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Market Comment for Week of July 18, 2011…

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MARKET COMMENT  Mortgage bond prices rose last week, which helped mortgage interest rates improve. Rates started off on a good note Monday as European debt worries reignited. Italy made headlines as the next country mired in debt concerns. The Treasury auctions showed decent foreign demand. The financial markets experienced some volatility mid week following comments by Fed Chairman Bernanke, which indicated additional stimulus might be needed to boost the economy. We saw some negative movements Friday morning following higher than expected core inflation on the consumer side. Mortgage bonds ended the week better by about 5/8 of a discount point.

The Treasury will auction 10Y TIPS on Thursday. If foreign demand falters rates may come under pressure.

LOOKING AHEAD

• Housing Starts; July 19; Consensus Estimate 510k; Important. A measure of housing sector strength. Weakness may lead to lower rates.
• Existing Home Sales; July 20; Consensus Estimate 4.8m; Low importance. An indication of mortgage credit demand. A significant decrease may lead to lower rates.
• Weekly Jobless Claims; July 21; Consensus Estimate 403k; Important. An indication of employment. Higher claims may result in lower rates.
• Philadelphia Fed Survey; July 21; Moderately important. A survey of business conditions in the Northeast. Weakness may lead to lower rates.
• Leading Economic Indicators; July 21; Consensus Estimate Up 0.4%; Important. An indication of future economic activity. A smaller increase may lead to lower rates.
• 10-year TIPS Auction; July 21; Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates.

HOUSING STARTS  Housing starts data is a leading indicator of the state of our economy. This report, provided by the Bureau of the Census, takes into account data from both single-family homes and multi-family dwellings. Building permits are also released with the housing starts data. By knowing the number of permits issued monthly, analysts can attempt to estimate for the upcoming months. Normally, starts are 10% higher than permits since all locations are not required to have a building permit.

Housing starts and permits give a warning of future economic activity. In effect, a rise in housing starts can lead to a fall in the bond market and vice versa. Consumers tend to hold off on the purchase of new homes, new cars, and other big-ticket items if they are worried about the future of the economy. Housing is an important part of our economy. Continued declines in housing starts can lead to continued economic slowdown and essentially a deeper recession. On the other hand, increases in housing starts could signal a possible reversal.

From the opposite perspective, changes in interest rates often lead to changes in housing starts. High interest rates can cause a significant decline in home sales, which can lead to a drop in housing starts. Just the opposite happens when rates drop and is one of the additional reasons the Fed is trying to keep rates low. Low mortgage rates affect both home sales and housing starts.

The housing market is a vital component in sustaining the economy. The continued weakness of the housing market has many worried. Many economists believe housing will continue to suffer.

There is still uncertainty regarding the future state of the economy. Interest rates are historically low. A cautious approach is wise to protect against future volatility.

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

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Market Comment for Week of May 16, 2011…

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MARKET COMMENT   Mortgage bond prices rose last week pushing mortgage interest rates slightly lower. We started the week positive when it was announced Greek’s debt rating was downgraded. Retails sales were slightly lower than expected. Inflation readings on the producer side were slightly higher than expected as prices rose 0.8% and the core rose 0.3%. Consumer prices rose 0.4% and the core rate, which excludes the volatile food and energy costs, rose 0.2%. The core value was higher than expected mirroring PPI earlier in the week. Unfortunately the 30-year auction results showed poor demand that caused the bond market to fall and rates to rise Thursday afternoon. Mortgage bonds ended the week better by about 1/4 of a discount point. 

LOOKING AHEAD 

  • Housing Starts; May 17; Consensus Estimate 529K; Important. A measure of housing sector strength. Weakness may lead to lower rates.
  • Industrial Production; May 17; Consensus Estimate +0.6%; Important. A measure of manufacturing sector strength. Weakness may lead to lower rates.
  • Capacity Utilization; May 17; Consensus Estimate 76.2; Important. A figure above 85% is viewed as inflationary. Weakness may lead to lower rates.
  • Weekly Jobless Claims; May 19; Consensus Estimate 440k; Important. An indication of employment. Higher claims may result in lower rates.
  • Existing Home Sales; May 19; Consensus Estimate 5.10M; Low importance. An indication of mortgage credit demand. Significant weakness may lead to lower rates.
  • Philadelphia Fed Survey; May 19; Consensus Estimate 19.2; Moderately important. A survey of business conditions in the Northeast. Weakness may lead to lower rates.
  • Leading Economic Indicators; May 19; Consensus Estimate +0.5%; Important. An indication of future economic activity. Weakness may lead to lower rates.
  • 10-year TIPS Treasury Note Auction; May 19; Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates.

