Tuesday, November 16, 2010

Market Comment - Week of November 15th, 2010

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.  Econoc FactorsEconomic Factors
Economic Factors
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.

Economic Factorso
As of 11/15/10, Retail Sales Up 0.6%.  A measure of consumer demand.  A smaller than expected increase may lead to lower mortgage rates.

As of 11/15/10, Business Inventories Up 0.6%.  An indication of stored-up capacity.  A significantly larger increase may lead to lower rates.

Release date - 11/16/10, Producer Price Index Up 0.7%.  Core up 0.1% Important. An indication of inflationary pressures at the producer level.  Weaker figures may lead to lower rates.

Release date -11/16/10, Industrial Production Up 0.3% Important.  A measure of manufacturing sector strength. A lower than expected increase may lead to lower rates.

Release date - 11/16/10, Capacity Utilization - 75%.  A figure above 85% is viewed as inflationary. Weakness may lead to lower rates.

Release date - 11/17/10, Consumer Price Index Up 0.3%, Core up 0.1%.  A measure of inflation at the consumer level. Lower than expected increases may lead to lower rates.

Release date - 11/17/10, Housing Starts - 605k.  A measure of housing sector strength. Larger than expected decreases may lead to lower rates.

Release date -11/18/10, Leading Economic Indicators Up 0.5%.  An indication of future economic activity. A smaller increase 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.

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