Mel's Blog

This week's FOMC meeting has adjourned with no change to key short-term interest rates. The post meeting statement didn't give us any surprises. The Fed stated that economic activity has picked up but that the labor market is still a concern and could hamper the economic recovery. They also indicated that inflation remains subdued, which is good news for bonds.

Today's 5-year Treasury Note auction was met with a demand that can be considered on the weak side. This had initially pressured bonds until the FOMC statement was released. The reference to inflationary pressures helped ease the negative tone in the bond market that came as a result of the 1:00 PM posting of the auction data.

The stock markets initially reacted favorably to the FOMC statement with the Dow and Nasdaq both setting new highs of the day immediately after it was released. However, they have since given back those gains and are now well into negative territory, setting new lows of the day. This has helped make bonds more attractive and led to some funds being shifted into the bond market. The end result is that we may see a slight improvement to mortgage rates this afternoon, but many lenders may just wait until tomorrow morning's update to reflect that change.

Weekly unemployment figures and August's Existing Home Sales report are the only semi-relevant economic releases scheduled for tomorrow. The Labor Department will give us last week's unemployment numbers early tomorrow. They are expected to say that 550,000 new claims for benefits were filed last week. But unless we see a wide variance between that figure and the actual number, I don't believe that this report will affect mortgage rates.

The National Association of Realtors will post their Existing Home Sales figures for August late tomorrow morning. This data gives us an indication of housing sector strength by tracking home resales in the U.S. It is expected to show a moderate increase from July's sales, however, this data is not considered to be of high importance to the bond market and likely will not cause a significant change to rates unless it varies greatly from forecasts.

Also tomorrow is the 7-year Treasury Note sale. If it is met with a similar demand as today's sale was, we could see mortgage rates move higher during afternoon trading. This sale gives us a better measurement of investor appetite for longer-term securities such as mortgage related bonds than today's 5-year Note sale did. So, we may see a more profound reaction in the bond and mortgage markets if the sale goes exceptionally well or badly.

                Mel

Wednesday's bond market opened in positive territory following the release of this morning's key inflation data that showed no significant surprises, but has since given back those gains. The stock markets are in positive ground with the Dow up 40 points and the Nasdaq up 11 points. The bond market is currently down 2/32, which will likely push this morning's mortgage rates a little higher.

There were two reports posted this morning. The first was August's Consumer Price Index (CPI) that revealed a 0.4% increase in the overall reading and a 0.1% rise in the core data. The increase in the overall reading was slightly higher than forecasts, but the more important core data reading that excludes volatile food and energy prices matched expectations. This means that prices at the consumer level of the economy rose modestly last month. That is good news for bond prices and mortgage rates because rapid increases in inflation makes long-term securities such as mortgage-related bonds less attractive to investors. The end result is almost always higher mortgage rates for borrowers.

The second report of the day was August's Industrial Production data. It showed a 0.8% increase in production at U.S. factories, mines and utilities. This was slightly more than expected, meaning manufacturing activity was a little stronger than thought. However, the difference was not enough to cause much concern in the bond market.

Tomorrow's data is much less important to the markets than the reports released the past two days. The Labor Department will give us last week's unemployment filings. They are expected to announce that 555,000 new claims for unemployment benefits were filed last week. This would be a small increase from the previous week, but unless we see a wide variance between forecasts and the actual number, this data likely will have little impact on tomorrow's mortgage pricing .

August's Housing Starts report will also be posted early tomorrow morning. This report is also considered to be low-to-moderately important and will probably not have a significant impact on the bond market or mortgage rates. It gives us a measurement of housing sector strength and mortgage credit demand. It is expected to show little change in starts of new home construction between July and August.

                Mel

Tuesday's bond market initially opened well in negative territory after this morning's economic data revealed stronger than expected results but has since recovered a good portion of those losses. The stock markets are showing gains with the Dow up 57 points and the Nasdaq up 11 points. The bond market is currently flat, but well above earlier levels. This will likely push this morning's mortgage rates higher .

