WR Starkey Mortgage News Market Comment - Week of March 1st, 2010 Mortgage bond prices rebounded last week pushing mortgage interest rates lower. The majority of the data came in bond friendly. Weaker than expected consumer confidence data Tuesday helped mortgage interest rates improve. The Treasury auctions showed decent foreign demand. The gross domestic product price deflator component showed a smaller price increase than expected while the consumer spending component also came in weaker than expected. Existing home sales fell a surprising 7.1%, considerably weaker than the expected 1% increase. Rates fell about 3/4 of a discount point for the week. The employment report Friday morning will take center stage this week. Until then, look for the PCE inflation data to set the tone for the beginning of the week and the ADP employment report to set the tone for the mid portion of the week. -------------------------------------------------------------------------------- Economic Factors Economic Indicator Release Date Time Consensus Estimate Analysis Personal Income and Outlays Monday, March 1, 2010 Income up 0.4%, Outlays up 0.4% Important. A measure of consumers' ability to spend. Weakness may lead to lower mortgage rates. PCE Price Index Monday, March 1, 2010 Up 0.1% Important. An indication of inflationary pressures. Decreases may lead to lower rates. Construction Spending Monday, March 1, 2010 Down 0.6% Low importance. An indication of economic strength. A significant decrease may lead to lower rates. ISM Index Monday, March 1, 2010 58.0 Important. A measure of manufacturer sentiment. A large decline may lead to lower mortgage rates. ADP Employment Wednesday, March 3, 2010 -15k Important. An indication of employment. Weakness may bring lower rates. Fed "Beige Book" Wednesday, March 3, 2010 None Important. This Fed report details current economic conditions across the US. Signs of weakness may lead to lower rates. Revised Q4 Productivity Thursday, March 4, 2010 Up 6.2% Important. A measure of output per hour. Improvement may lead to lower mortgage rates. Employment Friday, March 5, 2010 Unemp. @ 9.8%, Payrolls -25k Very important. An increase in unemployment or a large decrease in payrolls may bring lower rates. Fundamental Week The abundance of fundamental data this week provides a good opportunity for mortgages to improve. If the data shows weakness in the economy with little or no inflationary pressures then it is possible for mortgage bonds to rally resulting in mortgage interest rate decreases. However, if the data shows that the economy is rebounding or any significant signs of inflation, mortgage bonds may fall pushing mortgage interest rates higher. Mortgage interest rates remain favorable. Now is a great time to avoid the uncertainty surrounding continued market volatility. Market Comment - Week of February 22nd, 2010 Mortgage bond prices fell last week pushing mortgage interest rates considerably higher. The bond market took a hit as inflation concerns emerged after the stronger than expected producer price index data. Producer prices surged in January amid higher energy costs to almost double expectations. The Fed made a surprise rate hike to the discount rate that also resulted in mortgage rate increases. The only positive was the tame consumer inflation reading Friday morning but we were unable to rebound from the earlier losses. Unfortunately rates rose over a full discount point for the week. The consumer confidence data Tuesday will set the tone for trading this week. New home sales, weekly jobless claims, and the gross domestic product data also may move the financial markets. The Treasury will auction $118B in 2/5/7-year notes starting Tuesday. The additional supply may cause interest rate volatility. -------------------------------------------------------------------------------- Economic Factors Economic Indicator Release Date Time Consensus Estimate Analysis Consumer Confidence Tuesday, Feb. 23, 2010 55.0 Important. An indication of consumers' willingness to spend. Weakness may lead to lower mortgage rates. 2-year Treasury Note Auction Tuesday, Feb. 23, 2010 None Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates. New Home Sales Wednesday, Feb. 24, 2010 Up 2.3% Important. An indication of economic strength and credit demand. Weakness may lead to lower rates. 5-year Treasury Note Auction Wednesday, Feb. 24, 2010 None Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates. Durable Goods Orders Thursday, Feb 25, 2010 Up 1.5% Important. An indication of the demand for "big ticket" items. Weakness may lead to lower rates. Weekly Jobless Claims Thursday, Feb 25, 2010 460k Important. Higher jobless claims may lead to lower mortgage interest rates. 7-year Treasury Note Auction Thursday, Feb 25, 2010 None Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates. Q4 GDP second estimate Friday, Feb. 26, 2010 Up 5.6% Important. The aggregate measure of US economic production. Weakness may lead to lower rates. Fed Action Causes Uncertainty The Federal Reserve caught market participants by surprise with their 25 basis point discount rate hike last week. While analysts were split on whether the Fed would raise rates this year, that question has now been answered. The move resulted in volatility in most of the US financial markets. The discount rate is the interest rate charged to commercial banks on loans they receive from the Fed. The rate hike is an effort to pull back the aid provided by extraordinary low rates amid the global economic decline. The Fed specifically noted the move was needed "in light of continued improvement in financial market conditions." Many analysts noted the earlier warnings from Fed Bernanke that rate hikes were