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Market Comment for Week of September 20, 2010…

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MARKET COMMENT   Mortgage bond prices rose last week pushing interest rates slightly lower. Tame inflation readings helped to counter the better than expected weekly jobless figures. Core producer and consumer price data was generally bond friendly. The Philadelphia Fed report showed tremendous weakness in that region. Industrial product and capacity use data also came in below estimates, which helped rates improve. 

Rates fell by about 3/8 of a discount point for the week. 

The Fed meeting Tuesday will be the most important even this week. The housing data the beginning and end of the week can result in mortgage interest rate movements. Expect more volatility, as stocks and bonds are likely to continue their back and forth trading pattern. 


  • Housing Starts; Sept. 21; Consensus Estimate Down 0.7%; Important. A measure of housing sector strength. Larger than expected decreases may lead to lower rates.
  • Weekly Jobless Claims; Sept. 23; Consensus Estimate 440k; Important. An indication of employment. Higher claims may result in lower rates.
  • Existing Home Sales; Sept. 23; Consensus Estimate Down 7.3%; Low importance. An indication of mortgage credit demand. A significant decrease may lead to lower rates.
  • Leading Economic Indicators; Sept. 23; Consensus Estimate Up 0.1%; Important. An indication of future economic activity. Weakness may lead to lower rates.
  • Durable Goods Orders; Sept. 24; Consensus Estimate Down 2.2%; Important. An indication of the demand for “big ticket” items. Weakness may lead to lower rates.
  • New Home Sales; Sept. 24; Consensus Estimate Down 8%; Important. An indication of economic strength and credit demand. Weakness may lead to lower rates.

INFLATION   Inflation is an increase in the level of prices of goods and services over a period of time. Signs of inflation do not generally bode well for mortgage bonds. Inflation erodes the value of fixed income securities generally causing bond prices to fall and interest rates to rise. Tame inflation readings are usually well received. 

The mortgage bond market received mixed inflation data last week. The producer price index, a major gauge of inflation at the producer level, rose 0.4%, higher than the expected 0.3% increase. However, the core rate, which excludes volatile food and energy, rose 0.1% as expected. 

The relatively flat core producer price figure helps reinforce the belief that inflation remains in check. However, the higher than expected producer price figure supports the opposite conclusion. The consumer price release followed the same pattern. Consumer prices rose 0.3%, higher than the expected 0.2% increase. However, the core, which excludes volatile food and energy prices, was unchanged and lower than the expected 0.1% increase. Tame core inflation readings are generally good for fixed income securities such as mortgage bonds. We saw an example of this Friday morning as bond prices rose and interest rates fell. 

If future data echoes that of the core consumer price data, then it is a real possibility that mortgage interest rates can remain low. However, if future data shows inflation spikes be ready for a jump in rates. Floating in this environment is risky. The good news is that mortgage interest rates currently are historically favorable. 

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


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