Market Comment for Week of January 31, 2011…

MARKET COMMENT   Mortgage bond prices rose last week pushing mortgage interest rates lower. There were several Treasury auctions and most resulted in decent foreign demand. Stock strength the middle of the week along with higher than expected new home sales put some upward pressure on rates. Volatile oil prices also factored into trading. Saudi remarks indicated they might increase production. This helped stem some of the oil price spikes in the middle of the week but world benchmark prices remained near the $100/barrel mark and US benchmark prices were near $90/barrel as unrest in Egypt continued. Stock weakness and weaker than expected GDP figures led to rate improvements Friday afternoon. Mortgage bonds ended the week positive by about 1/8 to 1/4 of a discount point despite the continued market swings. 

LOOKING AHEAD 

  • Personal Income and Outlays; Jan. 31; Consensus Estimate Up 0.3%, Up 0.4%; Important. A measure of consumers’ ability to spend. Weakness may lead to lower mortgage rates.
  • PCE Core Inflation; Jan. 31; Consensus Estimate Up 0.1%; Important. A measure of price increases for all domestic personal consumption. Weakness may help rates improve.
  • Construction Spending; Feb. 1; Consensus Estimate Up 0.3%; Low importance. An indication of economic strength. Significant weakness may lead to lower rates.
  • ISM Index; Feb. 1; Consensus Estimate 56.5; Important. A measure of manufacturer sentiment. Weakness may lead to lower mortgage rates.
  • ADP Employment; Feb. 2; Consensus Estimate 240k; Important. An indication of employment. Weakness may bring lower rates.
  • Revised Q4 Productivity; Feb. 3; Consensus Estimate Up 2.4%; Important. A measure of output per hour. Improvement may lead to lower mortgage rates.
  • Weekly Jobless Claims; Feb. 3; Consensus Estimate 444k; Important. An indication of employment. Higher claims may result in lower rates.
  • Factory Orders; Feb. 3; Consensus Estimate Up 0.5%; Important. A measure of manufacturing sector strength. Weakness may lead to lower rates.
  • Employment; Feb. 4; Consensus Estimate 9.5%, Payrolls up 85k; Very important. An increase in unemployment or weakness in payrolls may bring lower rates.

ISM   The Institute for Supply Management (ISM), formerly the National Association of Purchasing Management (NAPM), releases the “Report on Business” on the first working day of each month. Part of this report is the “diffusion index,” which tracks the economy’s ups and downs fairly well. 

In conducting this survey, the ISM questions purchasing executives from over 250 industrial companies compiling data on production, orders, commodity prices, inventories, vendor performance, and employment. Each of the respondents is asked to rank the categories as “up” or “down.” Various weights are applied to the individual components to form the composite index. 

A composite index reading of 50 can be thought of as a “swing point.” A reading above 50 implies an increase in economic activity, while a reading below 50 indicates a decline. The ISM report is difficult for economists to forecast because there is little data upon which to base an educated guess. The report has a large “surprise factor” and can cause market swings. 

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 January 24, 2011…

MARKET COMMENT   Mortgage bond prices started in negative territory and that carried through most of the week. Spain and Portugal had relatively successful bond auctions, which reversed the flight to quality buying of US debt instruments that helped rates fall. Lower than expected weekly jobless claims Thursday added to the losses causing rates to spike higher. Analysts were looking for jobless claims at 425k and the actual release showed claims at 404k. Leading economic indicators were higher than expected with an increase of 1% compared to the anticipated 0.6% increase. Mortgage bonds ended the week negative by about a full discount point. 

The Fed meeting will take center stage this week. Look for the continued Treasury auctions to also factor into mortgage interest rate changes. 

LOOKING AHEAD 

  • Consumer Confidence; Jan. 25; Consensus Estimate 54.2; Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.
  • 2-year Treasury Note Auction; Jan. 25; Important. $35 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates.
  • New Home Sales; Jan. 26; Consensus Estimate 300k; Important. An indication of economic strength and credit demand. Weakness may lead to lower rates.
  • 5-year Treasury Note Auction; Jan. 26; Important. $35 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates.
  • Fed Meeting Adjourns; Jan. 26; Important. Few expect the Fed to change rates, but volatility may surround the adjournment of this meeting.
  • Weekly Jobless Claims; Jan. 27; Consensus Estimate 425k; Important. An indication of employment. Higher claims may result in lower rates.
  • Durable Goods Orders; Jan. 27; Consensus Estimate 1.9%; Important. An indication of the demand for “big ticket” items. Weakness may lead to lower rates.
  • 7-year Treasury Note Auction; Jan. 27; Important. $29 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates.
  • Advance Q4 GDP; Jan. 28; Consensus Estimate 3.8%; Very important. The aggregate measure of US economic production. Weakness may lead to lower rates.
  • Q4. Employment Cost Index; Jan. 28; Consensus Estimate 0.4%; Very important. A measure of wage inflation. Weaker figure may lead to lower rates.