coming but very few, if any, expected the move this soon. While the rate hike resulted in mortgage bond price weakness in the short-term, the long-term outlook is less certain. Most analysts believe inflation remains in check, but at the same time the Fed purchasing of MBS will soon be over. A cautious approach to "float" and "lock" decisions is prudent taking the current market conditions into consideration. Market Comment - Week of February 15th, 2010 Mortgage bond prices fell last week pushing mortgage interest rates slightly higher. The early part of the week saw a reversal of the recent flight to quality buying of US investments as talks hinted of a Greek bailout by Germany. German Chancellor Merkel dashed those hopes late in the week causing turmoil in the European Union. As a result global investor funds returned to the US bond market. Rates improved Friday morning, which helped recover some of the earlier losses. Unfortunately rates still rose overall for the week by about 1/8 of a discount point. The consumer price index Friday will be the most important release this week. The other inflation data and the shortened trading week may also factor into mortgage interest rate changes. The typical back and forth movements of stocks and bonds will also likely take place as uncertainty continues to permeate the financial markets. -------------------------------------------------------------------------------- Economic Factors Economic Indicator Release Date Time Consensus Estimate Analysis Presidents Day Monday, Feb. 15, 2010 None Important. Extended holiday weekend may result in volatility when trading resumes Tuesday. Housing Starts Wednesday, Feb. 17, 2010 Up 0.4% Important. A measure of housing sector strength. Weakness may lead to lower rates. Industrial Production Wednesday, Feb. 17, 2010 Up 0.8% Important. A measure of manufacturing sector strength. Weakness may lead to lower rates. Capacity Utilization Wednesday, Feb. 17, 2010 72.2% Important. A figure above 85% is viewed as inflationary. Weakness may lead to lower rates. Producer Price Index Thursday, Feb. 18, 2010 Up 0.7%, Core up 0.1% Important. An indication of inflationary pressures at the producer level. Lower figures may lead to lower rates. Leading Economic Indicators Thursday, Feb. 18, 2010 Up 0.5% Important. An indication of future economic activity. Weakness may lead to lower rates. Philadelphia Fed Survey Thursday, Feb. 18, 2010 17.5 Moderately important. A survey of business conditions in the Northeast. Weakness may lead to lower rates. Consumer Price Index Friday, Feb. 19, 2010 Up 0.3%, Core up 0.2% Important. A measure of inflation at the consumer level. Lower figures may lead to lower rates. Globalization Economic globalization is the increasing interdependence of national economies through trade, finances, and technology. While economists debate the pros and cons of globalization, the fact remains that globalization is not new and continues to expand. As a driving force in the global economy, the US often benefits when foreign economies struggle. A prime example is the concern of a Greek economic collapse. Unlike a corporation, a country cannot file for bankruptcy when they can't make debt payments. One remedy in situations like this has been restructuring the debt, which is mired in uncertainty for investors. The bigger global problem is the fear that a default by one member of the European Union could ripple throughout all the other eurozone countries. In times like this, investors often move funds to safe havens in what is called a "flight to quality." This is exactly what we saw Friday morning as US debt instruments saw an influx of foreign investment. Bond prices rose which caused mortgage interest rates to fall that morning. From a short-term perspective that is great for homebuyers and those refinancing. The long-term effects are less certain. A reversal could easily take place if the EU can prevent a default. This is a prime reason to take advantage of rate dips when they occur. Market Comment - Week of February 8th, 2010 Mortgage bond prices rose last week pushing mortgage interest rates slightly lower. Reignited fear of a global economic meltdown sent money into the mortgage bond market in flight to quality buying. The news reports were permeated with worries about European debt payment defaults. Greece and a few other countries were noted as specific concerns. The employment report Friday morning was mixed with unemployment not as bad as expected but a larger than expected drop in payrolls. For the week interest rates fell by about 1/4 of a discount point. The record debt issuance continues with billions of dollars worth of notes and bonds set for auction this week. Strong foreign demand will likely help the entire bond market. With the recent "revisions" to employment data the weekly jobless claims data will carry a bit more weight than usual. Retail sales figures will be the headline figure this week. -------------------------------------------------------------------------------- Economic Factors Economic Indicator Release Date Time Consensus Estimate Analysis 3-year Note Auction Tuesday, Feb. 9, 2010 None Important. $40 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates. Trade Data Wednesday, Feb. 10, 2010 $35 billion deficit Important. Affects the value of the dollar. A falling deficit may strengthen the dollar and lead to lower rates. 10-year Note Auction Wednesday, Feb. 10, 2010 None Important. $25 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates. Weekly Jobless Claims Thursday, Feb. 11, 2010 475k Important. An indication of the employment situation. Higher claims could lead to lower rates. Retail Sales Thursday, Feb. 11, 2010 Up 0.4% Important. A measure of consumer demand. A smaller than expected increase may lead to lower mortgage rates. Business Inventories Thursday, Feb. 11, 2010 Up 0.4% Low importance. An indication of stored-up capacity. A significantly larger increase may lead to lower rates. 