The Commerce Department announced this morning that sales at retail level establishments rose 2.7% last month, greatly exceeding analysts' forecasts of a 1.9% increase. Even when volatile auto transactions are excluded, sales were well above forecasts. This means that consumers spent much more last month than many had thought. That is bad news for bonds and mortgage rates because consumer spending makes up two-thirds of the U.S. economy.

The second important piece of data posted this morning also did not do much good for bonds. The Labor Department reported that August's Producer Price Index (PPI) rose 1.7%, more than twice the increase that was expected. The more important core data reading that excludes more volatile food and energy prices came in up 0.2% when it was expected to rise 0.1%. This means that prices at the producer level of the economy rose more rapidly than analysts had thought. That is also bad news for bonds because rising inflation erodes the value of a bond's future fixed interest payments and makes them less appealing to investors. The result of rising inflation is usually higher mortgage rates. In addition, today's PPI reading raises concern about tomorrow's CPI report that is even more important than this morning's release.

August's Consumer Price Index (CPI) will be released early tomorrow morning. The CPI is one of the most important reports we see each and every month. It is the sister report of today's PPI and is considered to be a key indicator of inflation at the consumer level of the economy. As with the PPI, there are two readings in the report- the overall index and the core data reading. Current forecasts are calling for a 0.3% increase in the overall reading and a 0.1% rise in the core data reading. A larger increase in the core data would likely lead to higher mortgage rates tomorrow morning.

Also scheduled for tomorrow morning is August's Industrial Production data. This report gives us a measurement of manufacturing sector strength by tracking output at U.S. factories, mines and utilities. It is considered to be moderately important but could help change mortgage rates if there is a significant difference between forecasts and the actual reading. Analysts are currently expecting to see a 0.7% increase in production. A higher level of output could lead to higher mortgage rates, while a weaker than expected figure would be considered good news for bonds and rates .

                Mel

All twelve Fed districts showed positive improvements in almost all sectors, other than labor markets, construction and consumer spending. This clearly shows that the economic downturn is slowing down. It's primarily the labor market that is stopping the economy's upward progress. Even though some Fed districts show reasonable improvement in temporary hiring and fewer layoffs, the numbers aren't quite there yet to declare an economic turnaround. For the month of August, unemployment rose to 9.7 percent amid the positive news of weekly jobless claims coming in steady at 550,000, beating the market expectation of 560,000.

The stock market continued its upward climb this past week. For the week, all major indices ended up, gaining between 2 to 4 percent. The energy and industrial sectors led the market with a 4.2 percent gain, while the utility and defense sectors ended in the red this past week. In commodity trading, commodities saw a busy week. Rising commodities can be seen as another sign of optimism, as demand for commodities grows alongside the growth of the overall economy. An unexpected decline in weekly inventories of crude oil and unchanged output from OPEC helped oil prices rally this past week.

In another boost to investor's sentiment regarding the health of the global economy, the trade imbalance in July widened by $5 billion from June. Although it sounds like a negative statistic, it's actually positive, as both imports and exports increased. However, imports jumped by nearly 4.7 percent and exports rose by only 2.5 percent.

The Mortgage industry saw a surge in loan application volume as interest rates were coming back to the near-low levels of a few months ago. The Conforming Fixed 30 year rate was hanging out at around 5 percent while the Conforming Fixed 15 year rate was around 4.45 percent. Standard 5/1 ARM rates were around 4 percent. According to the MBAA for the week ending Sept 4th, application volume jumped by nearly 17 percent, while the refinance index surged by 22 percent.

The coming week will be busy with economic indicators, as investors will be speculating an inflation move with the Producer price index and Consumer price index releases on Tuesday and Wednesday respectively. Retail sales and Empire manufacturing on Tuesday will give some clues to investors on the future direction of the economy.

