Mortgage Market News for the week ending April 29, 2011

No Change From Fed

The most highly anticipated economic event this week was Wednesday's Fed meeting. The Fed indicated that it will not make any changes in policy at this time, which investors took as positive news for stock and bond markets. Weakness in the GDP and Jobless Claims data released this week also helped mortgage rates improve. As a result, mortgage rates ended the week a little lower.

As expected, the Fed held the fed funds rate steady, and the statement was very similar to the last one. The Fed made no change to its plans to complete the $600 billion quantitative easing program by the end of June and will continue to reinvest the proceeds from maturing securities to maintain the size of its portfolio. The Fed did lower its near-term forecast for GDP growth and raised its outlook for both overall and core inflation levels for this year. Investors found relief in the lack of surprises and boosted their investments in both stocks and bonds, including mortgage-backed securities (MBS).

The housing data released during the week reflected improvement from last month. March New Home Sales rose 11% to an annual rate of 300K units. The inventory of unsold new homes fell to the lowest level since 1967. March Pending Home Sales, a leading indicator, rose 5%. The chief economist of the NAR predicted that existing home sales will increase by 5% to 10% in 2011 due to an improving labor market and favorable affordability levels.

Also Notable:

GDP showed that the economy grew at a 1.8% annual rate during the first quarter

The March Core PCE price index was a tame 0.9% higher than one year ago

The Dow stock index reached a multi-year high above 12,800

The value of the US dollar fell to the lowest level since the summer of 2008

Week Ahead The biggest economic event next week will be the important Employment report on Friday. As usual, this data on the number of jobs, the Unemployment Rate, and wage inflation will be the most highly anticipated economic data of the month. Before the employment data, the ISM Manufacturing index and Construction Spending will be released on Monday. Factory Orders will come out on Tuesday. ADP Employment and ISM Services are scheduled for Wednesday. Finally, Productivity will be released on Thursday.

Mortgage Market News for the week ending April 21, 2011

Mortgage Rates Improve on Debt Warning

With little economic data, it was a relatively quiet week for mortgage rates. The biggest economic news was a surprise warning from a major rating agency that it may downgrade US debt, but investors viewed this as positive for bonds. As a result, mortgage rates ended the week a little lower.

On Monday, S&P unexpectedly announced that it had lowered its outlook for US debt due to growing budget deficits. Basically, this means that S&P sees a higher risk that they will need to downgrade the credit rating for US debt over the next couple of years. A lower credit rating would increase the yield required by all investors to purchase US debt to offset the higher perceived risk. In addition, some investors are not permitted to own lower rated debt, and the selling from these investors would add further upward pressure to yields.

In recent months, similar warnings pushed yields higher in smaller European countries such as Greece and Portugal. The immediate reaction to Monday's S&P announcement was a rise in US bond yields as well, but yields soon moved lower as lawmakers began to use the news to support their plans for deficit reduction. Investors expect that the threat of a lower debt rating will make it easier for politicians to make difficult cuts in government spending. In short, what would normally be bad news for mortgage rates actually helped them improve.

Also Notable:
• March Existing Home Sales rose 4% from February
• Inflation in China rose to a 32-month high
• Gold prices reached a record high above $1,500 per ounce
• The Treasury will auction $99 billion in 2-yr, 5-yr, and 7-yr securities next week

Week Ahead
The biggest economic event next week will be Wednesday's Fed meeting. For the first time, the Fed Chief will hold a press conference after the meeting to discuss the Fed's announcement. No change in rates is expected, but investors will be looking for hints about when the Fed will begin to tighten monetary policy. The most significant economic report next week will be GDP on Thursday. GDP is the broadest measure of economic growth. Before that, New Home Sales will be released on Monday. Durable Orders, another important indicator of economic growth, will come out on Wednesday. Pending Home Sales, a leading indicator, will be released on Thursday. Chicago PMI, Personal Income and Core PCE inflation will come out on Friday. Consumer Confidence and Consumer Sentiment will round out the busy schedule. In addition, there will be Treasury auctions on Tuesday, Wednesday, and Thursday.

Mortgage Market News for the week ending April 15, 2011

Mortgage Rates Improve on Inflation Data

On target inflation data and strong demand for the longer-term Treasury auctions were favorable for mortgage rates this week. The other major economic reports contained few surprises. As a result, mortgage rates ended the week lower.

In recent weeks, the primary influence for mortgage rates has shifted from global events in Japan and the Middle East to the outlook for inflation. Last week's rate hikes in Europe and China to fight inflation raised concerns that the Federal Reserve was falling behind with its lack of tightening, and mortgage rates moved higher. This week's tame inflation data eased those concerns, however, and mortgage rates improved. The March Consumer Price Index (CPI) rose 0.5% from February, matching the consensus forecast, and was 2.7% higher than one year ago. Core CPI, which excludes food and energy, increased at a low 1.2% annual rate, which was a little lower than expected.

