Market Reports
A Mortgage Update from Jay Skwierawski for the Week of August 24
Hello Everybody!
Interest rates improved ever so slightly last week. Bad news on inflation was offset by a decrease in the price of oil. Most of the other economic news came in just as the markets anticipated. The news at the end of the week that the Korea Development Bank may be interested in acquiring Lehman Brothers brought some much needed confidence into the financial sector, which caused the stock market to rally. As is so often the case, investors pulled their money out of the treasury and mortgage bond markets to buy into the stock market rally. This caused a rally that had been happening in bonds to come to an abrupt halt.
Let's take a look at the news from last week:
On Tuesday, it was reported that the Producer Price Index (a measure of inflation at the wholesale level) was up 1.2 percent in July, double what was expected, with a year over year inflation figure of a very hot 9.8 percent! It was the biggest gain in 27 years. The "core PPI" figure, which strips out food and energy costs, was up 0.7 percent in July, well above expectations of up 0.2 percent, and leaving a year over year core inflation rate of 3.5 percent, the highest since 1991. The market reaction was actually quite muted, as most of the increase seems to be oil price driven, and the price of oil has dropped significantly since July, hitting a low recently of $111 per barrel, down from highs of $147 per barrel just a few weeks ago. Lower oil prices should result in lower inflation, as long as oil prices don't continue their trek higher. This week, oil reached a high of $121 per barrel on concerns over the dispute between Georgia and Russia, and a weakening dollar. Oil finished the week back down around $114, which bodes well for future inflation. Also on Tuesday, the government reported that new home starts came in at 965,000 units, which was slightly better than expected, yet still over 100,000 less than in June. At the same time, permits for new homes came in lower than expected. This housing news also helped to offset the worse than expected inflation news. On Thursday, First Time Unemployment claims came in close to the expected number. The Index of Leading Economic Indicators came in slightly worse than expected, and the Philadelphia Fed Index came in slightly better than expected. All three of these reports were treated as nonevents. The big news on Thursday was oil. As the price of oil rose on Thursday, so did interest rates!
Next week is a busy news week as far as economic reports go. Here's what we have to look forward to:
Monday - July Existing Home Sales came in this morning slightly better than expected (This report has a MODERATE impact on rates)
Tuesday - July New Home Sales are expected to show a slight decrease over June's sales. (MODERATE)
Tuesday - Consumer Confidence should show an increase, especially with gas prices coming down. (MODERATE)
Tuesday - The minutes from the most recent Federal Reserve Meeting will be released. The markets will be looking for signs of the future direction of interest rates. (HIGH)
Wednesday - July Durable Goods Orders are expected to show a decrease from June's numbers. (MODERATE)
Thursday - First Time Jobless Claims are released (MODERATE)
Thursday - Gross Domestic Product (1st revision) - The second quarter GDP is expected to show an increase over the original estimate of +1.9 percent. There is also an inflation index tied to the GDP - the GDP Chain Deflator. The GDP itself has a moderate impact on rates, while the Chain Deflator has a HIGH impact on rates, as do most inflation gauges.
Friday - Personal Income and Personal Spending are both expected to show decreases in July. (MODERATE)
Friday - Personal Consumption Expenditures (PCE) and Core PCE, excluding food and energy - These figures are the Federal Reserve's favorite gauges of inflation. They can have a very HIGH impact on mortgage rates.
Friday - Chicago Purchasing Manager's Index (PMI) - a gauge of the economy in the Chicago area is expected to show a decrease in economic activity in July. This report has a HIGH impact on mortgage rates.
Friday - University of Michigan Consumer Sentiment Index is expected to show an increase, especially with oil and gas prices falling. (MODERATE)
As far as economic news goes, it's going to be a very busy week. And this list doesn't even take into account the other things that can affect mortgage rates, like the price of oil, the skirmish in Georgia, the market's uneasiness about FNMA and FHLMC and the number of people that will be getting back on regular sleeping schedule now that the Olympics are over!
We will keep you posted on any major developments in the mortgage industry. Have a great week!
The chart above shows the price of mortgage bonds over the past 90 days, with the most recent days on the right. The price of bonds moves opposite mortgage rates, so on this chart, up and green are good, while down and red are bad. You will notice that the market started the week flat, rallied on Wednesday, tried to continue the rally on Thursday, but then sold off and finished flat on Friday. The end result - rates finished the week just about where they started.
Jay Skwierawski
President
First Sterling Mortgage Services, LLC
737 North Michigan Avenue, #1900
Chicago, IL 60611
312.268.7601
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