30-year Bond Auction Thursday, Feb. 11, 2010 None Important. $16 billion of bonds will be auctioned. Strong demand may lead to lower mortgage rates. U of Michigan Consumer Sentiment Friday, Feb. 12, 2010 74.6 Important. An indication of consumers' willingness to spend. Weakness may lead to lower mortgage rates. Employment Revision The employment report is one of the biggest, if not the biggest, data releases each month. Last week's employment report came with more twists than usual. Unemployment came in at 9.7%, a sharp drop from the expected 10% mark. Payrolls fell 20,000, weaker than the expected 15,000 increase. This divergence happens from time to time with the data derived from two completely different surveys. One piece of the report that caused major concern was the annual benchmark update, which showed the economy lost 930,000 more jobs than previously estimated in the 12 months ended March 2009. The revised number was very large and basically indicates 2009's employment situation was worse than most thought. A few things that called into question the accuracy of the data influenced the report. Some analysts argued the hiring of temporary census workers threw the figures off. The data was received with a lot of uncertainty and resulted in some wild market swings immediately after the release. The initial reaction sent bond prices lower and interest rates higher. However, the bond market rebounded a bit after digesting the data for an hour or so. This was a prime example of the volatility that often occurs with major data releases. Market Comment - Week of January 25th, 2010 Mortgage bond prices rose last week pushing mortgage interest rates lower. The bond market rallied following crumbling stocks as the DOW fell 213 points Thursday. Weekly jobless claims came in higher than expected causing unemployment fears to cast a shadow over the state of the economy. In a consumer based economy it is difficult for people to spend money without a job. The producer price index was mixed as the headline figure was higher than expected but the core was lower than expected. For the week interest rates fell by about 1/4 of a discount point. The Fed meeting Wednesday will be the most important event this week. The Treasury will continue the record auctions with 2-year notes on Tuesday, 5-year notes on Wednesday, and 7-year notes on Thursday. If foreign demand remains decent rates should hold near current levels. However, a drop in foreign demand will likely cause rates to head higher. -------------------------------------------------------------------------------- Economic Factors Economic Indicator Release Date Time Consensus Estimate Analysis Existing Home Sales Monday, Jan. 25, 2010 Down 8.3% Low importance. An indication of mortgage credit demand. A significant decrease may lead to lower rates. Consumer Confidence Tuesday, Jan. 26, 2010 52.9 Important. An indication of consumers' willingness to spend. Weakness may lead to lower mortgage rates. New Home Sales Wednesday, Jan. 27, 2010 Up 1.9% Important. An indication of economic strength and credit demand. A decrease may lead to lower rates. Fed Meeting Adjourns Wednesday, Jan. 27, 2010 No rate adjustment Important. Few expect the Fed to change rates, but some volatility may surround the adjournment of this meeting. Durable Goods Orders Thursday, Jan. 28, 2010 Up 2.0% Important. An indication of the demand for "big ticket" items. Weakness may lead to lower rates. Q4 Advance GDP Friday, Jan. 29, 2010 Up 4.5% Very important. The aggregate measure of US economic production. Weakness may lead to lower rates. Q4 Employment Cost Index Friday, Jan. 29, 2010 Up 0.4% Very important. A measure of wage inflation. Weakness may lead to lower rates. U of Michigan Consumer Sentiment Friday, Jan. 29, 2010 73.0 Important. An indication of consumers' willingness to spend. Weakness may lead to lower mortgage rates. Fed Focus 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 Federal Open Market Committee meeting Wednesday. No rate changes are expected. However, many analysts and traders believe rate hikes are on the horizon. Futures contracts show traders are pricing in a 77% chance the Fed will raise rates by November. Others argue those positions will be wrong because the economy isn't strong enough for the Fed to change rates. A cautious approach to float/lock decisions is prudent heading into the Fed meeting this week. Be prepared for potential market volatility. Market Comment - Week of January 18th, 2010 Mortgage bond prices rose last week pushing mortgage interest rates lower. The bond market rallied nicely Tuesday following moves by China to curb growth. Oil prices fell almost immediately providing a much-needed reprieve following the recent run up in prices tied to severe cold weather across the US. The consumer price index data showed tame inflation, which also helped rates improve. For the week interest rates fell by about 1/2 of a discount point. The inflation data Wednesday will be the most important economic release this week. Signs of stronger than expected inflation would not be good for mortgage interest rates. The bond market is closed Monday in honor of the Martin Luther King holiday. Interest rates may be volatile Tuesday as trading resumes following the extended holiday weekend. -------------------------------------------------------------------------------- Economic Factors Economic Indicator Release Date Time Consensus Estimate Analysis Martin