Mel's Blog

The economy seems to coming back on track, albeit at a slow pace, but at a rate which is enough to boost investor confidence. Even The Fed's Beige book, a report card on regional economic health, stated that the economic decline is slowing. Eight districts posted a surge in homes sales due to low interest rates, first-time home buyer tax credits and declining house prices. Better than expected unemployment claims and healthy retail sales this past week also added to investors euphoria and optimism about the economy. Investors are waiting to see what the Federal Reserve's next move will be in the upcoming Federal Open Market Committee meeting on June 23 and 24.

It was a quiet week for stock trading, with all the major indexes moving up slightly. The Utility sector led the markets with a 3.9 percent gain. Investors saw a rise in retail sales per their expectations. Retail sales in May rose by .5 percent mainly due to gasoline sales, which were up by 3.6 percent. Also, to the investors' pleasant surprise, initial unemployment claims decreased to 601,000, beating the market expectation by 14,000. The Consumer Confidence index also moved up marginally. Treasuries, on the other hand, had a very volatile week. The Treasury auctioned off $65 billion of debt this past week to meet government spending demand.

The Fed started a successful $300 billion debt buy-back program in March to maintain low yields; however, yields on government debt started their ascent in the last couple of weeks. Amid investors' concern of declining demand of U.S. Debt, the 10-year Treasury yield shot up to 4 percent last Wednesday. But after a successful auction of 30-year Treasuries on Thursday, by the end of the week, the 10-year Treasury yield came down to 3.78 percent, while the 30-year Treasury yield came down to 4.62 percent.

Sinking LIBOR rates gave investors a sign of a soothing credit market. The three-month LIBOR rate touched a record low of 0.62 percent, down from 0.63 percent Thursday. The overnight LIBOR rate sank to 0.21 percent from 0.26 percent. 10 -year Treasuries and LIBOR rates highly influenced fixed mortgage rates and adjustable rates mortgages, respectively. A decrease of 20 bps in the 10-year yield was not big enough to bring the Fixed-rate mortgages down to a pre-jitters 5 percent level, but good enough to show some downward direction in rates. The effect of rising rates can be seen in decreasing refinancing volume. According to the Mortgage Bankers Association, refinance index dropped by nearly 12 percent from the previous week, while overall loan application volume was down by 7.2 percent from the previous week. The Purchase index increased by nearly 1 percent from last week.

The coming week will keep investors busy, with speculation of the Fed's next move as connected to fears of Inflation. We will anticipate the release of the Producer Price index on Tuesday and the Consumer Price Index on Thursday. Economic health will be measured from Industrial production, Housing starts and building permits on Tuesday. Investors will be hoping for lower treasury yields that will assist in keeping mortgage rates low.