Mortgage bond prices continued to rebound higher last week, which pushedmortgage interest rates lower. Stock gains kept mortgage bonds relatively in check but many of the data releases were very bond friendly. The core PCE inflation reading was unchanged compared to the slight increase expected by analysts. Q4 revised productivity rose 6.9%, much better than expected. Higher productivity means a company can produce more with less input helping to keep prices and thus inflation in check. Rates fell about 1/8 of a discount point for the week. Expect stocks to factor into trading the early portion of the week with very little data on tap. The Treasury auctions will be the focus throughout the middle portion of the week. Strong foreign demand would likely help mortgage bonds also. The jobless figures and retail sales data will be the focus for the end of the week. US Treasury bonds do not directly dictate fixed mortgage interest rate pricing however they do have an indirect impact. Both Treasuries and mortgage bonds often track in the same direction but this is not always the case. There are many times that Treasuries and mortgage bonds move inversely. Despite the overwhelming size of the US economy, foreign investors can still have an effect on moving the financial markets. When foreign economies struggle foreign investors often purchase US based investments including mortgage bonds. This demand usually causes mortgage bond prices to rise and interest rates to fall. This flight to quality buying was one of the factors that helped mortgage interest rates to remain historically low in years past. There is a real threat that continued global economic turmoil might keep foreign investors from purchasing mortgage bonds in the future. The Treasury auctions this week will be important in determining the current appetite of foreign investors for dollar denominated securities. If this week's auctions are poorly bid mortgage bond prices could fall pressuring mortgage interest rates higher.
Economic
IndicatorRelease
Date and TimeConsensus
EstimateAnalysis
3-year Treasury Note Auction
Tuesday,
March 9,
1:15 pm, etNone
Important. $40 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates.
10-year Treasury Note Auction
Wednesday,
March 10,
1:15 pm, etNone
Important. $21 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates.
Weekly Jobless Claims
Thursday,
March 11,
8:30 am, et450k
Moderately important. An indication of the employment situation. A large increase may bring lower rates.
Trade Data
Thursday,
March 11,
8:30 am, et$40.3 billion
deficitImportant. Affects the value of the dollar. A falling deficit may strengthen the dollar and lead to lower rates.
30-year Treasury Bond Auction
Thursday,
March 11,
1:15 pm, etNone
Important. $13 billion of bonds will be auctioned. Strong demand may lead to lower mortgage rates.
Retail Sales
Friday,
March,
12, 8:30 am, etUp 0.1%
Important. A measure of consumer demand. Weakness may lead to lower mortgage rates.
U of Michigan Consumer Sentiment
Friday,
March,
12, 10:00 am, et73.6
Important. An indication of consumers' willingness to spend. Weakness may lead to lower mortgage rates.
Business Inventories
Friday,
March,
12, 10:00 am, etUp 0.2%
Low importance. An indication of stored-up capacity. A significantly larger increase may lead to lower rates.
Mortgage bond prices rebounded last week pushing mortgage interest rates lower. The majority of the data came in bond friendly. Weaker than expected consumer confidence data Tuesday helped mortgage interest rates improve. The Treasury auctions showed decent foreign demand. The gross domestic product price deflator component showed a smaller price increase than expected while the consumer spending component also came in weaker than expected. Existing home sales fell a surprising 7.1%, considerably weaker than the expected 1% increase. Rates fell about 3/4 of a discount point for the week. The employment report Friday morning will take center stage this week. Until then, look for the PCE inflation data to set the tone for the beginning of the week and the ADP employment report to set the tone for the mid portion of the week. The abundance of fundamental data this week provides a good opportunity for mortgages to improve. If the data shows weakness in the economy with little or no inflationary pressures then it is possible for mortgage bonds to rally resulting in mortgage interest rate decreases. However, if the data shows that the economy is rebounding or any significant signs of inflation, mortgage bonds may fall pushing mortgage interest rates higher. Mortgage interest rates remain favorable. Now is a great time to avoid the uncertainty surrounding continued market volatility.
Economic
IndicatorRelease
Date and TimeConsensus
EstimateAnalysis
Personal Income and Outlays
Monday,
March 1,
8:30 am, etIncome up 0.4%,
Outlays up 0.4%Important. A measure of consumers' ability to spend. Weakness may lead to lower mortgage rates.
PCE Price Index
Monday,
March 1,
8:30 am, etUp 0.1%
Important. An indication of inflationary pressures. Decreases may lead to lower rates.
Construction Spending
Monday,
March 1,
10:00 am, etDown 0.6%
Low importance. An indication of economic strength. A significant decrease may lead to lower rates.
ISM Index
Monday,
March 1,
10:00 am, et58.0
Important. A measure of manufacturer sentiment. A large decline may lead to lower mortgage rates.
