lower mortgage rates. |
Revised GDPThe Gross Domestic Product (GDP) is one the most important reports during any given quarter. GDP is a measure of US economic output and spending. The report is significant in that it provides investors, analysts, traders, and economists with a comprehensive report of the direction of the economy. In addition, it also influences the decisions of Federal Reserve policy makers, Congressional budget employees, and corporate financial planners.
GDP is the sum total of goods and services produced by the United States. The four major components of the GDP release are consumption, investment, government purchases, and net exports. The initial report is often based on incomplete data. Therefore, additional revisions are released over the following two months. There are often substantial differences between the initial release and the revisions. The mortgage-backed security market generally responds favorably to weaker GDP growth.
The revised third quarter gross domestic product data this week has the potential to move mortgage bond prices, especially amid the thin trading that is likely.
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Market Update 12/15/2008
Market Comment
Mortgage bond prices rose last week pushing mortgage interest rates lower. Trading remained volatile with wild swings in both stocks and bonds. The Treasury auction of 3 and 10-year bonds was met with reasonable demand helping to support the overall interest rate markets. The economic data released was within the estimated range and indicated the US economy continues to weaken. For the week, interest rates on government and conventional loans fell by about 3/8 of a discount point. The meeting on Tuesday of the Federal Open Market Committee will be the most important event this week. Look for rates to be potentially volatile Monday as traders position themselves ahead of Tuesday’s meeting.LOOKING AHEAD
|
Economic |
Release |
Consensus |
|
| Industrial Production |
Monday, Dec. 15, |
Down 0.5% | Important. A measure of manufacturing sector strength. Weakness may lead to lower rates. |
| Capacity Utilization |
Monday, Dec. 15, |
75.9% | Important. A figure above 85% is viewed as inflationary. Weakness may lead to lower rates. |
| Consumer Price Index |
Tuesday, Dec. 16, |
Down 1.3%, |
Important. A measure of inflation at the consumer level. Weaker figures may lead to lower rates. |
| Housing Starts |
Tuesday, Dec. 16, |
Down 7.7% | Important. A measure of housing sector strength. Larger than expected decreases may lead to lower rates. |
| Fed Meeting Adjourns |
Tuesday, Dec. 16, |
75 basis point cut | Important. Most expect the Fed to cut rates. Volatility will likely surround the adjournment of this meeting. |
| Leading Economic Indicators |
Thursday, Dec. 18, |
Down 0.5% | Important. An indication of future economic activity. Weakness may lead to lower rates. |
| Philadelphia Fed Survey |
Thursday, Dec. 18, |
None | Moderately important. A survey of business conditions in the Northeast. Weakness may lead to lower rates. |
Fed Meeting
The United States central bank, the Federal Reserve, coordinates the borrowing and lending activities of federally chartered banks. The principal reason the Federal Reserve was created was to reduce severe financial crises. One way of accomplishing this goal is to control the amount of money that flows through the economy. By manipulating the US money supply, the Fed influences inflation, unemployment, and the level of US economic activity. The Fed has a variety of tools that it uses to control the money supply, but its chief policy tool is the manipulation of short-term interest rates.
All eyes will be focused on the Fed meeting Tuesday. Most analysts predict another rate cut as the economy continues to struggle. As of trading late last week, futures contracts showed a greater than 80% chance of a 75 basis point cut.
Keep in mind that a Fed rate cut does not automatically mean mortgage interest rates will improve. The Federal Reserve has direct control over the level of short-term interest rates. The Fed’s influence over longer-term interest rates with rate cuts is less certain. However, the unprecedented recent direct purchasing of mortgage bonds is a strong effort to push longer-term rates lower as well.
Remember, rates are historically favorable. While there is a strong possibility rates could improve, there are no guarantees in these uncertain times. As a reminder, just a few months ago analysts overwhelmingly predicted gas prices would continue to rise. Conditions can change quickly.
