Market Reports
A Mortgage Update from Jay Skwierawski for the Week of October 19
Hello Everybody!
Mortgage rates improved last week on some less than favorable news on the economy. With the mortgage bond market in a very oversold condition, it was not surprising to see it finally improve this week. What did surprise us this week is seeing the disconnect between the stock and bond markets continue. Typically, when the stock market goes up, the price of bonds goes down (and rates increase,) as investors pull their money out of the bond market and go into the stock market. Conversely, when the stock market goes down, the price of bonds go up (and rates decrease,) as investors pull their money out of stock and put it into bonds. What we have been seeing a lot of in the past few weeks is both markets selling off, as investors have needed to raise cash to get out of positions in both markets. This has made it very hard to predict what is going to happen from day to day in either market, and when you have the stock market moving by over a 1000 points in one day, this further exacerbates the situation!
Let's take a look at the economic reports that came out last week:
On Wednesday it was reported that the Producer Price Index fell by 0.4 percent, as expected, on further decreases in the cost of oil. The Core PPI, excluding food and energy costs, rose by 0.4 percent. The first number was good for the markets, the second number not so good. Retail Sales fell by 1.2 percent versus the 0.7 percent drop that was expected, and Retail Sales, excluding autos, came in at -0.6 percent, lower than the -0.2 percent that was expected. This shows a further erosion in the U.S. economy. The New York State Empire Index came in with a surprisingly low reading of -24 in October, from a previous reading of -7.4 in September, showing a slowdown in the New York region. Thursday brought news that U.S. Industrial Production fell by a whopping 2.8 percent in September, much more that the drop of 1.0 percent that was anticipated. The Consumer Price Index (CPI) came in flat and the Core CPI, excluding food and energy costs, came in slightly better than expected, both reflecting the recent drop in oil and gasoline prices. First time unemployment claims improved from last week, while the Philadelphia Fed Index (similar to the Empire Index) showed a substantial drop from September to October. Finally, on Friday we found out that New Housing Starts continued their downward spiral along with Building Permits for new homes, and the University of Michigan Consumer Sentiment Index dropped over the previous reports as the continuous flow of bad economic news out of the media continues to pound on minds of consumers.
Beyond economic reports, there was also news that the Treasury has started putting the bailout plan to action, announcing that it was investing up to $25 billion in each of nine banks, including JP Morgan Chase, Bank of America, Citigroup, and others. The plan is that this will increase their capital levels to a place where they will want to and be able to freely lend again. On Wednesday, the Chairman of the Federal Reserve gave a speech, where he painted a less than lovely picture of the near term economic future. The markets had been hoping for more, and when they didn't get it, there was a sell-off in both stocks and bonds. We also saw the price of oil fall to $71 per barrel, and close at its lowest level since August, 2007. Now, if only we could get gas prices to follow. I was listening to a reporter question an oil company executive about why there wasn't a large drop in gas prices on a day when oil had dropped by $7 per barrel in one day. The answer was that "the oil companies had paid more for the oil that was in the tanks at the gas stations and they couldn't drop the price until that gas was gone." Funny, when oil jumped by $7 per barrel in one day, we saw a large increase in gas prices. I guess the cost of the gas in the tanks only matters when oil prices are falling!
The week ahead will be a quiet one, at least as far as economic reports are concerned. I'm certain that it will still have its exciting moments and surprises, but it would sure be nice if it didn't! Here's the news we will be watching:
Monday - The Index of Leading Economic Indicators, which predicts the economy up to six months ahead, is expected to come in at -0.3 percent, slightly improved over last month's reading of -0.5 percent. This report has a very low impact on mortgage rates.
Wednesday - Crude oil inventories will be reported and will be watched closely for its impact on those dropping oil prices.
Thursday - Weekly first time unemployment claims will be reported (Moderate Impact)
Friday - Existing Home Sales are expected to show an increase in October (Moderate Impact)
We will also be on the lookout for more news on the bailout plan, OPEC's decision on whether to cut back on oil production, FNMA and FHLMC changes and whether or not the volatility in the stock market is continuing this week. If there are any large movements on any fronts, we will keep you informed of them.
Above is a chart showing the price of mortgage bonds over the past 90 days, with the most recent trading days, including the four trading days from last week, on the right side. You will notice the chart moving higher. Remember that mortgage bond prices move the opposite of mortgage rates, so on this chart up and green are good, while down and red are bad.
Have a great week!
Jay Skwierawski
President
First Sterling Mortgage Services, LLC
737 North Michigan Avenue, #1900
Chicago, IL 60611
312.268.7601
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