                                Mel

Monday's bond market has opened in negative territory despite a flat morning in stocks and no economic data on today's calendar. The stock markets are calm with the Dow down 8 points and the Nasdaq nearly unchanged from Friday's close. The bond market is currently down 8/32, which will likely push this morning's mortgage rates higher by approximately .125 of a discount point.

This week brings us the release of five relevant economic reports that may influence mortgage rates, but none of them are scheduled for release today. A couple of the reports are considered to be highly important to the financial and mortgage markets, meaning that we may see significant changes to rates this week. There is a very good chance of seeing noticeable changes in rates at least one day, if not several days this week.

There are two highly important reports being released early tomorrow morning. The first is the release of August's Retail Sales report. It will give us a measurement of consumer spending, which is very important to the markets because consumer spending makes up two-thirds of the U.S. economy. Current forecasts are calling for a 1.9% increase in sales. The sizable jump is expected to come from auto sales that were fueled by the Cash for Clunkers program. Analysts are calling for a 0.4% rise in sales if auto sales are excluded. A larger than expected increase would be considered bad news for bonds and likely lead to an increase in mortgage pricing tomorrow.

The second important piece of data is the release of August's Producer Price Index (PPI), also being posted early tomorrow morning. This report will give us a very important measurement of inflationary pressures at the producer level of the economy. There are two readings that analysts follow in this release. They are the overall index and the core data reading. The core data is the more important of the two because it excludes more volatile food and energy prices. Analysts are currently predicting a .08% increase in the overall index, and a rise of 0.1% in the core data. Stronger than expected readings could fuel inflation concerns in the bond market and lead to an increase in mortgage rates tomorrow morning. Both of the day's reports are considered to be extremely important to the markets and mortgage rates.

Overall, I think we need to label tomorrow as the most important day of the week with the Retail Sales and PPI reports both being posted that day. However, Wednesday's CPI release is also extremely important to the markets, so Wednesday cannot be ignored either. We could see a significant change to rates this week if the major reports vary greatly from forecasts.

                                Mel

Tuesday's bond market is in negative territory after this morning's primary economic release showed a much stronger than expected reading. The stock markets are showing losses with the Dow down 185 points and the Nasdaq down 40 points. The bond market is currently up 16/32.

Today's big news came from the Institute for Supply Management (ISM), who posted their manufacturing index for August late this morning. They reported a reading of 52.9 that was stronger than analysts had expected, indicating manufacturer sentiment is growing. This was the first time this index was above 50 since January 2008. That is considered bad news for bonds and mortgage rates because it points towards a strengthening economy. However, a note in the report says that manufacturers are not planning on hiring new workers anytime soon. This helps support the theory that t he job market will remain weak for some time, likely preventing a rapid economic recovery. The result was a minimal impact on this morning's bond trading and mortgage rates.

Tomorrow brings us three events for the markets to digest. The first is the revision to the 2nd Quarter Productivity numbers, which measures employee productivity in the workplace. Strong levels of productivity allow the economy to expand without inflation concerns. It is expected to show a downward change from the previous estimate of a 6.4% annual pace. Forecasts are currently calling for a reading of 6.1%. A larger than expected reading would be considered good news for bonds and mortgage rates.

The second relevant economic report is July's Factory Orders data. This report measures manufacturing sector strength and is similar to last week's Durable Goods Orders, but includes orders for both durable and non-durable goods. This data is expected to show a 1.5% increase in new orders. A smaller than expected rise should lead to lower mortgage rates Wednesday, as long as the productivity number doesn't hurt bond prices.

The third and final event tomorrow is the release of the minutes from the last FOMC meeting. There is a pretty good possibility of the markets reacting to them following their 2:00 PM ET release, especially if they show some divisiveness by its members. It will be interesting to see some of the Fed member's views on the economy and inflation and if they will hint what the Fed's next move may be. But this is one of those events that can cause significant movement in rates after its release or be a non-factor. It generally causes a little movement in bond prices but not enough to significantly affect mortgage pricing.

                                Mel