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Market Update 12/08/2008
Market Comment
Mortgage bond prices rose last week pushing mortgage interest rates lower. Mortgage bonds were initially helped by reports the Treasury would try to get rates lower. Unfortunately, a lot of the gains seen mid-week were erased Friday following mixed employment figures. Unemployment was not as bad as anticipated and average hourly earnings showed a surprise increase. The payrolls component was bond friendly but it wasn’t enough to overshadow the headline figure. For the week, interest rates on government and conventional loans fell by about 1/8 of a discount point.The retail sales data Friday will be the most important release this week. Look for any additional moves by the Fed, the US Treasury, and legislative developments to also result in mortgage interest rate movements. This will be the last full week of data before the next Fed meeting.LOOKING AHEAD
|
Economic |
Release |
Consensus |
|
| Trade Data |
Thursday, Dec. 11, |
$54 billion deficit |
Important. Affects the value of the dollar. A falling deficit may strengthen the dollar and lead to lower rates. |
| Producer Price Index |
Friday, Dec. 12, |
Down 1.8%, |
Important. An indication of inflationary pressures at the producer level. Weaker figures may lead to lower rates. |
| Retail Sales |
Friday, Dec. 12, |
Down 1.4% |
Important. A measure of consumer demand. Weakness may lead to lower mortgage rates. |
| U of Michigan Consumer Sentiment |
Friday, Dec. 12, |
58.0 |
Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates. |
4.5% Rates Possible?The news is abuzz about the Treasury lowering home loan rates to 4.5% to stem the foreclosure crisis but details have been lacking. The Treasury Department stated it is looking for additional ways to help the struggling housing industry and believes lower rates are needed.
This idea is similar to the November 26th announcement from the Federal Reserve where they indicated the intent to purchase up to $500 billion in mortgage-backed securities from Fannie Mae, Freddie Mac and Ginnie Mae. In addition they would buy another $100 billion in direct debt issued by those firms. The November news caused bond prices to spike higher and forced mortgage rates lower. Just like any commodity, whenever tremendous buying interest exists, prices rise. Mortgage rates fell almost 1/2% in rate following the announcement. However, the following week market forces continued and rates spiked a bit higher from the recent lows.
It is important to remember that there are no details to the Treasury plan as of yet. The Federal Government does not directly dictate home loan rates. Rates are determined by price movements of Mortgage Backed Securities (MBS), which compete for investor funds in the open market. The Treasury can buy mortgage bonds on the open market but remember that they are not the only entity buying and selling these instruments.
The Treasury is in a very tough position in trying to manipulate home loan rates. Creating a new Federal mortgage program could be very risky. How would rates be set, who would qualify, and can the funds be used for purchases and refinances are just some of the questions being asked. The other critical concern is implementing such a program without destroying the current mortgage securities market. Doing so could have the unintended consequence of causing additional economic turmoil.
Rates are not going to 4.5% with the wave of a wand by Hank Paulson or Ben Bernanke. As a matter of fact, the massive borrowing to fund the TARP program has a negative effect on rates. At this time, the announcement still leaves a lot of uncertainty. What we do know is that rates are at historic lows and house prices have moderated setting up a great scenario for people who need to refinance or are looking to buy a home. Waiting for rates to fall to 4.5% may leave people sorely disappointed.
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Market Update 12/01/2008
Market Comment
Mortgage bond prices rose last week pushing mortgage interest rates lower. Trading remained volatile as trading was thin amid the shortened holiday trading sessions. Mortgage bonds rallied nicely following the announcement that the Treasury and the Federal Reserve will spend $800 billion to help the ailing credit markets (details in article below).
For the week, interest rates on government and conventional loans fell by about 1.625 discount points.
The employment report Friday will be the most important data this week. Look for any additional moves by the Fed, the US Treasury, and legislative developments to also result in mortgage interest rate movements.
