Archive for March 2011
MARKET COMMENT Mortgage bond prices fell last week pushing mortgage interest rates higher. Stocks generally showed strength throughout the week, which didn’t help mortgage bonds. Reports of Japan stabilizing their nuclear facilities resulted in a reversal of the earlier flight to quality buying of US debt. New home sales data came in weaker than expected which helped rates bounce back a bit mid-week. Unfortunately Fed Official Plosser’s comments Friday afternoon sent bonds falling and rates higher. Plosser indicated monetary policy will soon need to reverse course and that the preferred exit strategy would raise rates and reduce the Fed’s balance sheet concurrently. Mortgage bonds ended the week worse by about 3/4 of a discount point.
The Treasury will auction 2-year notes on Monday, 5-year notes on Tuesday, and 7-year notes on Wednesday.
- Personal Income and Outlays; March 28; Consensus Estimate Up 0.4%, Up 0.6% Important. A measure of consumers’ ability to spend. Weakness may lead to lower mortgage rates.
- PCE Core Inflation; March 28; Consensus Estimate Up 0.2%; Important. A measure of price increases for all domestic personal consumption. Weaker figure may help rates improve.
- Consumer Confidence; March 29; Consensus Estimate 70; Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.
- ADP Employment; March 30; Consensus Estimate 180k; Important. An indication of employment. Weakness may bring lower rates.
- Weekly Jobless Claims; March 31; Consensus Estimate 365k; Important. An indication of employment. Higher claims may result in lower rates.
- Factory Orders; March 31, Consensus Estimate Up 2.4%; Important. A measure of manufacturing sector strength. Weakness may lead to lower rates.
- Employment; April 1; Consensus Estimate 8.9%, 160k; Very important. An increase in unemployment or weakness in payrolls may bring lower rates.
- ISM Index; April 1; Consensus Estimate 61; Important. A measure of manufacturer sentiment. A large decline may lead to lower mortgage rates.
INCOME & OUTLAYS The personal income and outlays release is a monthly report issued by the Bureau of Economic Analysis (BEA). The data is important because it is thought to provide a solid indication of future consumer demand. The personal income component is primarily a measure of wages and salaries. The outlays component is primarily a measure of spending on goods and services. Together the figures provide analysts valuable insight into consumer economic standing and consumption.
The prior release showed an increase in wages and salaries. Some of that was attributed to a cut in the payroll tax. If that trend reverses future weakness could adversely affect consumer spending and the entire US economy. Decreased or stagnant wages coupled with tighter borrowing restrictions make it difficult for consumers to spend money. It is important to note that no single economic indicator can consistently predict the future of the economy. However, the personal income and outlays report is a closely watched release. The consumer remains a vital component of the US economy.
The release this week has the potential to move the financial markets. Now is a good time to take advantage of mortgage interest rates at their current levels to avoid market volatility.
MARKET COMMENT Mortgage bond prices rose last week helping mortgage interest rates improve. Flight to safety buying of US debt instruments helped rates improve as the Japanese stock market struggled. Oil prices eased a bit early in the week. However, clashes in Saudi Arabia Thursday sent prices back above $100/barrel. Core inflation readings remained relatively in check however the headline figures exceeded expectations. The Fed’s recent statement noted “short-term” increases in food and energy prices but indicated the spikes are not expected to spill over to the core. Despite the mixed data mortgage bonds ended the week better by about 1/4 of a discount point.
The weekly jobless data and Treasury auction will receive a lot of attention this week amid continued global economic uncertainty.
• Existing Home Sales; March 21; Consensus Estimate Down 6%, 5.05M; Low importance. An indication of mortgage credit demand. Significant weakness may lead to lower rates.
• New Home Sales; March 23; Consensus Estimate Unchanged, 288k; Important. An indication of economic strength and credit demand. Weakness may lead to lower rates.
• Weekly Jobless Claims; March 24; Consensus Estimate 384k; Important. An indication of employment. Higher claims may result in lower rates.
• Durable Goods Orders; March 24; Consensus Estimate Up 0.8%; Important. An indication of the demand for “big ticket” items. Weakness may lead to lower rates.
