Market Update 09-25-2008

US Stocks are on the rise, with the Dow up over 200 points in the first hour of trading, as hope for congressional approval of a rescue plan overwhelms negative economic data. Mortgage Bonds initially posted gains as a reaction to the poor economic news, but have fallen back a bit as Stocks gain momentum.

Once again it's all eyes on Washington as Stocks spike higher in anticipation of the proposed $700,000,000,000 bailout for Wall Street. The Rally by Stocks flies in the face of today's economic news. Today's economic calendar shows three significant reports, all of which indicate negativity for Stocks. The latest Initial Jobless claims figure of 493,000 is the highest since late 2001, and marks the 9th consecutive week over 425,000 (which typically indicates recession). The jump in claims can be partially explained by the recent hurricanes which are thought to have added 50,000 lost jobs. Continuing claims were reported over 3.5 Million, the highest since 2003. New home sales for August declined by 11.5%, and the median price fell by 5.5%. The month to month drop has pushed the rate of sales to its worst since early 1991. This report is considered to be somewhat volatile, and as such the Durable Goods report is considered more significant. That report came in at minus 4.5% against expectations ranging from -1.5% to -2.0%. Durable goods are big ticket items designed to last at least 3 years, and are considered a bellwether for economic growth. Demand was weak over almost all industrial categories, and seems to confirm weakness in the economy reaching far beyond the housing industry. Despite all this, The Dow is up by over 260 points right now.

Mortgage Bonds began the day looking very positive as a result of this poor economic outlook (remember bad news for the economy tends to lead to lower mortgage rates), but the Stock rally is pulling money out of Bonds. The decline in Durable Goods orders is being blamed on the lack of availability of capital to lend, which the bailout is intended to alleviate. The same goes for the double digit decline in housing sales, and prices, in so far as people are not able to get loans. Last, but not least, the poor employment numbers can be seen as inflation friendly (both Stocks and Bonds hate inflation) since companies should be able to hire workers at a lower cost. This will help to control wage based inflation which the Fed is watching closely. When coupled with the belief that the government bailout will truly unfreeze the credit markets, investors are able to rationalize pumping money into Stocks. In this somewhat upside down logic, Mortgage Bonds are now trading "sideways" as they are merely reacting to the Stock Market and fluctuating within a price range of support, and resistance.

I am recommending to float cautiously for now, since any short term closings should have already been locked. Regardless of the outcome of the bailout, the economy is going to take some time to recover. In the meantime, the economic data should continue to be weak which is a positive for mortgage rates.

Make it a great day!

Ron Brown

VA & FHA Loan Specialist

First Mortgage Company of Washington