MARKET COMMENT Mortgage bond prices rose last week pushing mortgage interest rates lower. The data was mixed. The headline retail sales figure was slightly weaker than expected while the ex-autos figure was higher than expected. Producer prices rose 0.7%, weaker than the expected 1% increase however the core, which excludes volatile food and energy prices, rose a higher than expected 0.3%. Tame core consumer inflation data Friday morning helped end the week on a positive note despite higher than expected consumer sentiment, industrial production, and capacity use data. Mortgage bonds ended the week better by about 1/2 of a discount point.
The bond market will close early Thursday and will be closed Friday. Rates could be volatile Thursday as traders position themselves ahead of the extended holiday weekend.
- Housing Starts; April 19; Consensus Estimate 468k; Important. A measure of housing sector strength. Weakness may lead to lower rates.
- Existing Home Sales; April 20; Consensus Estimate 4.8m; Low importance. An indication of mortgage credit demand. A significant decrease may lead to lower rates.
- Weekly Jobless Claims; April 21; Consensus Estimate 405k; Important. An indication of employment. Higher claims may result in lower rates.
- Philadelphia Fed Survey; April 21; Consensus Estimate 44.4; Moderately important. A survey of business conditions in the Northeast. Weakness may lead to lower rates.
- Leading Economic Indicators; April 21; Consensus Estimate Up 0.6%; Important. An indication of future economic activity. A smaller increase may lead to lower rates.
GLOBALIZATION Economic globalization is the increasing interdependence of national economies through trade, finances, and technology. While economists debate the pros and cons of globalization, the fact remains that globalization is not new and continues to expand.
As a driving force in the global economy, the US often benefits when foreign economies struggle. A prime example is the continued Euro concerns tied to struggling economies in Spain, Portugal, and Greece. Unlike a corporation, a country cannot file for bankruptcy when they can’t make debt payments. One remedy in situations like this has been restructuring the debt, which is mired in uncertainty for investors. A big global concern is the fear that a default by one member of the European Union could ripple throughout all the other eurozone countries. In times like this, investors often move funds to safe havens in what is called a “flight to quality.” This is exactly what we saw recently as US debt instruments saw an influx of foreign investment following the tsunami in Japan. Bond prices rose, which caused mortgage interest rates to fall. From a short-term perspective it was great for homebuyers and those refinancing if they take advantage of the short-term drop in rates. Unfortunately those improvements in rates were often very short-lived. The fear of inflation continues to permeate the US and abroad. Oil prices are skyrocketing with political instability throughout the Middle East and Northern Africa. Rising energy costs are only part of the problem as US monetary policy also plays a key role. Inflation, real or perceived, erodes the value of fixed income securities generally causing prices to fall and rates to rise. While there have been a few dips here and there in rates over the course of the last few months we have also seen rates test recent highs. It is wise to take advantage of rate dips when they occur with the continued global economic uncertainty.