Mel's Blog

The Federal Reserve boosted the discount rate from 0.50% to 0.75%, the first such hike in three and half years. The move was claimed as a technical adjustment to increase the spread over an unchanged federal funds rate target. The stock market also responded in a surprisingly positive mood and the Dow closed up last week. The Fed emphasized that its decision was not a signal for any change in economic or monetary policy and that it is still intent on keeping money easily accessible. The discount rate is what the Fed charges banks that borrow from them when liquidity is required. The discount rate is not to be confused with the fed funds rate, which determines the price of short-term credit throughout the economy. When put in context, the discount rate is still considered low relative to the fed funds rate (between 0% and 0.25%) which is typically a full percentage point lower than the discount rate. The discount move was considered overdue, given the return to relative health of the overall financial system.

In another change of course, Chinese appetites for Uncle Sam's debt seem to be waning. According to new data released last Tuesday morning by the Treasury Department, foreign holdings of U.S. Treasury securities plunged by $53 billion in December, a record drop. China led the sell-off, reducing its holdings by $34 billion. Japan, meanwhile, increased its holdings by $11 billion to become the new largest foreign holder of Treasuries. As of the end of December, Japan held $768 billion of U.S. government debt, followed by China at $755 billion, and then Great Britain at $302 billion. In the last year there have been consistent concerns that China and other nations might reduce their holdings of U.S. government debt as the U.S. continues to rack up record deficits in the wake of the recession. If foreigners were to undertake a massive unloading of U.S. Treasuries, the country could have to make available higher interest payments to entice other would-be participants. However, it may still be a pre-mature conclusion based only on one month's worth of data.

The sudden spotlight on troubled government borrowers in the Euro zone is presenting an opportunity for hedge fund investors who placed early bets against countries now under pressure. In Europe, many countries are experiencing troubles due to excessive sovereign debt. In particular, there are problems in Portugal, Ireland, Italy, Greece, and Spain (thus the acronym "PIIGS"). So, in a way, some hedge funds are planning to feast on "PIIGS". What is the source of the problems? The standard explanation for the problems in some of the countries, e.g. Greece, is that lack of effective monitoring of government deficits within Euro-area countries and lack of enforcement of the rules on how much debt a country can carry, allowed excessive debt levels to accumulate. In other cases, such as Spain, the problem wasn't irresponsible budget behavior, it was the recession that caused the government budget to collapse. Thus, the problems were generated both by bad behavior and by bad luck, and as it turned out, once these countries got into trouble, the deficit problems were made worse by the fact that countries within the Euro area do not have the ability to utilize independent monetary policy. If these countries had their own currency, they could devalue and stimulate exports and this would then offset the negative effects from raising taxes or cutting spending to address the deficit problem. But that option is subsequently not available to them.

The International Monetary Fund has long preached the virtues of keeping inflation low and allowing money to flow freely across international boundaries. But two recent research papers by economists at the IMF have questioned the soundness of that advice, arguing that slightly higher inflation and restrictions on capital flows can sometimes help buffer countries from financial turmoil. One paper has received particular attention for suggesting that central banks should set their target inflation rate much higher -- at 4 percent, rather than the 2 percent, which is the most widely held standard. This paper is getting more attention amongst economists and some are concerned that the U.S. and Europe's near-zero-policy interest rates are fueling a surge of international capital into Asia and Latin America that will end in more problems if not properly managed. Who knows, this may be a time to challenge the traditional approach .

                Mel

Friday's bond market has opened relatively flat despite weaker than expected inflation data. The stock markets are showing minor gains with the Dow up 9 points and the Nasdaq up 2 points. The bond market is currently up from yesterday's close by 12 basis points. We will still see an increase  in this morning's mortgage rates compared to yesterday's morning pricing. This is mostly due to weakness in bonds late yesterday.

The Labor Department posted January's Consumer Price Index (CPI) this morning, showing a 0.2% increase in the overall reading and a 0.1% decline in the more important core reading. Both were below forecasts, meaning that inflationary pressures were calmer at the consumer level of the economy last month than many had thought. This can be considered favorable news for the bond market and mortgage rates, however, this morning's news has failed to influence bond buying.

                Mel

The Commerce Department reported early this morning that retail level sales rose 0.5% last month. This matched forecasts for the most part, meaning consumers spent no more than was thought. That is relatively good news for the bond market and mortgage rates because consumer spending fuels economic growth. Today's report did revise December's sales 0.2% better than previously thought, but it appears that news has not influenced trading or mortgage pricing.

February's preliminary reading to the University of Michigan Index of Consumer Sentiment revealed a reading of 73.7. This was a decline from January's reading and lower than forecasts were calling for. This means that consumers are less optimistic about their own financial situations this month than many had thought. That is considered good news for the bond market and mortgage rates because waning consumer confidence usually translates into weaker levels of consumer spending.

Yesterday's 30-year Bond sale also was met with a lackluster interest from investors. This was no surprise and neither was the minimal reaction to the results once they were posted yesterday afternoon. Mortgage rates were not affected by the results of the sale yesterday.

