Market Comment for Week of April 19, 2010…

MARKET COMMENT   Mortgage bond prices rose last week, which helped mortgage interest rates improve. Oil prices continued to fall off the beginning of the week. Fortunately mortgage bonds rallied nicely amid the tame inflation environment. Unfortunately that trend reversed mid week as oil prices spiked tied to a report which indicated supplies declines. 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. 

Leading economic indicators data Monday 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. 

LOOKING AHEAD 

  • Leading Economic Indicators; April 19th; Consensus Estimate Up 1.0% Important; An indication of future economic activity. Weakness may lead to lower rates.
  • Weekly Jobless Claims; April 22nd; Consensus Estimate 465K Important;  An indication of employment. An increase in jobless claims may bring lower rates.
  • Producer Price Index; April 22nd; Consensus Estimate Up 0.5%; Core up 0.1% Important. An indication of inflationary pressures at the producer level. Decreases may lead to lower rates.
  • Existing Home Sales; April 22nd; Consensus Estimate 5.3m Low importance; An indication of mortgage credit demand. Significant weakness may lead to lower rates.
  • Durable Goods Orders; April 23rd; Consensus Estimate Unchanged Important; An indication of the demand for “big ticket” items. Weakness may lead to lower rates.
  • New Home Sales; April 23rd; Consensus Estimate Up 1.9% Important; An indication of economic strength and credit demand. Weakness may lead to lower rates.

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 they are extremely volatile. The volatility of the data usually is 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 are many times in the past 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 very volatile and 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. 

Source:  Courtesy of Todd Kabel, US Bank, Nashville, Tennessee