LOOKING AHEAD
|
Economic |
Release |
Consensus |
|
| Construction Spending |
Monday, Dec. 1, |
Down 0.9% | Low importance. An indication of economic strength. Weakness may lead to lower rates. |
| ISM Index |
Monday, Dec. 1, |
38.00 |
Important. A measure of manufacturer sentiment. Weakness may lead to lower mortgage rates. |
| ADP Employment |
Wednesday, Dec. 3, |
Jobs -173k |
Important. A measure of employment. Weakness in payrolls may bring lower rates. |
| Revised Q3 Productivity |
Wednesday, Dec. 3, |
up 0.9% |
Important. A measure of output per hour. Improvement may lead to lower mortgage rates. |
| Fed “Beige Book” |
Wednesday, Dec. 3, |
None | Important. This Fed report details current economic conditions across the US. Signs of weakness may lead to lower rates. |
| Factory Orders |
Thursday, Dec. 4, |
Down 2.7% |
Important. A measure of manufacturing sector strength. Weakness may lead to lower rates. |
| Employment |
Friday, Dec. 5, |
Jobs -300k Unemp @ 6.8% |
Very important. An increase in unemployment or a large decrease in payrolls may bring lower rates. |
| Consumer Credit |
Friday, Dec. 5, |
2.7B |
Low importance. A significantly larger than expected increase may lead to lower mortgage interest rates. |
$800 Billion
The US Government finally took a needed step to stabilize home prices and help lower mortgage interest rates with the announcement of a new $800 billion spending plan. While rates on Treasury bonds had pushed historically low over the past few weeks, rates on mortgage bonds were way behind. The housing market remains in peril and the demand for mortgage bonds is not as strong as the demand for Treasuries. Fortunately, the Federal Reserve announced it would purchase $500 billion of mortgage-backed securities and another $100 billion of debt from Ginnie Mae, Fannie Mae, and Freddie Mac. This spending is an effort to improve the credit markets so businesses and consumers can get loans. Treasury Secretary Henry Paulson said, “This lack of affordable consumer credit undermines consumer spending and, as a result, weakens our economy.” The Fed will also make $200 billion available to help with the consumer debt market. The initial reaction to the plan was very favorable for mortgage interest rates. The financial markets were relieved that something was done to address the housing industry.
Keep in mind that despite the recent improvements the housing sector still remains troubled. It will likely take more efforts to resolve the credit freeze. Expect more market volatility.
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Market Update 11/24/2008
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Market Update 11/17/2008
Market Comment
Mortgage bond prices rose last week pushing mortgage interest rates lower. Trading was choppy with thin conditions surrounding the holiday. Continued global economic uncertainty remained the focus. Both stocks and bonds exhibited wild swings. The US Treasury modified the earlier $700 billion bailout plan to strengthen financial institutions that offer credit instead of purchasing troubled sub-prime mortgage assets. The change caused additional uncertainty and debate. For the week, interest rates on government and conventional loans remained nearly unchanged.
The consumer price index Wednesday will be the most important event this week. Producer price index and the Fed minutes also have the potential to result in mortgage interest rate volatility.
LOOKING AHEAD
|
Economic |
Release |
Consensus |
|
| Industrial Production |
Monday, Nov. 17, |
Down 0.1% | Important. A measure of manufacturing sector strength. Weakness may lead to lower rates. |
| Capacity Utilization |
Monday, Nov. 17, |
76.6% | Important. A figure above 85% is viewed as inflationary. Weakness may lead to lower rates. |
| Producer Price Index |
Tuesday, Nov. 18, |
Down 1.5%, |
Important. An indication of inflationary pressures at the producer level. Lower inflation may lead to lower rates. |
| Consumer Price Index |
Wednesday, Nov. 19, |
Down 0.8%, |
Important. A measure of inflation at the consumer level. Lower inflation may lead to lower rates. |
| Housing Starts |
Wednesday, Nov. 19, |
Down 4.5% | Important. A measure of housing sector strength. Larger than expected decreases may lead to lower rates. |
| Fed Minutes |
Wednesday, Nov. 19, |
None | Important. Details of the last Fed meeting will be thoroughly analyzed. |
| Leading Economic Indicators |
Thursday, Nov. 20, |
Down 0.6% | Important. An indication of future economic activity. A smaller increase may lead to lower rates. |
| Philadelphia Fed Survey |
Thursday, Nov. 20, |
None | Moderately important. A survey of business conditions in the Northeast. Weakness may lead to lower rates. |
Volatility Likely
The likeliness of mortgage interest rate volatility this week is very high considering the abundance of important economic releases.
