Mortgage Market News for the week ending June 24, 2011

No Change From Fed

Investors focused on the Fed meeting and Greece this week. A reduced growth forecast from the Fed and continued concerns about the situation in Greece helped mortgage rates move a little lower.

As widely expected, the Fed made no change in the fed funds rate, and Fed policy appears unlikely to change in the near-term. The Fed lowered its forecast for 2011 GDP growth to 2.8%. This is down from 3.2% at the last meeting, but it does assume faster growth during the second half of the year. Inflation is expected to remain low. The Fed gave no indication that it will provide additional monetary stimulus any time soon. In short, it will likely take a major improvement or deterioration in the economic outlook for the Fed to take significant additional action.

On Thursday, Greece reached a deal with European Union (EU) and International Monetary Fund (IMF) officials. Greece will receive additional aid from the EU and the IMF, but to get the aid it must further reduce government spending, and its ability to execute on the deal is in doubt. The question is whether the Greek government has the political will to pass new austerity measures. The answer could lead to further market volatility. If the opposition is too strong and the measures fail, the resulting uncertainty likely would lead to a global flight to safety, which would be good for mortgage rates. On the other hand, if the measures successfully pass, mortgage rates likely would move higher.

Also Notable:
• May Durable Orders increased 2% from April
• May Existing Home Sales fell 4% from April
• The Treasury will auction $99 billion in 2-yr, 5-yr, and 7-yr securities next week
• After government intervention, oil prices declined to the lowest levels in 4 months

Week Ahead Next week, the Core PCE price index, the Fed's preferred inflation indicator, will come out on Monday, along with Personal Income. Consumer Confidence is scheduled for Tuesday. Pending Home Sales, a leading indicator for the housing sector, will be released on Wednesday. The Chicago PMI manufacturing index will come out on Thursday. There will be Treasury auctions on Monday, Tuesday, and Wednesday. The Fed's quantitative easing program is scheduled to conclude on Thursday.

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Mortgage Market News for the week ending June 17, 2011

Inflation Higher

There was a lot of volatility during the middle of the week, but mortgage rates ended nearly unchanged. Weak manufacturing data offset higher than expected inflation readings. Similarly, increased social unrest in Greece early in the week was balanced by renewed hopes on Friday for a quick solution to Greece's debt problems.

The current economic outlook, which includes expectations for tame inflation, has supported low mortgage rates. The monthly inflation reports released this week caused investors some concern, however. The May Consumer Price Index (CPI) rose 0.2% from April, which was above the consensus forecast, and CPI was 3.6% higher than one year ago, which was the highest annual rate since October 2008. Core CPI, which excludes food and energy, increased at a 1.5% annual rate, also above expectations, and up from 1.3% last month. Meanwhile, inflation readings in China rose to the highest levels since July 2008. While it will take several months of unexpectedly high data to signal a trend, investors will be closely watching for signs of a rapid increase in inflation, which would be negative for mortgage rates.

The housing sector data released this week was stronger than expected. May Housing Starts rose 4% from April, which was well above the consensus forecast. Building Permits increased 9% to the highest level since December. A closer look at the data, though, reveals that most of the improvement came from multi-family units, while new construction of single-family homes remained at low levels.

Also Notable:
• Philly Fed declined to the lowest reading since July 2009
• May Retail Sales fell, the first monthly decline since June 2010
• The IMF lowered its 2011 forecast for US GDP growth to 2.5%
• China's central bank again raised reserve requirements to fight inflation

Week Ahead The big story next week will be Wednesday's Fed meeting. No change in rates is expected, but investors will be seeking hints of any additional monetary stimulus to boost the economy. Existing Home Sales will come out on Tuesday, and New Home Sales will be released on Thursday. Durable Orders, an important indicator of economic growth, will come out on Friday. The final revisions to first quarter 2011 GDP will also be released on Friday.

Mortgage Market News for the week ending June 10, 2011

Little Change in Mortgage Rates

While mortgage rates reached a new low for the year during the middle of the week, they ended nearly unchanged. It was a light week for economic data, and demand for the Treasury auctions was close to average, so investors had little reason to alter their outlooks.

Economic growth during the first half of the year has been slower than expected, and the consensus economic outlook is for just a modest pick up in growth later in the year, with continued low inflation. This week's Beige Book confirmed that economic growth is moderate in most regions with few inflationary pressures. In speeches this week, Fed officials agreed that the first half performance was somewhat disappointing, partly due to the earthquakes in Japan. The downwardly revised growth rates in recent forecasts have helped mortgage rates remain at low levels.

How the situation in Greece will be resolved remains a major consideration for investors, and European officials are very divided over what approach to take. The basic options are to provide a bailout package or to allow Greece to default on its sovereign debt. Due to the risk of default, weaker European countries have had to offer yields in excess of 20% to persuade investors to buy their bonds. Despite these yields, many investors have shifted funds to the relative safety of US bonds, including mortgage-backed securities (MBS). This added demand has been favorable for mortgage rates.

Also Notable:
• US household debt shrank by 2.0% during the first quarter of 2011
• Bernanke gave no sign that additional monetary stimulus is coming
• The European Central Bank (ECB) held rates steady, as expected
• Fitch Ratings will put US debt on watch for downgrade if lawmakers fail to raise the debt ceiling

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 Tuesday. The Consumer Price Index (CPI), the most closely watched monthly inflation report, will come out on Wednesday. CPI looks at the price change for those finished goods which are sold to consumers. In addition, Retail Sales will be released on Tuesday. Retail Sales account for about 70% of economic activity. Industrial Production, another important indicator of economic growth, will come out on Wednesday. Housing Starts will be released on Thursday. Philly Fed, Empire State, Consumer Sentiment, and Leading Indicators will round out the schedule.

Mortgage Market News for the week ending June 3, 2011

Jobs Data Falls Short

Friday's Employment report was a disappointing indicator of the current state of the US economic recovery. This report, along with just about every other economic measure released this week, was weaker than expected. As a result, mortgage rates fell to a new low for the year. Against a consensus forecast of 150K, the economy added just 54K jobs in May, and the figures for prior months were revised lower as well. This was the lowest monthly level of net job creation since September 2010.

The big question about the economy is whether the slowdown in growth is mostly due to temporary factors or whether it will be longer-term. The earthquake in Japan caused a shortage of parts, which had a large impact on global manufacturing, and the swift rise in oil prices caused consumers to scale back on other spending. The Japanese earthquake was a one-time event, and oil prices have dropped back to $100 per barrel. Other investors, though, feel that economic troubles are more fundamental. They view debt problems in weaker European countries and a winding down of some fiscal and monetary stimulus programs in the US as major factors in the slower growth. Since mortgage rates are heavily influenced by the pace of economic growth, the degree to which the slowdown proves to be shorter-term versus longer-term will likely determine how long rates remain at these low levels.

Also Notable:
• The May Unemployment Rate increased to 9.1% from 9.0% in April
• The ISM Manufacturing index dropped to the lowest level since September 2009
• The Treasury will auction $64 billion in 3-yr, 10-yr, and 30-yr securities next week
• Moody's may put US debt on review for a possible downgrade if the debt ceiling is not raised

Week Ahead The Economic Calendar will be very light next week. The Fed's Beige Book will come out on Wednesday. The Trade Balance will be released on Thursday, and Import Prices will come out on Friday. There will be Treasury auctions on Tuesday, Wednesday, and Thursday.