MARKET COMMENT Mortgage bond prices rose last week, which pushed mortgage interest rates lower. Rates started off on a bad note Monday in reaction to the US debt rating downgrade, the first in history. Stocks took a roller coaster ride surging and falling hundreds of points throughout the week. The Fed kept rates unchanged and indicated the intent to keep rates low through mid 2013. Mortgage bonds pushed higher in reaction to post some solid gains Tuesday afternoon and Wednesday morning. Unfortunately some of those gains were erased Thursday afternoon following weak foreign demand for the 30Y Treasury bond auction. Despite the extreme volatility, mortgage bonds ended the week better by about 7/8 of a discount point.
The inflation reports will be the most important events this week.
• Housing Starts; Aug. 16; Consensus Estimate Down 8.2%; Important. A measure of housing sector strength. Larger than expected decreases may lead to lower rates.
• Industrial Production; Aug. 16; Consensus Estimate Up 0.3%; Important. A measure of manufacturing sector strength. A lower than expected increase may lead to lower rates.
• Capacity Utilization; Aug. 16; Consensus Estimate 76.9%; Important. A figure above 85% is viewed as inflationary. A decrease may lead to lower rates.
• Producer Price Index; Aug. 17; Consensus Estimate Unchanged, Core up 0.2%; Important. An indication of inflationary pressures at the producer level. Decreases may lead to lower rates.
• Weekly Jobless Claims; Aug. 18; Consensus Estimate 400k; Important. An indication of employment. Higher claims may result in lower rates.
• Consumer Price Index; Aug.19; Consensus Estimate Up 0.1%, Core up 0.2%; Important. A measure of inflation at the consumer level. Lower figures may lead to lower rates.
• Existing Home Sales; Aug.19; Consensus Estimate 4.78m; Low importance. An indication of mortgage credit demand. A significant decrease may lead to lower rates.
• Philadelphia Fed Survey; Aug.19; Moderately important. A survey of business conditions in the Northeast. Weakness may lead to lower rates.
• Leading Economic Indicators; Aug.19; Consensus Estimate Up 0.3%; Important. An indication of future economic activity. A smaller increase may lead to lower rates.
INDUSTRIAL PRODUCTION The Federal Reserve releases the Industrial Production report each month. It is a real measure of output from manufacturing, mining, electric, and gas utilities. The data is significant in that it provides an indicator of the state of the economy. Analysts use the data to attempt to determine market direction. The Fed uses the data to help set the course for monetary policy. Generally the Fed likes to see steady growth in the economy with little price pressures.
Mortgage interest rates generally react favorably to weaker than expected industrial production data. In times of economic weakness investors often move out of stocks and into mortgage bonds. When things look good investors often move out of bonds and back into stocks. We have seen these patterns frequently in recent months.
Floating into significant economic data always has some risk involved. Now is a great time to take advantage of mortgage interest rates at these historically low levels.
Source: Todd Kabel, F&M Mortgage; Blog distribution provided by Kenneth Bargers and Bargers Solutions, a proud member of Pilkerton Realtors, residential real estate services located in Nashville, Tennessee