Each piece of data has the ability to cause volatility in the financial markets. Floating ahead of the data exposes a person to a tremendous amount of risk. It is possible for interest rates to improve if the data shows continued weakness in the economy with few price pressures. However, any surprises will likely be bad for mortgage interest rates.
Governmental actions in addition to the economic data continue to weigh upon the financial markets. We are really in uncharted territory here with the wobbly underpinnings of the economy. Credit remains tight, as lending has become more stringent. However, there still remain funds available. Real estate transactions continue to take place despite perceptions to the contrary.
The important thing to remember is that even the Treasury officials trying to shore the economy do not know exactly what the future holds. With this in mind, be cautious during these times of economic uncertainty and be ready to lock in the event interest rates spike higher.
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Market Update 11/10/2008
Market Comment
Mortgage bond prices rose last week pushing mortgage interest rates lower. Trading the beginning of the week focused on the election and we saw equities rally in anticipation of the result. The latter portion of the week resumed focus on economic turmoil tied to rising unemployment, tight credit markets, continued housing market concerns, and global economic uncertainty. Trading was choppy with almost a full discount point up and down swing on Thursday alone. For the week, interest rates on government and conventional loans fell by about 3/4 of a discount point.
The retail sales data Friday will be the most important event this week. The additional debt supply that continues to hit the market along with the shortened trading week may also lead to mortgage interest rate volatility.
LOOKING AHEAD
|
Economic |
Release |
Consensus |
|
| 3-year Treasury Note Auction |
Monday, Nov. 10, |
None |
Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates. |
| Veterans Day |
Tuesday, Nov 11 |
Important. Shortened trading week may lead to thin trading conditions and market volatility. | |
| 10-year Treasury Note Auction |
Wednesday, Nov. 12, |
None |
Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates. |
| Trade Data |
Thursday, Nov. 13, |
$56.8 billion deficit |
Important. Affects the value of the dollar. A falling deficit may strengthen the dollar and lead to lower rates. |
| 30-year Treasury Bond Auction |
Thursday, Nov. 13, |
None | Important. Bonds will be auctioned. Strong demand may lead to lower mortgage rates. |
| Retail Sales |
Friday, Nov. 14, |
Down 1.2% | Important. A measure of consumer demand. Weakness may lead to lower mortgage rates. |
| Business Inventories |
Friday, Nov. 14, |
Up 0.2% |
Low importance. An indication of stored-up capacity. A significantly larger increase may lead to lower rates. |
| U of Michigan Consumer Sentiment |
Friday, Nov. 14, |
57.0 | Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates. |
AuctionsUS Treasury bonds do not directly dictate fixed mortgage interest rate pricing however they do have an indirect impact. Both Treasuries and mortgage bonds often track in the same direction but this is not always the case. There are many times that Treasuries and mortgage bonds move inversely.
Despite the overwhelming size of the US economy, foreign investors can still have an effect on moving the financial markets. When foreign economies struggle foreign investors often purchase US based investments including mortgage bonds. This demand usually causes mortgage bond prices to rise and interest rates to fall. This flight to quality buying was one of the factors that helped mortgage interest rates to remain historically low in years past.
There is a real threat that continued global economic turmoil may keep foreign investors from purchasing mortgage bonds in the future. The Treasury auctions this week will be important in determining the current appetite of foreign investors for dollar denominated securities. If this week’s auctions are poorly bid mortgage bond prices could fall pressuring mortgage interest rates higher.
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Market Update 11/03/2008
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