• 10YR TIPS Treasury Note Auction; March 24; Important. $11 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates.
• Q4 GDP 3rd estimate; March 25; Consensus Estimate 2.9%; Very important. The aggregate measure of US economic production. Weakness may lead to lower rates.
• U of Michigan Consumer Sentiment; March 25; Consensus Estimate 68; Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.
EXISTING HOME SALES The National Association of Realtors releases existing home sales data near the end of each month. The data is derived from a sampling of MLS data across the nation. The release shows the current sales rate for existing single-family, coops, and condos. A national figure and 4 regional figures are provided. The NAR Chief Economist indicated in February the current methodology used to calculate the benchmarks will be revised in the near future. There is no timetable for the revision.
The housing market is a critical component of the US economy. A house is usually one of the largest assets a consumer owns. Housing usually leads market recoveries. Unfortunately the housing industry remains in transition as the effects of massive foreclosures still weigh heavily. Most analysts agree that the housing market will remain wobbly for some time. The important thing to remember is that housing is a “local” issue. The maxim about housing being strongly tied to “location, location, location” still holds true. The overall housing market shows signs of trouble while there are areas that don’t follow the overall trend.
While the data usually isn’t a big market mover it still has the potential to result in some market volatility. The release usually includes remarks from the Chief Economist regarding prices, inventory, and interest rates.
MARKET COMMENT Mortgage bond prices rose last week helping mortgage interest rates improve. The US Treasury auctions generally showed decent foreign demand for US debt instruments. Oil prices fluctuated which continued to cause market volatility. Weekly jobless claims came in higher than expected which sent mortgage interest rates lower as stocks struggled. Retail sales came in as expected while the inflation component of the Michigan consumer sentiment survey shocked to the upside. Despite the mixed data mortgage bonds ended the week better by about 1/2 of a discount point.
The Fed meeting Tuesday will take center stage this week and set the tone for the days ahead. The inflation data that follows has the real potential to cause mortgage interest rate volatility.
- Fed Meeting Adjourns; March 15; Consensus Estimate No rate change; Important. Few expect a rate change, but some volatility may surround the adjournment of the meeting.
- Housing Starts; March 16; Consensus Estimate 550k; Important. A measure of housing sector strength. Weakness may lead to lower rates.
- Producer Price Index; March 16; Consensus Estimate Up 0.6%, Core up 0.2%; Important. An indication of inflationary pressures at the producer level. Lower figures may lead to lower rates.
- Weekly Jobless Claims; March 17; Consensus Estimate 380k; Important. An indication of employment. Higher claims may result in lower rates.
- Consumer Price Index; March 17; Consensus Estimate Up 0.4%, Core up 0.1%; Important. A measure of inflation at the consumer level. Weaker figures may lead to lower rates.
- Industrial Production; March 17; Consensus Estimate Up 0.6%; Important. A measure of manufacturing sector strength. A lower than expected increase may lead to lower rates.
- Capacity Utilization; March 17; Consensus Estimate 76%; Important. A figure above 85% is viewed as inflationary. Weakness may lead to lower rates.
- Leading Economic Indicators; March 17; Consensus Estimate Up 0.4%; Important. An indication of future economic activity. A smaller increase may lead to lower rates.
- Philadelphia Fed Survey; March 17; Consensus Estimate 35; Moderately important. A survey of business conditions in the Northeast. Weakness may lead to lower rates.
PRODUCER PRICE INDEX The producer price index is a measure of prices at the producer level and is important because it is the first inflation report to be released each month. Investors are typically able to gain an initial indication of inflationary pressures from the release. If producer prices are increasing, there is a tendency for producers to pass the increases on to consumers in the form of higher priced goods. It is important to note that the PPI is only a measure of goods, while the consumer price index is a measure of goods and services. It is possible for the price of goods to remain stable, while the price of services increases. In this scenario PPI would do little to warn of a change in inflationary pressures, while the CPI report would provide an indication of the inflationary effects of the service component. This distinction between the two reports shows why most analysts view the CPI as a more accurate indicator of inflation. Nevertheless, market participants still gain valuable insight into potential volatility in the financial markets from the PPI release. Be cautious heading into the inflation data this week.