Rising commodity prices have focused attention on the distinction between overall inflation levels and core inflation levels. Core inflation excludes the volatile food and energy components, so it is often viewed as a better indicator of short-term inflation trends by economists and Fed officials. While consumers certainly struggle with higher gas prices, longer-term inflation trends generally are more influenced by other factors such as wages and housing costs, which recently have been increasing very slowly. In short, stronger than expected demand for commodities and violence in the Middle East have pushed energy prices significantly higher, but Fed officials forecast that this represents a temporary increase in overall inflation levels. Commodity prices are not expected to climb at this pace indefinitely. If food and energy prices stabilize, then the gap between overall and core inflation levels will likely shrink.

Also Notable:

The Beige Book reported that economic activity "generally continued to improve"

Capacity Utilization rose to the highest level since August 2008

The sovereign debt of Ireland was downgraded again

Gold prices reached a record high above $1,480 per ounce

Week Ahead Next week will be shortened by a holiday and will be a light week for economic data. Housing Starts will be released on Tuesday. Existing Home Sales will come out on Wednesday. Philly Fed and Leading Indicators are scheduled for Thursday. Mortgage markets will close early on Thursday and will be closed on Friday in observance of Good Friday.

Mortgage Market News for the week ending April 8, 2011

Inflation Concerns Push Rates Higher

With little other economic news, inflation concerns weighed on mortgage rates this week. Despite rising commodity prices, Fed officials appear to be in no rush to tighten monetary policy. Investors, worried about the risk of higher inflation, pushed mortgage rates a little higher.

While the ECB (European Central Bank) and China raised rates this week to fight inflation, US Fed officials continued to downplay the risks. According to the Fed Minutes released this week and in recent statements, the majority of Fed officials maintain the view that higher commodity prices are unlikely to raise future inflation expectations. These officials expect the impact to be "transitory" and "muted". To support the economic recovery, they believe that the Fed should move slowly in removing monetary stimulus. The more hawkish minority at the Fed is gaining support, however, and several Fed officials have suggested that the Fed may need to tighten monetary policy before the end of the year. In light of the Fed's debate, investors will be closely watching next week's important inflation reports.

Even with higher energy prices, consumers continued to spend freely on other items last month. The March sales figures from about two dozen large retail chain stores released on Thursday were stronger than expected. Consumer spending accounts for about 70% of economic activity, so this data was encouraging news for the economy.

     Also Notable:

• Continuing Jobless Claims fell to the lowest level since October 2008
• The sovereign debt of Portugal was downgraded again
• Oil prices reached a 30-month high above $110 per barrel
• The Treasury will auction $66 billion in 3-yr, 10-yr, and 30-yr securities next week

Week Ahead The most significant economic data next week will be the monthly inflation reports. The Producer Price Index (PPI) focuses on the increase in prices of "intermediate" goods used by companies to produce finished products and will come out on Thursday. The Consumer Price Index (CPI), the most closely watched monthly inflation report, will come out on Friday. CPI looks at the price change for those finished goods which are sold to consumers. In addition, Retail Sales will be released on Wednesday. Industrial Production, another important indicator of economic growth, is scheduled for Friday. Import Prices, the Trade Balance, Empire State, Consumer Sentiment, and the Fed's Beige Book will round out a busy week. There will be Treasury auctions on Tuesday, Wednesday, and Thursday. Investors also will be watching to see if Congress reaches an agreement on the debt ceiling to avoid a shutdown.

Mortgage Market News for the week ending April 1, 2011

Mortgage Rates Increase

An improving economic outlook was unfavorable for mortgage rates this week. The Dow stock index reached a new high for the year, as investors shifted funds from bonds to stocks. Weaker than average demand for the 7-yr Treasury auction also helped push mortgage rates a little higher.

The economic data released during the week generally was a little stronger than expected. Most significant was the monthly Employment report. Against a consensus forecast of 195K, the economy added 216K jobs in March. The Unemployment Rate declined to 8.8%, the lowest level since March 2009, from 8.9% in February. Stronger economic growth increases inflationary pressures, which is negative for mortgage rates.

The recently passed Dodd-Frank Act requires Federal housing regulators to define the characteristics of loans which will be exempt from new risk retention requirements. Such loans will be known as Qualified Residential Mortgages (QRM). Non-QRM loans will likely require higher interest rates than QRM loans. This week, the first proposed QRM characteristics were announced. In the proposal, all government guaranteed or insured loans, including FHA/VA, Fannie Mae and Freddie Mac loans, will be QRM. Unfortunately, outside of these agency loans, the definition was very strict, making it hard to qualify. There will now be a 60-day comment period.

Also Notable:
• The February Core PCE inflation index was just 0.9% higher than one year ago
• February Pending Home Sales, a leading indicator, rose 2.1% from January
• Oil prices rose to a 2.5-year high above $107 per barrel
• The Fed's Lacker suggested that Fed asset sales and rate hikes could happen this year

Week Ahead

After a busy week, the Economic Calendar will be extremely light next week. ISM Services will come out on Tuesday. The minutes from the March 17 Fed meeting will also be released on Tuesday. These detailed notes on the discussion between Fed officials provide additional insight into the reasoning behind the Fed's decisions.