FED FOCUS   The United States central bank, the Federal Reserve, coordinates the borrowing and lending activities of federally chartered banks. The principal reason the Federal Reserve was created was to reduce severe financial crises. One way of accomplishing this goal is to control the amount of money that flows through the economy. By manipulating the US money supply, the Fed influences inflation, unemployment, and the level of US economic activity. The Fed has a variety of tools that it uses to control the money supply, but its chief policy tool is the manipulation of short-term interest rates. 

No rate changes are expected at the Wednesday meeting but there is concern about the future considering the Dallas and Kansas City Federal Reserve banks requested a discount point hike. 

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 January 17, 2011…

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 January 10, 2011…

MARKET COMMENT   Mortgage bond prices started the week in negative territory. The ADP employment report was significantly stronger than expected sending rates higher. There were few data releases. Stocks started the New Year generally stronger, which added to the losses in bonds. The employment report was mixed and the initial reaction Friday morning was muted. 

Mortgage bonds ended the week negative by about 1/8 of a discount point. 

The US Treasury will auction $32b in 3-year notes on Tuesday, $21b in 10-year notes on Wednesday, and $13b in 30-year bonds on Thursday. These auctions along with the inflation data this week are likely to set the tone for trading. 

LOOKING AHEAD 

  • Fed “Beige Book”; Jan. 12; None;  Important. This Fed report details current economic conditions across the US. Signs of weakness may lead to lower rates.
  • Weekly Jobless Claims; Jan. 13; Consensus Estimate 420k; Important. An indication of employment. Higher claims may result in lower rates.
  • Producer Price Index; Jan. 13; 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.
  • Trade Data; Jan. 13; Consensus Estimate $40b deficit; Important. Affects the value of the dollar. A falling deficit may strengthen the dollar and lead to lower rates.
  • Consumer Price Index; Jan. 14; 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.
  • Retail Sales; Jan. 14; Consensus Estimate Up 0.9%; Important. A measure of consumer demand. A smaller than expected increase may lead to lower mortgage rates.
  • Industrial Production; Jan. 14; Consensus Estimate Up 0.4%; Important. A measure of manufacturing sector strength. A lower than expected increase may lead to lower rates.
  • Capacity Utilization; Jan. 14; Consensus Estimate 75.3%; Important. A figure above 85% is viewed as inflationary. Weakness may lead to lower mortgage interest rates.
  • U of Michigan Consumer Sentiment; Jan. 14; Consensus Estimate 75; Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.

EMPLOYMENT RESULTS   The December employment report came in mixed with the headline rate surprising lower and the jobs figure also lower. Fortunately we had some gains heading into the release and rates were able to improve following the report. Unemployment came in at 9.4%, considerably better than the 9.7% rate and not bond friendly. However, the payrolls component showed jobs increased 103,000 compared to the 150,000 increase expected by analysts. The mortgage bond market had a positive reaction to the report. 

The Bureau of Labor Statistics (BLS) of the U.S. Department of Labor compiles data from two different surveys that they conduct, the household survey and the establishment survey, in order to complete the employment report. This explains why sometimes there is an unexpected divergence between the unemployment rate and payrolls figures each month. The payrolls figure usually receives the greater weight from analysts but the headline figure covers the news headlines. 

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 January 3rd, 2011…

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. 

LOOKING AHEAD 

  • 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. 

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 27, 2010…

MARKET COMMENT   Mortgage bond prices started the week in positive territory. Unfortunately those gains were short-lived as trading was thin and choppy with continued large market swings. Most of the data was neutral. We received some positive news that inflation remained in check as the PCE core came in up 0.1% exactly as expected. As the economy improves inflation will become a focal point for investors. Mortgage bonds ended the week slightly positive by about a 1/8 of a discount point. 

Look for the possibility of volatility amid likely thin trading conditions and a shortened trading week. The bond market will close early Friday afternoon ahead of the New Year’s holiday. 

LOOKING AHEAD 

  • 2-year Treasury Note Auction; Dec. 27; Important. $35 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates.
  • Consumer Confidence; Dec. 28; Consensus Estimate 56; Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.
  • 5-year Treasury Note Auction; Dec. 28; Important. $35 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates.
  • 7-year Treasury Note Auction; Dec. 29; Important. $29 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates.
  • Weekly Jobless Claims; Dec. 30; Consensus Estimate 423k; Important. An indication of employment. Higher claims may result in lower rates.

