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Market Comment - Week of January 17th, 2011 by WR Starkey Mortgage, LLP

By Coleen Donovan

Real Estate Agent with Keller Williams Realty Frisco

January 17, 2011 12:20 PM

Mortgage bond prices started the week in positive territory. We were able to establish some interest rate improvements as flight to quality buying emerged heading into some European debt auctions. Unfortunately there was a spike in rates the middle of the week as the buying reversed following an announcement by Japan that they would support the European markets. Higher than expected weekly jobless claims Thursday helped reverse this spike and enabled rates to fall. We ended the week on a rather sour note as profit-taking ensued heading into the extended holiday weekend. Mortgage bonds ended the week positive by about 5/8 of a discount point despite the continued large market swings.

Housing starts and weekly jobless claims data will set the tone for trading this week.

The index of leading economic indicators (LEI) is a weighted average of eleven economic variables that "lead" the business cycle. It is constructed for forecasting future aggregate economic activity. The eleven variables that make up the LEI measure workers' hours, initial unemployment claims, new factory orders, vendor performance, contracts and orders for plant and equipment, new housing permits, changes in unfilled orders, prices of raw materials, stock prices, money supply and consumer expectations.

Each of the variables that comprise the index has a tendency to predict (or lead) economic activity. For example, new orders for manufactured goods, new orders for plant and equipment, and new building permits are all direct measures of the amount of future production being planned for the economy.

Analysts monitor the LEI in an effort to predict future economic growth. When the LEI report is up, mortgage market participants expect credit demand to increase and inflationary pressures to build. Thus, when the LEI report is rising, interest rates tend to rise as well.

The LEI report is a valuable forecasting device that correctly predicts most economic turning points. The percentage change in the LEI is reported monthly and is an indication of the activity that will occur within the next three to six months. The LEI tends to turn down before peaks in the business cycle. Continuous declines are generally accepted as evidence that a recession continues.

Nine of the eleven components that make up this index are known before the release of the report, so the index is easy for economists to predict. Thus, although this is important predictive data for market participants, surprises are not common with the release of this data.