MARKET COMMENT Mortgage bond prices got crushed the beginning of last week pushing rates significantly higher. Increased inflation fears tied to the Fed’s quantitative easing (QE2) and stronger than expected data led to an increase in mortgage interest rates. Retail sales and producer price data were higher than expected. Fortunately the bond market became so oversold that buyers emerged and mortgage bonds rebounded Thursday afternoon and Friday. Even with the bounce back we were still negative on the week by about 5/8 of a discount point.
Look for the possibility of volatility amid likely thin trading conditions and a shortened trading week. The bond market will close early Thursday afternoon and will be closed the entire day Friday in observance of the Christmas Holiday.
- Q3 GDP third estimate; Dec. 22; Consensus Estimate Up 2.6%; Important. The aggregate measure of US economic production. Weakness may lead to lower rates.
- Existing Home Sales; Dec. 22; Consensus Estimate 4.65m; Low importance. An indication of mortgage credit demand. Significant weakness may lead to lower rates.
- Personal Income and Outlays; Dec. 23; Consensus Estimate Up 0.2%, Up 0.4%; Important. A measure of consumers’ ability to spend. Weakness may lead to lower mortgage rates.
- PCE Core Inflation; Dec. 23; Consensus Estimate Up 0.1%; Important. A measure of price increases for all domestic personal consumption. Weaker figure may help rates improve.
- Durable Goods Orders; Dec. 23; Consensus Estimate Down 0.8%; Important. An indication of the demand for “big ticket” items. Weakness may lead to lower rates.
- Weekly Jobless Claims; Dec. 23; Consensus Estimate 455k; Important. An indication of employment. Higher claims may result in lower rates
- U of Michigan Consumer Sentiment; Dec. 23; Consensus Estimate 73.7; Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.
- New Home Sales; Dec. 23; Consensus Estimate 300k; Important. An indication of economic strength and credit demand. Weakness may lead to lower rates.
GAS PRICES With gasoline prices hovering around the $3/gallon mark and oil prices in the upper $80/barrel range the fear of continued energy price increases is ever present. Oil prices remain high amid a slight rebound in the US economy and increased global demand. Many foreign nations blame the rising prices on a weaker US dollar. Higher energy costs are generally viewed as evidence of inflation. Inflation erodes the value of fixed income investments such as mortgage bonds causing prices to fall and rates to rise.
The markets seem convinced that the demand for oil will continue to grow as economies recover across the globe. However, these predictions are not a given. OPEC increased output in the third quarter but prices continued to rise. The world economies are still struggling and a spike in energy prices could lead to severe economic turmoil. However, predictions are tenuous at best, the future is uncertain, and market sentiment changes daily.
The important thing to remember is that rates remain historically favorable. Now is a great time to avoid the uncertainty surrounding continued market volatility and the possibility of higher mortgage interest rates.