FOREIGN DEMAND   China is the largest foreign holder of US debt and continues to debate future purchases. Recent talk from China indicates a desire to diversify. Many stories hit the wires last week indicating that diversification may take the form of European debt purchases. A Chinese spokesperson told reporters that the EU will “be one of the major markets for our (future) forex investment.” These remarks caused some weakness in the US debt market Thursday. The concerns were eventually calmed but uncertainties remain regarding the future of the entire US debt market. 

Global investors are constantly searching for opportunities that will provide the greatest return with the least amount of acceptable risk. That is one of the major problems with China investing in EU debt. While the higher rates of return are enticing, they are not without considerably higher risk. 

Investment products inherently all possess some sort of risk. As global financial markets struggled, many market participants searched for a safe haven in the US financial markets even with their shortcomings. With the backing of the US Government, investors viewed the US Treasury and mortgage bond markets as less risky investment opportunities amid global economic uncertainty. This resulted in an increased demand for US investments, such as the mortgage-backed securities that affect mortgage interest rates. Increased demand for mortgage bonds moved prices higher and interest rates lower. A reversal of this foreign demand has and may continue to result in future spikes in mortgage interest rates. 

Caution is the key heading into the auctions this week. There is a real possibility of wild market swings with thin trading conditions likely. Mortgage interest rates remain historically favorable. The future remains uncertain. Today’s rates are a given. Lower rates are not a given as is evident from the overall upward trend seen the past few months. 

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 20, 2010…

MARKET COMMENT   Mortgage bond prices got crushed the beginning of last week pushing rates significantly higher. Increased inflation fears tied to the Fed’s quantitative easing (QE2) and stronger than expected data led to an increase in mortgage interest rates. Retail sales and producer price data were higher than expected. Fortunately the bond market became so oversold that buyers emerged and mortgage bonds rebounded Thursday afternoon and Friday. Even with the bounce back we were still negative on the week by about 5/8 of a discount point. 

Look for the possibility of volatility amid likely thin trading conditions and a shortened trading week. The bond market will close early Thursday afternoon and will be closed the entire day Friday in observance of the Christmas Holiday. 

LOOKING AHEAD 

  • Q3 GDP third estimate; Dec. 22; Consensus Estimate Up 2.6%; Important. The aggregate measure of US economic production. Weakness may lead to lower rates.
  • Existing Home Sales; Dec. 22; Consensus Estimate 4.65m; Low importance. An indication of mortgage credit demand. Significant weakness may lead to lower rates.
  • Personal Income and Outlays; Dec. 23; Consensus Estimate Up 0.2%, Up 0.4%; Important. A measure of consumers’ ability to spend. Weakness may lead to lower mortgage rates.
  • PCE Core Inflation; Dec. 23; Consensus Estimate Up 0.1%; Important. A measure of price increases for all domestic personal consumption. Weaker figure may help rates improve.
  • Durable Goods Orders; Dec. 23; Consensus Estimate Down 0.8%; Important. An indication of the demand for “big ticket” items. Weakness may lead to lower rates.
  • Weekly Jobless Claims; Dec. 23; Consensus Estimate 455k; Important. An indication of employment. Higher claims may result in lower rates
  • U of Michigan Consumer Sentiment; Dec. 23; Consensus Estimate 73.7; Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.
  • New Home Sales; Dec. 23; Consensus Estimate 300k; Important. An indication of economic strength and credit demand. Weakness may lead to lower rates.

GAS PRICES   With gasoline prices hovering around the $3/gallon mark and oil prices in the upper $80/barrel range the fear of continued energy price increases is ever present. Oil prices remain high amid a slight rebound in the US economy and increased global demand. Many foreign nations blame the rising prices on a weaker US dollar. Higher energy costs are generally viewed as evidence of inflation. Inflation erodes the value of fixed income investments such as mortgage bonds causing prices to fall and rates to rise.

The markets seem convinced that the demand for oil will continue to grow as economies recover across the globe. However, these predictions are not a given. OPEC increased output in the third quarter but prices continued to rise. The world economies are still struggling and a spike in energy prices could lead to severe economic turmoil. However, predictions are tenuous at best, the future is uncertain, and market sentiment changes daily. 

The important thing to remember is that rates remain historically favorable. Now is a great time to avoid the uncertainty surrounding continued market volatility and the possibility of higher mortgage interest rates. 

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