MARKET COMMENT Mortgage bond prices started the week in negative territory. Those losses were short-lived as trading was thin and choppy with continued large market swings. There were few data releases. The Treasury auctions showed relatively strong foreign demand for US debt instruments, which helped carry over to the mortgage bond market Wednesday afternoon. Weekly jobless claims came in better than expected which was not good for bonds early Thursday morning. Fortunately mortgage bonds ended the week positive by about 1/2 of a discount point.
The employment report will be the most important release this week. This data will set the tone for trading this month. We ended last year with considerable volatility and this is expected to continue for some time.
- Construction Spending; Jan. 3; Consensus Estimate Up 0.2%; Low importance. An indication of economic strength. Significant weakness may lead to lower rates.
- ISM Index; Jan. 3; Consensus Estimate 57; Important. A measure of manufacturer sentiment. Weakness may lead to lower mortgage rates.
- Factory Orders; Jan. 4; Consensus Estimate Down 0.5%; Important. A measure of manufacturing sector strength. Weakness may lead to lower rates.
- ADP Employment; Jan. 5; Consensus Estimate 75k; Important. An indication of employment. Weakness may bring lower rates.
- Weekly Jobless Claims; Jan. 6; Consensus Estimate 400k; Important. An indication of employment. Higher claims may result in lower rates.
- Employment; Jan. 7; Consensus Estimate 9.8%, Payrolls +110k; Very important. An increase in unemployment or a large decrease in payrolls may bring lower rates.
- Consumer Credit; Jan. 7; Consensus Estimate Down $6.5b; Low importance. A significantly higher than expected figure may lead to lower mortgage interest rates.
THE YEAR AHEAD The future of the economy, 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 remain 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. Of course even that maxim was tested the last few months of last year as market swings of 1/2 a discount point both up and down were often seen in very short spans of time.
It is possible for mortgage interest rates to push lower considering the Fed still wants to keep rates relatively low. However, we are in unprecedented times and we have seen rates jump off the lows from last year. The Fed isn’t the only player in the financial markets and there are many others buying and selling securities. Remember that the Fed does not directly dictate that mortgage interest rates will be at a certain rate. Rates are determined by the supply and demand for mortgage-backed securities.
Despite spikes near the end of 2010, the Fed kept rates low. The big unknown is how things will play out this year. Now is a great time to take advantage of mortgage interest rates at these still historically favorable levels.