Next week has several relevant economic reports scheduled, including two key inflation readings. Others include a couple of housing reports and a measurement of industrial output.

                Mel

Friday's bond market has opened fairly flat following this morning's release of January's employment figures. The stock markets are also relatively flat considering the past couple of days with the Dow down 11 points and the Nasdaq up 6 points. The markets ended the day up 10 and 15 respectively, the bond market is currently up 12/32, which will likely improve this morning's mortgage rates.

The Labor Department gave us today's major news. The monthly Employment report is arguably the most important report we see each month. Ironically, the market reaction has been little, especially when yesterday's usually irrelevant weekly unemployment report helped fuel a major stock sell-off and nice bond rally. It is supposed to be the other way around- monthly report causes significant volatility while the weekly report is a non-factor.

Today's release actually gave us mixed results. The headline number was the 9.7% unemployment rate that was well below the 10.0% that was expected. But offsetting that negative news for bonds was the loss of 20,000 jobs when new payrolls were expected to be up 15,000. Also favorable to bonds was a sizable downward revision to December's payroll numbers. It was previously announced last month that 85,000 jobs were lost during December, but today's release revised that loss to 150,000. This means that more jobs were lost during the past two months than many had thought.

The end result is a fairly calm day in the markets, at least so far. It appears that traders are content and sticking with yesterday's movements. I believe that today's employment report was not as bad as many had thought it would be. Much of yesterday's stock selling and bond buying were a result of fears that today's report was going to point towards a much weaker employment situation. It was not strong enough for the market to take back yester day's changes, but not weak enough to fuel another around of stock selling. In fact, despite all of the volatility this week, mortgage rates have not moved nearly as much as one would think. Therefore, in my opinion this keeps us on the edge of a sizable improvement or loss. I am leaning towards the bond market giving back some of yesterday's gains, which could translate into higher mortgage rates in the immediate future. It may not be today, but my risk versus reward scale is tilted towards the risky side of floating an interest rate over the next couple of days.

          Mel

Wednesday's bond market has opened in negative territory despite early stock weakness. The stock markets are giving back some of the gains from the previous two days with the Dow down 26 points and the Nasdaq up 1 point. The bond market is currently down 15/32, which will likely push this morning's mortgage rates higher.

The Institute for Supply Management released their services index late this morning, announcing a reading of 50.5. This was a little lower than expected, and as mentioned yesterday did not have an impact on this morning's bond trading or mortgage rates.

There are a couple of relevant reports scheduled for release tomorrow. The first is Employee Productivity and Costs data for the 4th quarter will be released early tomorrow morning. It can cause some movement in the bond market, but should have a minimal impact on mortgage pricing. If it varies greatly from analysts' forecasts of a 6.5% increase, we may see some movement in mortgage rates. However, the markets will be much more interested in Friday's data.

Late tomorrow morning, December's Factory Orders data will be posted. It is similar to last week's Durable Goods Orders release in giving us a measurement of manufacturing sector strength, but this data includes new orders for both durable and non-durable goods. It is one of the less important reports of the week, but can influence mortgage pricing if it varies greatly from forecasts. It is expected to show a 0.5% increase in new orders.

The Labor Department will post last week's unemployment figures tomorrow morning also, however, with January's monthly figures coming Friday morning, this release will likely have less impact on rates than the minimal amount it usually does. Look for the other reports of the morning to have a bigger influence on bond trading and mortgage rates than the weekly unemployment figures.

          Mel

Monday's bond market has opened well in negative territory following stronger than expected economic reports. The stock markets are starting the week in positive ground. The bond market is currently down 17/32, but due to strength late Friday we will see little change to this morning's mortgage rates compared to Friday's morning rates.

There were two relevant reports posted this morning. The first was January's Personal Income and Outlays data early this morning. It showed a 0.4% increase in income and a 0.2% rise in spending. The income reading was stronger than expected, but the spending increase fell short of forecasts. Therefore, this report can be considered neutral for mortgage rates.

The second report of the day was the Institute of Supply Management's (ISM) manufacturing index. This index tracks manufacturer sentiment by rating surveyed trade executives' opinions of business conditions. It showed a reading of 58.4 that was well above what analysts were expecting to see. This means that more surveyed manufacturers felt business had improved last month than the previous month, indicating a strengthening manufacturing sector. This can be considered bad news for bonds and mortgage rates.

There is no relevant economic data scheduled for release tomorrow, but we do have two speaking engagements to watch. Treasury Secretary Geithner will speak before a Senate Finance Committee at 10:00 AM ET regarding the U.S. budget. At the same time, Paul Volcker who is the Chairman of the President's Economic Recovery Advisory Board, will testify to the Senate Bank Committee about high-risk banking activities. Since the government bonds are highly involved in the economic recovery and budget issues, these speeches may affect the markets if something unexpected is said. This could be positive or negative for bonds and mortgage rates, but are worth watching.

                Mel

Thursday's bond market has opened in negative territory as yesterday's afternoon weakness continues into this morning's trading. The stock markets are showing noticeable losses with the Dow down 116 points and the Nasdaq down 42 points. The bond market is currently up 9/32.