A SURE THING   While nobody can accurately predict what the future holds for mortgage interest rates, the fact remains that they are historically low. It is difficult to justify the risk in floating when the excellent rates currently available are a sure thing. 

Timing is one of the most important factors in success. Unfortunately, knowing the perfect time to lock in a loan is impossible until after the fact. While analysts constantly try to predict the future, the bottom line is they continually fall short in terms of accuracy. Recent history is a testament to this. At the end of last year analysts overwhelming predicted low rates for the months ahead. The first quarter of this year saw rates generally increase. Fortunately there has been a recent reprieve but things still remain volatile. The movements over the past 5 months show the challenge of making predictions. 

The good news is that the current low interest rates are here now. It is possible for rates to improve. However, if rates move higher, they are likely to spike fast and furiously with inflation fears looming. A cautious approach is necessary to protect against market volatility. 

Source: Todd Kabel, F&M Mortgage; Blog distribution provided by Kenneth Bargers and Bargers Solutions residential real estate services, a proud member of Pilkerton Realtors, located in Nashville, Tennessee

Market Comment for Week of March 14, 2011…

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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. 

LOOKING AHEAD 

  • 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.

Source: Todd Kabel, F&M Mortgage; Blog distribution provided by Kenneth Bargers and Bargers Solutions residential real estate services located in Nashville, Tennessee

Market Comment for Week of February 14, 2011…

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MARKET COMMENT   Mortgage bond prices fell last week pushing mortgage interest rates higher. The Treasury auctions were mixed. The 3YR auction showed weak foreign demand and resulted in a sell off following the results. The 10YR auction was decent and helped keep things in check while the 30YR auction didn’t move the market much. Weekly jobless claims came in at 383k, lower than the expected 410k. That data pressured rates higher. There were some positive movements Friday morning following weaker than expected consumer sentiment data but not enough to recover all the earlier losses. Mortgage rates ended the week higher by a disappointing 3/8 of a discount point. 

The Treasury will have a 30Y TIPS auction Thursday afternoon. If demand falters rates could be adversely affected. 

LOOKING AHEAD 

  • Retail Sales; Feb. 15; Consensus Estimate Up 0.5%; Important. A measure of consumer demand. A smaller than expected increase may lead to lower mortgage rates.
  • Housing Starts; Feb. 16; Consensus Estimate 495k; Important. A measure of housing sector strength. Weakness may lead to lower rates.
  • Producer Price Index; Feb. 16; Consensus Estimate Up 0.8%, Core up 0.1%; Important. An indication of inflationary pressures at the producer level. Weaker figures may lead to lower rates.
  • Industrial Production Feb. 16; Consensus Estimate Up 0.7%; Important. A measure of manufacturing sector strength. A lower than expected increase may lead to lower rates.
  • Capacity Utilization; Feb. 16; Consensus Estimate 75.5%; Important. A figure above 85% is viewed as inflationary. Weakness may lead to lower rates.
  • Consumer Price Index; Feb. 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.
  • Weekly Jobless Claims; Feb. 17; Consensus Estimate 390k; Important. An indication of employment. Higher claims may result in lower rates.
  • Leading Economic Indicators; Feb. 17; Consensus Estimate Up 0.8%; Important. An indication of future economic activity. A smaller increase may lead to lower rates.
  • Philadelphia Fed Survey; Feb. 17; Consensus Estimate 19; Moderately important. A survey of business conditions in the Northeast. Weakness may lead to lower rates.

WORLD RATES   China’s central bank raised rates for the third time in four months to help ward off inflation as food and energy costs continue to rise. A drought in China is threatening the wheat crop, which is adding further pressure to commodity prices. Other emerging economies are also fearful of a spike in inflation. Market analysts are expecting Brazil’s central bank to raise rates soon. The overnight lending rate there is currently 11.25%. In contrast, the Federal Reserve continues to add stimulus to the US economy keeping rates near zero and buying bonds. 

The futures market is now pricing in a near 100% chance the Fed will move rates higher by December. Last week they put the odds of a rate increase at 25%. That is a big change in sentiment in such a short period of time. While interest rates have seen significant increases over the past few months they still remain historically very low. There are no guarantees rates will remain low as recent history has shown. 

