Mortgage Market Review - 6/15/09

This Morning…Monday, June 15, 2009:

Mortgage backed securities (MBS) prices continue to rally higher (rates lower) as weakness in the stock market is lifting MBS markets as money flows out of equities and into fixed income assets. Market participants note the price rally may continue this week as MBS are likely to benefit from a brief respite in government supply and the Fed's two scheduled purchases of Treasuries. The outlook for the next six months climbed to the highest level in almost two years as the drawdown in goods on hand clears the way for factories to ramp up output. Regional and national purchasing manager surveys have shown a declining rate of contraction in recent months, but actual improvement will not be evident until current new orders pick up and destocking comes to an end. International holdings of long term U.S. financial assets, a safe haven for foreign investors during the global financial crisis, rose in March. Foreigners were net buyers of equities, but turned sellers of U.S. corporate bonds and agency debt. The key topic among foreign investors remains the U.S. commitment to a strong dollar

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Last Week:

After two weeks of steadily increasing mortgage rates, volatility in the mortgage market has show signs of stabilization. Last week mortgage rates topped out near 5.625% before a late week MBS market improvement allowed lenders to lower the 30 year conventional fixed mortgage rate. US debt concerns played the biggest factor in rate swings as worries continued that countries would shift out of US dollar holdings. Russia indicated a willingness to move some reserves from US Treasuries to International Monetary Fund bonds. Retails sales rose 0.5% as expected but the positive figure reinforced the belief that the economy is turning. Oil prices continued to escalate hitting over $72/barrel.

For new readers and as a reminder for long standing rate watchers, the foundation for how mortgage rates are generated is built upon trading in the secondary mortgage market, specifically mortgage backed securities (MBS). If investor demand for MBS is high, prices are generally moving higher which helps mortgage rates tick lower. If investor demand is weak for MBS, that drives prices lower, which increases mortgage rates. Investor demand is determined by their perception of the overall economy and the gyrations for the yield curve. If investors believe the economy is strong and growing, they tend to move their funds into higher yielding stocks as a growing economy tends to lead to higher corporate profits and higher returns for their investment dollar. When our economy is struggling, investors tend to move their money into safer lower yielding investments such as MBS and treasuries to avoid losing money by holding stocks. During a struggling economy, corporate profits tend to decrease or disappear thus the flight into safer assets. Investors make their investment decisions based on many factors including economic reports which are released almost on a daily basis.

This Week:

This week provides investors information on the housing market and manufacturing, but the most significant economic data released will be the monthly inflation reports. The week begins with the Empire State manufacturing index, a survey of factory executives from New York, New Jersey and one county in Connecticut and the earliest measure of regional manufacturing. Also Monday, the Treasury International Capital report details long term investment inflows from foreign investors. Tuesday the Producer Price Index (PPI) comes out, which focuses on the increase in prices for goods used to produce finished products. Housing starts and building permits provide a view of the housing market and construction industry, both expected to be awful. Rounding out a busy Tuesday is Industrial Production and Capacity Utilization figures. Consumer Price Index (CPI) is the most closely watched inflation report and will come out on Wednesday. The CPI looks at the price change for finished goods sold to consumers, while the core rate excludes volatile food and energy prices. Information on mortgage applications from the Mortgage Bankers Association is due out also on Wednesday. Thursday we get Jobless Claims, Leading Economic Indicators and the Philadelphia Fed Index, all important barometers of the economy, but ultimately the Treasury's announcement of the size of their next round of debt offerings will be the primary focus of the day. Friday there are no economic reports due out but it is "Quadruple Witching" day, when all cash and futures contracts expire along with the indexes themselves. Tendency is for an extremely volatile day in the equity markets.

Economic Indicator

Housing Starts Tuesday, June 16,
8:30 am, et Up 6.9% Important. A measure of housing sector strength. Weakness may lead to lower rates.
Producer Price Index Tuesday, June 16,
8:30 am, et Up 0.4%,
Core up 0.1% Important. An indication of inflationary pressures at the producer level. Lower figures may lead to lower rates.
Industrial Production Tuesday, June 16,
9:15 am, et Down 0.5% Important. A measure of manufacturing sector strength. Weakness may lead to lower rates.
Capacity Utilization Tuesday, June 16,
9:15 am, et 68.6% Important. A figure above 85% is viewed as inflationary. Weakness may lead to lower rates.
Consumer Price Index Wednesday, June 17,
8:30 am, et Up 0.2%,
Core up 0.1% Important. A measure of inflation at the consumer level. Lower figures may lead to lower rates.
Leading Economic Indicators Thursday, June 18,
10:00 am, et Up 0.9% Important. An indication of future economic activity. A smaller increase may lead to lower rates.
Philadelphia Fed Survey Thursday, June 18,
10:00 am, et Down 16.4 Moderately important. A survey of business conditions in the Northeast. Weakness may lead to lower rates.

Market Forecast:

Market participants expect the consumer price index to be critical heading into the Fed’s meeting next week. Inflation friendly data may lead to improvements in mortgage interest rates. However, unexpected consumer price spikes may push interest rates higher in the short-term. A cautious approach to float/lock decisions is prudent.

Some Humor:

Jim died.
His will provided $40,000 for an elaborate funeral.
As the last guests departed the affair, his wife Sharon turned to her oldest and dearest friend. "Well, I'm sure Jim would be pleased," she said.
"I'm sure you're right," replied Brenda, who lowered her voice and leaned in close.
"How much did this really cost?”
"All of it: $40k," said Sharon.
"No!" Brenda exclaimed. "I mean, it was very nice, but $40,000?”
Sharon answered, "The funeral was $6,500. I donated $500 to church. The whiskey, wine and snacks were another $500. The rest went for the Memorial Stone.”
Brenda computed quickly. "$32,500 for a Memorial Stone? How big is it?”
“5 carats.”