ADP Employment
Wednesday,
March 3,
8:30 am, et-15k
Important. An indication of employment. Weakness may bring lower rates.
Fed “Beige Book”
Wednesday,
March 3,
2:00 pm, etNone
Important. This Fed report details currenteconomic conditions across the US. Signs of weakness may lead to lower rates.
Revised Q4 Productivity
Thursday,
March 4,
8:30 am, etUp 6.2%
Important. A measure of output per hour. Improvement may lead to lower mortgage rates.
Factory Orders
Thursday,
March 4,
10:00 am, etUp 1.2%
Important. A measure of manufacturing sector strength. Weakness may lead to lower rates.
Employment
Friday,
March 5,
8:30 am, etUnemp. @ 9.8%,
Payrolls -25kVery important. An increase in unemployment or a large decrease in payrolls may bring lower rates.
Consumer Credit
Friday,
March 5,
3:00 pm, etDown $4.1 billion
Low importance. A significantly large increase may lead to lower mortgage interest rates.
MARKET COMMENT
Mortgage bond prices fell last week pushing mortgage interest rates considerably higher. The bond market took a hit as inflation concerns emerged after the stronger than expected producer price index data. Producer prices surged in January amid higher energy costs to almost double expectations. The Fed made a surprise rate hike to the discount rate that also resulted in mortgage rate increases. The only positive was the tame consumer inflation reading Friday morning but we were unable to rebound from the earlier losses. Unfortunately rates rose over a full discount point for the week.
The consumer confidence data Tuesday will set the tone for trading this week. New home sales, weekly jobless claims, and the gross domestic product data also may move the financial markets. The Treasury will auction $118B in 2/5/7-year notes starting Tuesday. The additional supply may cause interest rate volatility.
LOOKING AHEAD
|
Economic |
Release |
Consensus |
Analysis |
|
Consumer Confidence |
Tuesday, |
55.0 |
Important. An indication of consumers' willingness to spend. Weakness may lead to lower mortgage rates. |
|
New Home Sales |
Wednesday, |
Up 2.3% |
Important. An indication of economic strength and credit demand. Weakness may lead to lower rates. |
|
Durable Goods Orders |
Thursday, |
Up 1.5% |
Important. An indication of the demand for "big ticket" items. Weakness may lead to lower rates. |
|
Weekly Jobless Claims |
Thursday, |
460k |
Important. Higher jobless claims may lead to lower mortgage interest rates. |
|
Q4 GDP second estimate |
Friday, |
Up 5.6% |
Important. The aggregate measure of US economic production. Weakness may lead to lower rates. |
|
U of Michigan Consumer Sentiment |
Friday, |
73.9 |
Important. An indication of consumers' willingness to spend. Weakness may lead to lower mortgage rates. |
|
Existing Home Sales |
Friday, |
Up 0.9% |
Low importance. An indication of mortgage credit demand. Significant weakness may lead to lower rates. |
FED ACTION CAUSES UNCERTAINTY
The Federal Reserve caught market participants by surprise with their 25 basis point discount rate hike last week. While analysts were split on whether the Fed would raise rates this year, that question has now been answered. The move resulted in volatility in most of the US financial markets.
The discount rate is the interest rate charged to commercial banks on loans they receive from the Fed. The rate hike is an effort to pull back the aid provided by extraordinary low rates amid the global economic decline. The Fed specifically noted the move was needed "in light of continued improvement in financial market conditions." Many analysts noted the earlier warnings from Fed Bernanke that rate hikes were coming but very few, if any, expected the move this soon.
While the rate hike resulted in mortgage bond price weakness in the short-term, the long-term outlook is less certain. Most analysts believe inflation remains in check, but at the same time the Fed purchasing of MBS will soon be over. A cautious approach to "float" and "lock" decisions is prudent taking the current market conditions into consideration.
MARKET COMMENT
Mortgage bond prices rose last week pushing mortgage interest rates slightly lower. Reignited fear of a global economic meltdown sent money into the mortgage bond market in flight to quality buying. The news reports were permeated with worries about European debt payment defaults. Greece and a few other countries were noted as specific concerns. The employment report Friday morning was mixed with unemployment not as bad as expected but a larger than expected drop in payrolls. For the week interest rates fell by about 1/4 of a discount point.
The record debt issuance continues with billions of dollars worth of notes and bonds set for auction this week. Strong foreign demand will likely help the entire bond market. With the recent "revisions" to employment data the weekly jobless claims data will carry a bit more weight than usual. Retail sales figures will be the headline figure this week.