Source: Todd Kabel, F&M Mortgage; blog distribution provided by Kenneth Bargers and Bargers Solutions residential real estate services located in Nashville, Tennessee

Market Comment for Week of January 17, 2011…

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MARKET COMMENT   Mortgage bond prices started the week in positive territory. We were able to establish some interest rate improvements as flight to quality buying emerged heading into some European debt auctions. Unfortunately there was a spike in rates the middle of the week as the buying reversed following an announcement by Japan that they would support the European markets. Higher than expected weekly jobless claims Thursday helped reverse this spike and enabled rates to fall. We ended the week on a rather sour note as profit-taking ensued heading into the extended holiday weekend. Mortgage bonds ended the week positive by about 5/8 of a discount point despite the continued large market swings. 

Housing starts and weekly jobless claims data will set the tone for trading this week. 

LOOKING AHEAD 

  • Housing Starts; Jan. 19; Consensus Estimate 512k; Important. A measure of housing sector strength. Weakness may lead to lower rates.
  • Weekly Jobless Claims; Jan. 20; Consensus Estimate 448k; Important. An indication of employment. Higher claims may result in lower rates.
  • Existing Home Sales; Jan. 20; Consensus Estimate 4.52m; Low importance. An indication of mortgage credit demand. A significant decrease may lead to lower rates.
  • Leading Economic Indicators; Jan. 20; Consensus Estimate Up 0.9%; Important. An indication of future economic activity. A smaller increase may lead to lower rates.
  • Philadelphia Fed Survey; Jan. 20; Consensus Estimate 22.8; Moderately important. A survey of business conditions in the Northeast. Weakness may lead to lower rates.

 LEI  The index of leading economic indicators (LEI) is a weighted average of eleven economic variables that “lead” the business cycle. It is constructed for forecasting future aggregate economic activity. The eleven variables that make up the LEI measure workers’ hours, initial unemployment claims, new factory orders, vendor performance, contracts and orders for plant and equipment, new housing permits, changes in unfilled orders, prices of raw materials, stock prices, money supply and consumer expectations. 

Each of the variables that comprise the index has a tendency to predict (or lead) economic activity. For example, new orders for manufactured goods, new orders for plant and equipment, and new building permits are all direct measures of the amount of future production being planned for the economy. 

Analysts monitor the LEI in an effort to predict future economic growth. When the LEI report is up, mortgage market participants expect credit demand to increase and inflationary pressures to build. Thus, when the LEI report is rising, interest rates tend to rise as well. 

The LEI report is a valuable forecasting device that correctly predicts most economic turning points. The percentage change in the LEI is reported monthly and is an indication of the activity that will occur within the next three to six months. The LEI tends to turn down before peaks in the business cycle. Continuous declines are generally accepted as evidence that a recession continues. 

Nine of the eleven components that make up this index are known before the release of the report, so the index is easy for economists to predict. Thus, although this is important predictive data for market participants, surprises are not common with the release of this data. 

Source: Todd Kabel, US Bank; blog distribution provided by Kenneth Bargers and Bargers Solutions residential real estate services located in Nashville, Tennessee

Market Comment for Week of December 13, 2010…

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MARKET COMMENT   Mortgage bond prices got crushed last week pushing mortgage interest rates significantly higher. News that tax cuts would be extended sent stocks higher Tuesday at the expense of bonds. Market participants remained concerned about the cost of the tax cuts. We saw a slight reprieve Thursday afternoon following a strong 30-year Treasury bond auction. However, this was short-lived and Friday brought more losses for bonds, as consumer sentiment data was stronger than expected. Unfortunately interest rates were worse by about a full discount point for the week. 

Look for the inflation data and the Fed meeting to take center stage this week. Producer inflation estimates are higher than the prior month. Inflation, real or perceived, generally erodes the value of fixed income investments causing prices to fall and rates to rise. 