Luther King Day Monday, Jan. 18, 2010 Important. Shortened trading week may result in volatility when trading resumes Tuesday. Producer Price Index Wednesday, Jan. 20, 2010 Unchanged, Core up 0.2% Important. An indication of inflationary pressures at the producer level. Weaker figures may lead to lower rates. Housing Starts Wednesday, Jan. 20, 2010 Up 1.0% Important. A measure of housing sector strength. Weakness may lead to lower rates. Weekly Jobless Claims Thursday, Jan. 21, 2010 445k Moderately Important. An indication of employment. Higher figures may result in lower rates. Leading Economic Indicators Thursday, Jan. 21, 2010 Up 0.5% Important. An indication of future economic activity. Weakness may lead to lower rates. Philadelphia Fed Survey Thursday, Jan. 21, 2010 18.2 Moderately important. A survey of business conditions in the Northeast. Weakness may lead to lower rates. LEI The index of leading economic indicators (LEI) is a weighted average of eleven economic variables that "lead" the business cycle. It is constructed for forecasting future aggregate economic activity. The eleven variables that make up the LEI measure workers' hours, initial unemployment claims, new factory orders, vendor performance, contracts and orders for plant and equipment, new housing permits, changes in unfilled orders, prices of raw materials, stock prices, money supply and consumer expectations. Each of the variables that comprise the index has a tendency to predict (or lead) economic activity. For example, new orders for manufactured goods, new orders for plant and equipment, and new building permits are all direct measures of the amount of future production being planned for the economy. Analysts monitor the LEI in an effort to predict future economic growth. When the LEI report is up, mortgage market participants expect credit demand to increase and inflationary pressures to build. Thus, when the LEI report is rising, interest rates tend to rise as well. The LEI report is a valuable forecasting device that correctly predicts most economic turning points. The percentage change in the LEI is reported monthly and is an indication of the activity that will occur within the next three to six months. The LEI tends to turn down before peaks in the business cycle. Continuous declines are generally accepted as evidence that a recession continues. Nine of the eleven components that make up this index are known before the release of the report, so the index is easy for economists to predict. Thus, although this is important predictive data for market participants, surprises are not common with the release of this data. Market Comment - Week of January 4th, 2010 Mortgage bond prices fell last week pushing mortgage interest rates higher. The bond market was choppy most of the week as thin trading conditions magnified movements. We started the week with rates heading higher Monday. Fortunately there was a bit of a rally Tuesday and Wednesday as the Treasury auctions were decent. Those gains were short-lived as the weekly jobless claims figure wasn't as bad as expected. The bond market closed early Thursday and was closed the entire day Friday. For the week interest rates rose by about 1/4 of a discount point. ISM Index data will set the tone for trading this week. The employment report will be the most important release but it doesn't arrive until Friday. This will be the first full week of trading this year. It will be interesting to see how traders react to the recent spike in rates following the various shortened trading sessions. -------------------------------------------------------------------------------- Economic Factors Economic Indicator Release Date Time Consensus Estimate Analysis Construction Spending Monday, Jan. 4, 2010 Down 0.5% Low importance. An indication of economic strength. Weakness may lead to lower rates. ISM Index Monday, Jan. 4, 2010 54.0 Important. A measure of manufacturer sentiment. Weakness may lead to lower mortgage rates. Factory Orders Tuesday, Jan. 5, 2010 Up 0.5% Important. A measure of manufacturing sector strength. Weakness may lead to lower rates. ADP Employment Wednesday, Jan. 6, 2010 -75k Important. A measure of employment. A larger than expected decrease in jobs may bring lower rates. Employment Friday, Jan. 8, 2010 Unemp. @ 10%, Payrolls unchanged Very important. An increase in unemployment or a large decrease in payrolls may bring lower 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 little or no opportunities for additional refinancing. Mortgage interest rates did spike higher from time to time throughout the year but overall the Fed did an excellent job of keeping rates in check. Unfortunately now the Fed's $1.25 trillion mortgage backed securities (MBS) purchasing program is nearing the end and the future remains uncertain. The good news is that 30 year fixed rate mortgages remain low but 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. 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 week of positive improvements. It is possible for mortgage interest rates to push lower considering the Fed still has a few hundred billion dollars of MBS purchasing left. However, we are in unprecedented times. The Fed has clearly signaled they want rates to remain low but also want to exit the market. 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. The Fed kept rates in check for 2009. The big unknown is how they will exit the market without causing major disturbances this year. While there have been signs of improvement in the housing sector, the last thing we need is higher rates. Without the Fed buying mortgage bonds rates may very well head considerably higher. Now is a great time to take advantage of favorable rates.