Last week saw about a 1/8th percent increase in mortgage rates. Stronger than anticipated financial news as well as continued strength in the stock market were the major forces driving this change. Additionally, it appears that foreign investors are beginning to lose interest in U.S. bonds. This is also leading to deteriorating pricing in the market.
This week sees a number of major economic news releases. Most importantly, this is the week that Fed Chairman Alan Greenspan steps down after over 18 years at the helm. Ben Bernanke will take over the post on Tuesday. Greenspan will deliver his final Fed Policy Statement on Tuesday, and everyone predicts that it will be yet another 1/4 % interest rate hike. Furthermore, word on the street is that Bernanke will likely follow with one more rate hike in late March before finally returning to a neutral policy.
This weeks releases include:
Mon. January 30 08:30 Personal Income
Mon. January 30 08:30 Personal Spending
Tue. January 31 08:30 Employment Cost Index
Tue. January 31 10:00 Chicago PMI
Tue. January 31 10:00 Consumer Confidence
Tue. January 31 02:15 FOMC Meeting
Wed. February 01 10:30 Crude Inventories
Wed. February 01 10:00 ISM Index
Thu. February 02 08:30 Jobless Claims (Initial)
Fri. February 03 08:30 Non-farm Payrolls
Fri. February 03 08:30 Unemployment Rate
Fri. February 03 08:30 Hourly Earnings Jan
Fri. February 03 08:30 Average Work Week
Fri. February 03 09:45 Consumer Sentiment Index (UoM)
Fri. February 03 10:00 ISM Services Index
There were a number of events last week which influenced both the stock and bond markets. Bin Laden's threat of new attacks, Iran's nuclear program, and disappointing earnings from bellweathers GE and Citigroup caused bond prices to rise last week. In reaction, mortgage rates appear to have stabilized.
Last week new home sales data showed a cooling off, but historically, the housing starts are still very strong. This week's data will include durable goods orders as well as release of the GDP numbers. None of this news should have a major impact on the bond markets.
Mortgage rates finished last week basically unchanged. The producer price index showed a healthy 5.4% increase in 2005 due mostly to rising energy costs. Factoring out food and energy, the PPI rose only 1.7%. This indicates that inflation is still in check and should be good news for interest rates as we move into 2006.
This week's big news will be the release of the Consumer Price Index on Wednesday. This will give further indication of whether the Fed's efforts to keep inflation under control are working. The stock market continues to fight to keep the Dow above the 11,000 mark and the bond markets will attempt to keep a run above the 100 day moving average for the first time in over a year.
Continued strength in the stock market could be bad news for bonds and mortgage rates. A stock rally could cause funds to flow out of bonds which would cause a rise in interest rates.
The language from the Fed changed slightly last week leading bond investors to take this change as a shift in Fed policy. Their hope is that the slew of rate increases will be over following a final Fed increase in January. The result of all this was slightly lower mortgage rates over the last week.
The big economic report for this week will come on Friday when the trade balance and jobless claims reports are released. Also, with the Dow Jones Industrials hitting their highest levels since June 2001, bond traders will continue to watch the stock market. If money continues to pour into stocks, it could mean a weakening in the bond market and higher mortgage rates in turn.
Overview
Last week saw the inversion of the yield curve with respect to the 2 and 10 year bonds. This week brings a slew of new financial data which could have serious impacts on mortgage bonds.
Last Week
The major news in the financial markets last week was the appearance of the inverted yield curve. This occurs when the 2-year treasury moves higher than the 10-year longer term treasury. Historically, this has almost always signalled recession.
This inversion, however, may be different. Even Mr. Greenspan seems optimistic about the current financial cycle. Because of the 12 consecutive rate increases by the Fed, this has quickly pushed the 2-year yield up. The 2-year bond is a very short-term instrument and is mostly concerned with short-term data - ie the Federal funds rate. While the 10-year bond is much less concerned with short term interest rate fluctuations. It is mainly concerned with inflation. As there is no clear data on the horizon to suggest near-term problems with inflation, the 10-year bond coninues to drift sideways.
This Week
While last week was a very quiet week in terms of new economic data, there is a busy calendar in place this week. The highlight will be Friday's Job's Report.
