Weekly Mortgage Newsletter week of January 5th 2009

Provided by www.ratelink.com

Mortgage bond prices remained volatile last week in thin trading conditions associated with the holiday. Daily movements in discount points often exceeded 1/2. Consumer confidence and ISM Index data showed continued economic weakness. However, weekly jobless claims were not as bad as expected. Stocks rallied mid-afternoon Friday on the first trading day of the year. Unfortunately this came at the expense of bonds, causing interest rates to spike higher. For the week, interest rates on government and conventional loans rose by 3/4 of a discount point.

The employment report Friday will be the most important event this week. It will be interesting to see how trading resumes the first full trading week of the year following the holidays.

LOOKING AHEAD

Revised GDP

Factory orders data is a monthly report released by the US Census Bureau. The release is officially referred to as The Advance Report on Durable Goods Manufacturers' Shipments, Inventories, and Orders.

The manufacturing sector is a major component of the economy. Investors use the factory orders report to attempt to determine the direction of the economy in the future. Orders are generally believed to be a precursor to activity in the manufacturing sector because manufacturing typically has an order before considering an increase in production. Conversely, a decrease in orders eventually causes production to scale back; otherwise, the manufacturer accumulates inventories, which must be financed.

Total factory orders break down to approximately 55% durable and 45% non-durable. Durable goods are items such as refrigerators, cars, and aircraft. Non-durables are items such as cigarettes, candy, and soap. The report is often dismissed due to the timing of the release. Durable goods orders are typically reported a week earlier making a portion of the factory orders data "old news." While some analysts dismiss the value of the factory orders data others point out the fact that the report provides a more complete picture than the initial durable goods release. Revisions to initial data along with non-durable figures are factored in providing a more accurate look at the condition of the manufacturing sector.

The stock market typically likes to see strong factory orders data indicating a surge in future production. On the other hand, bonds typically like weaker figures.

The manufacturing sector of the economy has been hit hard in the downturn. If the factory orders data shows a significant increase, stocks may rise on the data. This scenario is likely to pressure mortgage interest rates higher. However, a factory orders report showing continued weakness may help to push mortgage interest rates lower.

While the data is important, it may be overshadowed by developments in the Fed plan to systematically purchase mortgage bonds. Right now the Fed is saying the plan will take effect in early January but no definitive date was released as of this report. The Fed indicated the plan is to purchase up to $500 billion in agency mortgage bonds by the end of June.