LAST WEEK: Recap
Last week was quite a volatile week for the stock and bond markets and mortgage rates. Mortgage rates ended the week slightly higher then when the week began. As you remember last week was packed with economic releases so let's take a closer look at the data for the week. Tuesday retail sales were released and they were weaker than expected at an annual growth rate 4.2% which was the weakest in five years. This was bad news since most of our economy is based on consumer spending. Along with retail sales the PPI was reported lower than expectations too. The PPI report shows a moderation in wholesale inflation. Anytime we have inflation moderating that is good news for the bond market. The Consumer Price Index (CPI) was reported slightly above expectations for December. This was not good news for the bond market since inflation is the bonds worst enemy. A closer look at the year-over-year core CPI was reported at 2.4% this has edged higher than the 2.1% reading we have seen in the recent months. This presents a challenge for the Federal Reserve. They are meeting at the end of this month to set monetary policy and the markets are expecting a .50 reduction to the Fed Funds Rate. When the Fed lowers the Fed Funds Rate it can be inflationary. So the Fed is faced with increasing consumer inflation and a slowing economy that wants a rate cut. The market is wants a .50 reduction and I think it will happen but it will be an interesting meeting to say the least. Speaking of the Fed, Chairman Ben Bernanke gave testimony before the House budget committee on Thursday. Mr. Bernanke indicated he felt there would not be a recession but slower economic growth for 2008 and additional rates cuts may be necessary to boost the economy. He also stated that inflation remains a risk but feels that overall inflation will moderate. This made the markets feel better that the Fed would lower rates to help the economy. Also on Thursday housing starts and building permits were both reported below expectations. I feel this is good news as the overbuilding has led to large housing inventory. So less inventory coming to the market in the future should be good for the overall housing market.
THIS WEEK: Looking Ahead
In contrast to last week the week ahead has very little scheduled for economic releases. The only news we are going have will be Existing homes sales and Initial jobless claims. Nether of these reports are big market movers. When the economic calendar is anemic, technical factors dictate the markets direction. The bond market is in an overbought state with all of the recent increases (bond market increases means lower mortgage rates) so it is ripe for a reversal. This could be the week without economic news to drive the markets. The bond market will also take direction from the stock market. If the stock market continues to perform poorly that will help the bond market as money flows out of the stock market into bonds.
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