Mortgage Market Review - 2/22/10

This Morning…Monday, February 22, 2010:
Most rate prices are slightly improved today as mortgage bonds tighten with Treasuries after last week’s beating. Stocks are lower, still bruised from the Fed’s hiking of the discount rate last week and uncertainty over Greece’s debt crisis despite positive manufacturing data released this morning.

Last Week:
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 ¼% for the week.

This Week:
As we head into the last week of February, today is void of economic news. Tomorrow we have the Case-Shiller 20-city Index, along with Consumer Confidence which will set the tone for trading this week.. Wednesday holds New Home Sales which is expected to be up over 2%. Thursday we have the standard Jobless Claims, and also Durable Goods. Friday is the Chicago Purchasing Manager’s Survey, and Existing Home Sales which is expected to be up almost 1%. In addition, there will be Treasury auctions on Tuesday, Wednesday, and Thursday and a Bernanke speech on Wednesday.

EconomicIndicator
Consumer Confidence
Tuesday, Feb. 23,10:00 am, et
55.0
Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.
2-year Treasury Note Auction
Tuesday, Feb. 23,1:00 pm, et
None
Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates.
New Home Sales
Wednesday, Feb. 24, 10:00 am, et
Up 2.3%
Important. An indication of economic strength and credit demand. Weakness may lead to lower rates.
5-year Treasury Note Auction
Wednesday, Feb. 24, 1:00 pm, et
None
Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates.
Durable Goods Orders
Thursday, Feb 25,8:30 am, et
Up 1.5%
Important. An indication of the demand for "big ticket" items. Weakness may lead to lower rates.
Weekly Jobless Claims
Thursday, Feb 25,8:30 am, et
460k
Important. Higher jobless claims may lead to lower mortgage interest rates.
7-year Treasury Note Auction
Thursday, Feb 25,1:00 pm, et
None
Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates.
Q4 GDP second estimate
Friday, Feb. 26,8:30 am, et
Up 5.6%
Important. The aggregate measure of US economic production. Weakness may lead to lower rates.
U of Michigan Consumer Sentiment
Friday, Feb. 26,10:00 am, et
73.9
Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.
Existing Home Sales
Friday, Feb. 26,10:00 am, et
Up 0.9%
Low importance. An indication of mortgage credit demand. Significant weakness may lead to lower rates.

Market Forecast:
There should be plenty of movement in bond prices and mortgage rates this week. I think we will see the most movement either Wednesday or Thursday, but Friday may be fairly active also.
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. Interest rates are headed higher, in a choppy pattern but up. The path won't be straight up and analysts do not expect rates to increase more than another ½% through the rest of the year. As for any potential for a sizeable decline in rates; it will take a solid break in the equity markets which at this point doesn't seem likely. A cautious approach to "float" and "lock" decisions is prudent taking the current market conditions into consideration.

Some Humor:
A psychiatrist was conducting a group therapy session with four young mothers and their small children.
"You all have obsessions," he observed.
To the first mother, he said, "Mary, you are obsessed with eating. You've even named your daughter Candy."
He turned to the second Mom: "Ann, your obsession is with money. Again it manifests itself in your child's name, Penny."
He turned to the third Mom: "Joyce, your obsession is alcohol. This too shows itself in your child's name, Brandy."
At this point, the fourth mother, Kathy, quietly got up, took her little boy by the hand, and whispered, "Come on, Dick, this guy has no idea what he's talking about. Let's pick up Peter and Willy from school and go get dinner."

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