LOOKING AHEAD 

  • Producer Price Index; Dec. 14; Consensus Estimate Up 0.5%, Core up 0.3%; Important. An indication of inflationary pressures at the producer level. Weaker figures may lead to lower rates.
  • Retail Sales; Dec. 14; Consensus Estimate Up 0.8%; Important. A measure of consumer demand. A smaller than expected increase may lead to lower mortgage rates.
  • Business Inventories; Dec. 14; Consensus Estimate Up 0.6%; Low importance. An indication of stored-up capacity. A significantly larger increase may lead to lower rates.
  • Consumer Price Index; Dec. 15; Consensus Estimate Up 0.2%, Core up 0.1%; Important. A measure of inflation at the consumer level. Lower than expected increases may lead to lower rates.
  • Industrial Production; Dec. 15; Consensus Estimate Up 0.3%; Important. A measure of manufacturing sector strength. A lower than expected increase may lead to lower rates.
  • Capacity Utilization; Dec. 15; Consensus Estimate 75%; Important. A figure above 85% is viewed as inflationary. Weakness may lead to lower rates.
  • Housing Starts; Dec. 16; Consensus Estimate 540k; Important. A measure of housing sector strength. Weakness may lead to lower rates.
  • Philadelphia Fed Survey; Dec. 16; Consensus Estimate 14 Moderately; Important. A survey of business conditions in the Northeast. Weakness may lead to lower rates.
  • Leading Economic Indicators; Dec. 17; Consensus Estimate Up 1.2%; Important. An indication of future economic activity. A smaller increase may lead to lower rates.

VOLATILITY LIKELY   The likeliness of mortgage interest rate volatility this week is very high considering the abundance of important economic releases. 

Each piece of data has the ability to cause volatility in the financial markets. Floating ahead of the data exposes a person to a tremendous amount of risk. It is possible for interest rates to improve if the data shows weakness in the economy with few price pressures. However, any surprises will likely be bad for mortgage interest rates. 

We are really in uncharted territory here with the huge market swings as of late. The important thing is to remain cautious during these times of uncertainty. 

Source: Todd Kabel, US Bank; blog distribution by Kenneth Bargers and Bargers Solutions residential real estate services located in Nashville, Tennessee.

Market Comment for Week of November 15, 2010…

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MARKET COMMENT   Mortgage bond prices were lower for the week pushing mortgage interest rates higher. The Treasury auctions were mixed with generally decent foreign demand but rather lackluster overall results. The weekly jobless claims data came in lower than expected which was not bond friendly and pushed rates considerably higher Wednesday. The bond market was closed Thursday for the holiday, which likely contributed to the volatility with thin trading conditions surrounding shortened trading week. For the week interest rates finished worse by about 7/8 of a discount point. 

The retail sales data Monday will set the tone for trading this week. The inflation data on Tuesday and Wednesday have the greatest potential to move the financial markets. 

LOOKING AHEAD 

  • Retail Sales; Nov. 15; Consensus Estimate Up 0.6%; Important. A measure of consumer demand. A smaller than expected increase may lead to lower mortgage rates.
  • Business Inventories; Nov. 15; Consensus Estimate Up 0.6%; Low importance. An indication of stored-up capacity. A significantly larger increase may lead to lower rates.
  • Producer Price Index; Nov. 16; Consensus Estimate Up 0.7%, Core up 0.1%; Important. An indication of inflationary pressures at the producer level. Weaker figures may lead to lower rates.
  • Industrial Production; Nov. 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; Nov. 16; Consensus Estimate 75%; Important. A figure above 85% is viewed as inflationary. Weakness may lead to lower rates.
  • Consumer Price Index; Nov. 17; Consensus Estimate Up 0.3%, Core up 0.1%; Important. A measure of inflation at the consumer level. Lower than expected increases may lead to lower rates.
  • Housing Starts; Nov. 17; Consensus Estimate 605k; Important. A measure of housing sector strength. Larger than expected decreases may lead to lower rates.
  • Leading Economic Indicators; Nov. 18; Consensus Estimate Up 0.5%; Important. An indication of future economic activity. A smaller increase may lead to lower rates.
  • Philadelphia Fed Survey; Nov. 18; Consensus Estimate 2.0; Moderately important. A survey of business conditions in the Northeast. Weakness may lead to lower rates.

LOW RATES   Mortgage interest rates remain near historic lows. Borrowers that choose to float in this environment expose themselves to an upside risk in mortgage interest rates. The Fed has specifically stated, “Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability.” This means the Fed believes inflation levels should increase. Inflation, real or perceived, generally erodes the value of fixed income securities causing prices to fall and rates to rise. If the Fed has its way it is very possible to see mortgage interest rates increase. However, there are no certainties even with the Fed’s stated goals. The Fed does not directly dictate mortgage interest rates but its activities have an indirect effect on rates. 

Recent history attests to spikes and drops in rates on almost a weekly basis. Last week was a prime example. A cautious approach to interest rate exposure is prudent. 

Source: Courtesy of Todd Kabel, US Bank, Nashville, Tennessee

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