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.
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