Monday Market Update

In recent weeks, mortgage rates have been pushed and pulled mostly by Fed policy expectations and European Union headlines. With little news on these fronts, though, the US economic data emerged as the main driver of mortgage rates this week. Unfortunately for mortgage rates, the data was generally stronger than expected, and rates ended the week higher.

This week's economic data exceeded expectations nearly across the board. Important broad indicators of economic growth, including Retail Sales and Industrial Production, showed solid increases from last month. The Philly Fed manufacturing index rose to the highest level since April. Perhaps the biggest surprise came from the housing data (see below). While stronger economic growth is great news for the economy, it tends to increase future inflationary expectations, which is bad news for mortgage rates.

The national housing data released this week continued to reflect solid improvement. September Housing Starts jumped 15% from August to the highest level since July 2008. Building Permits showed similar strength. September Existing Home Sales were 11% higher than one year ago, making 15 straight months of increases on an annual basis. Inventories of unsold existing homes declined to the lowest level since March 2006. The October NAHB Home Builder Sentiment index rose slightly, its sixth consecutive monthly increase, to the highest level since June 2006.

The big story next week will be Wednesday's Fed meeting, although investors are not expecting any major changes from the Fed following the announcement of QE3 at the last meeting. The most significant economic data will be Friday's release of third quarter Gross Domestic Product (GDP), the broadest measure of economic growth. Before that, New Home Sales will come out on Wednesday. Durable Orders and Pending Home Sales will be released on Thursday. In addition, there will be Treasury auctions on Tuesday, Wednesday, and Thursday.

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The Market Update

 

While there was a full slate of economic data and Treasury auctions this week, investors were focused on a speech by Fed Chief Bernanke on Friday. The resulting increase in expectations for future Fed action was positive for mortgage rates, which ended the week a little lower.

Bernanke did not commit to implementing any additional easing measures in his highly anticipated speech from Jackson Hole, but his comments caused investors to raise their expectations for a third round of Fed asset purchases (called quantitative easing or QE3). Bernanke emphasized that a high jobless rate imposes large costs on the economy and left the door open for further easing. QE3 would likely involve Fed purchases of mortgage-backed securities (MBS), so mortgage rates improved after his speech. The possibility of additional monetary stimulus also caused stocks to rally on Friday.

The housing sector data released this week continued to show improvement. July Pending Home Sales increased 2% from June to the highest level since April 2010, which was shortly before the deadline for the homebuyer tax credit. Pending Home Sales are a leading indicator of future housing market activity. The June S&P/ Case-Shiller 20-city home price index increased 2.3% from May.

The biggest economic event next week may be the European Central Bank (ECB) meeting on Thursday. Investors will be watching whether there will be an announcement of additional aid measures for European countries with debt troubles. The biggest US economic report next week will be the important Employment data 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, particularly this month coming out a little before the next Fed meeting on September 12. Before the employment data, ISM Manufacturing and Construction Spending will be released on Tuesday. Productivity is scheduled for Wednesday. ISM Services will come out on Thursday. Mortgage markets will be closed on Monday in observance of Labor Day.

Market Update :: More Stimulus Soon?

The Fed Minutes were the big story this week, raising expectations that the Fed will provide additional monetary stimulus soon. Mixed US economic data and minor news out of Europe had little impact. As a result, mortgage rates ended the week lower.

Released on Wednesday, the detailed Minutes from the August 1 Fed meeting stated that "many" members judged that further monetary easing would be called for in the near future unless economic growth shows a "substantial and sustainable" increase. In short, the Fed wants to see quicker improvement in the labor market and is prepared to act to help achieve this. Following the news, investors raised their expectations that the Fed will announce a third round of quantitative easing (QE3) soon, which would likely involve Fed purchases of mortgage-backed securities (MBS). As a result, demand for MBS increased, causing mortgage rates to improve.

One relatively bright spot for the economy this year has been improving housing market data, which was encouraging again this week. July Existing Home Sales rose 2% from June, while July New Home Sales increased 4% from June. Both measures were significantly higher than one year ago. With mortgage rates still at very low levels and home affordability very high, any pickup in the labor market could lead to increased activity in the housing market.

Next week will be packed with economic news. Revisions to second quarter GDP, Pending Home Sales, and the Fed's Beige Book will come out on Wednesday. Core PCE inflation and Personal Income will be released on Thursday. Chicago PMI Manufacturing and Factory Orders will come out on Friday. In addition, Fed Chief Bernanke will be speaking from Jackson Hole on Friday, and it's possible that he will announce new Fed actions. EU officials will be meeting with Greek leaders to discuss the terms of the bailout package. There will be Treasury auctions on Tuesday, Wednesday, and Thursday.