December's Durable Goods Orders was posted this morning, giving us an indication of manufacturing sector strength. It revealed a 0.3% increase in new orders for big-ticket products, which fell well short of analysts' forecasts of a 2.0% increase. However, if more volatile transportation related orders are excluded, such as orders for new aircraft, we saw a larger than expected increase of 0.9 %. Therefore, this report basically gives us mixed results, but should be considered slightly negative for bonds and mortgage rates.

In a bit of positive news, the Labor Department reported that 470,000 new claims for unemployment benefits were filed last week. This was a decline from the previous week, but was much higher than the 450,000 that were expected. This is good news for bonds but its impact on trading and mortgage pricing is minimal because it is not considered to be very important news due to its single-week tracking.

There are three relevant reports scheduled for release tomorrow morning. The first is arguably the single most important report that we see regularly. The initial reading of the 4th Quarter Gross Domestic Product (GDP) will be posted early tomorrow. This data is so important because it is considered to be the best measurement of economic growth. The GDP itself is the total sum of all goods and services produced in the United States. Its' results usually have a major impact on the financial markets and can cause significant changes in mortgage rates. There are three readings to each quarter's activity, each released approximately one month apart. The first, which usually carries the most volatility, is expected to be an increase of 4.6%. A noticeably weaker reading would be great news for the bond market, questioning the pace of the economic recovery. That would likely fuel stock selling and a rally in bonds that would push mortgage rates lower tomorrow morning.

The 4th Quarter Employment Cost Index (ECI) is also scheduled for release early tomorrow morning. It measures employer costs for employee wages and benefits, giving us an indication of the threat of wage inflation. Current forecasts are showing an increase of 0.4%. A lower than expected reading would be favorable to bonds and mortgage rates, but the GDP reading will be the biggest influence on trading and rates tomorrow.

The last report of the week is the revised reading to the University of Michigan's Index of Consumer Sentiment. This index measures consumer confidence, which is thought to indicate consumer willingness to spend. I don't see this data having much of an impact on the markets or mortgage rates due to the importance of the employment index and GDP figures. It is expected to show a slight upward revision from the previous estimate of 72.8.

                Mel

Thursday's bond market has opened in negative territory then moved up on mixed economic data and a declining stock market. The Dow currently is down 213 points and the Nasdaq is down 25 points. The bond market is currently up 25/32, we will see a improvement in this morning's mortgage rates due to strength late yesterday.

The Labor Department reported this morning that 482,000 new claims for unemployment benefits were filed last week. This was much higher than the 440,000 that was expected and hints that further weakness in the employment sector may be ahead. However, this was only a single week's worth of data so look for next Thursday's numbers to be watched closely. Unfortunately for bonds and mortgage shoppers, this data does not usually have a lot of influence on the markets because it covers such a sort time frame. But the surprising jump did garner some attention in the markets, making next week's release more important.

The Conference Board, who is a New York-based business research group, posted December's Leading Economic Indicators (LEI) late this morning. They reported a surprising 1.1% jump, well over the 0.7% increase that was expected. This means that they are predicting a rapid increase in economic activity over the next three to six months. While that is more of a prediction than factual results, if it is an accurate forecast it would not bode well for bonds and mortgage rates in the near future.

There is no relevant economic data tomorrow, so look for the stock markets to be the biggest influence on bond trading and mortgage rates. I suspect it may be a fairly quiet day for rates unless something drastic happens to stocks or unexpected news comes out.

                Mel

Tuesday's bond market has opened in negative territory as stocks recover a good part of Friday's losses. The stock markets are off to a strong start following yesterday's holiday with the Dow up 115 points and the Nasdaq up 32 points. The bond market is down 6/32.

This week brings us the release of three pieces of economic data to digest, but only one is considered to be of high importance. The first two reports will be released early tomorrow morning. The Labor Department will post their Producer Price Index (PPI) and the Commerce Department will release December's Housing Starts data, both at 8:30 AM. The PPI is much more important to the markets and mortgage rates because it measures inflationary pressures at the producer level of the economy. It is the sister report to last week's Consumer Price Index (CPI) that didn't give us an y major surprises. Analysts are expecting to see no change in the overall reading and a 0.1% increase in the more important core data reading that excludes volatile food and energy prices. Unexpected increases, particularly in the core reading, could mean higher mortgage rates tomorrow.

December's Housing Starts helps us measure housing sector strength and future mortgage credit demand by tracking construction starts of new homes. It is not considered to be one of the more important releases each month, so I don't see it causing much movement in mortgage rates tomorrow. It is expected to show little change from November's starts.

Overall, tomorrow will likely turnout to be the most important day of the week with the PPI scheduled. If it meets expectations or is lower than forecasts, we could see mortgage rates close the week lower than this morning's opening levels. There will be discussion about Congress raising the debt ceiling this week that ma y bring the amount of outstanding U.S. debt in focus again. Unfortunately, if it becomes a hot topic, the bond market may see pressure as everyone is reminded about the large sum of debt we currently have outstanding. But, I don't think we have too much to be concerned with in this week's economic data and could see the rates move little this week.

                Mel