LOOKING AHEAD
| Economic Indicator |
Release Date and Time |
Consensus Estimate |
Analysis |
| 3-year Note Auction | Tuesday, Feb. 9, 1:00 pm, et |
None | Important. $40 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates. |
| Trade Data | Wednesday, Feb. 10, 8:30 am, et |
$35 billion deficit | Important. Affects the value of the dollar. A falling deficit may strengthen the dollar and lead to lower rates. |
| 10-year Note Auction | Wednesday, Feb. 10, 1:00 pm, et |
None | Important. $25 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates. |
| Weekly Jobless Claims | Thursday, Feb. 11, 8:30 am, et |
475k | Important. An indication of the employment situation. Higher claims could lead to lower rates. |
| Retail Sales | Thursday, Feb. 11, 8:30 am, et |
Up 0.4% | Important. A measure of consumer demand. A smaller than expected increase may lead to lower mortgage rates. |
| Business Inventories | Thursday, Feb. 11, 10:00 am, et |
Up 0.4% | Low importance. An indication of stored-up capacity. A significantly larger increase may lead to lower rates. |
| 30-year Bond Auction | Thursday, Feb. 11, 1:00 pm, et |
None | Important. $16 billion of bonds will be auctioned. Strong demand may lead to lower mortgage rates. |
| U of Michigan Consumer Sentiment | Friday, Feb. 12, 10:00 am, et |
74.6 | Important. An indication of consumers' willingness to spend. Weakness may lead to lower mortgage rates. |
The employment report is one of the biggest, if not the biggest, data releases each month. Last week's employment report came with more twists than usual. Unemployment came in at 9.7%, a sharp drop from the expected 10% mark. Payrolls fell 20,000, weaker than the expected 15,000 increase. This divergence happens from time to time with the data derived from two completely different surveys. One piece of the report that caused major concern was the annual benchmark update, which showed the economy lost 930,000 more jobs than previously estimated in the 12 months ended March 2009. The revised number was very large and basically indicates 2009's employment situation was worse than most thought.
A few things that call into question the accuracy of the data influenced this report. Some analysts argued the hiring of temporary census workers threw the figures off. The data was received with a lot of uncertainty and resulted in some wild market swings immediately after the release. The initial reaction sent bond prices lower and interest rates higher. However, the bond market rebounded a bit after digesting the data for an hour or so. This was a prime example of the volatility that often occurs with major data releases.
Mortgage bond prices rose last week pushing mortgage interest rates lower. The bond market rallied following crumbling stocks as the DOW fell 213 points Thursday. Weekly jobless claims came in higher than expected causing unemployment fears to cast a shadow over the state of the economy. In a consumer based economy it is difficult for people to spend money without a job. The producer price index was mixed as the headline figure was higher than expected but the core was lower than expected. For the week interest rates fell by about 1/4 of a discount point. The Fed meeting Wednesday will be the most important event this week. The Treasury will continue the record auctions with 2-year notes on Tuesday, 5-year notes on Wednesday, and 7-year notes on Thursday. If foreign demand remains decent rates should hold near current levels. However, a drop in foreign demand will likely cause rates to head higher. 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. All eyes will be focused on the Federal Open Market Committee meeting Wednesday. No rate changes are expected. However, many analysts and traders believe rate hikes are on the horizon. Futures contracts show traders are pricing in a 77% chance the Fed will raise rates by November. Others argue those positions will be wrong because the economy isn't strong enough for the Fed to change rates. A cautious approach to float/lock decisions is prudent heading into the Fed meeting this week. Be prepared for potential market volatility.
Economic
IndicatorRelease
Date and TimeConsensus
EstimateAnalysis
Existing Home Sales
Monday,
Jan. 25,
10:00 am, etDown 8.3%
Low importance. An indication of mortgage credit demand. A significant decrease may lead to lower rates.
Consumer Confidence
Tuesday,
Jan. 26,
10:00 am, et52.9
Important. An indication of consumers' willingness to spend. Weakness may lead to lower mortgage rates.
New Home Sales
Wednesday,
Jan. 27,
10:00 am, etUp 1.9%
Important. An indication of economic strength and credit demand. A decrease may lead to lower rates.
Fed Meeting Adjourns
Wednesday,
Jan. 27,
2:15 pm, etNo rate adjustment
Important. Few expect the Fed to change rates, but some volatility may surround the adjournment of this meeting.
Durable Goods Orders
Thursday,
Jan. 28,
8:30 am, etUp 2.0%
Important. An indication of the demand for “big ticket” items. Weakness may lead to lower rates.
Q4 Advance GDP
Friday,
Jan. 29,
8:30 am, etUp 4.5%
Very important. The aggregate measure of US economic production. Weakness may lead to lower rates.
Q4 Employment Cost Index
Friday,
Jan. 29,
8:30 am, etUp 0.4%
Very important. A measure of wage inflation. Weakness may lead to lower rates.
U of Michigan Consumer Sentiment
Friday,
Jan. 29,
10:00 am, et73.0
Important. An indication of consumers' willingness to spend. Weakness may lead to lower mortgage rates.
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