Rate Watch
As discussed in my previous newsletter, there was not much activity on last week's economic calendar. However, investor anticipation of this week's Fed meeting made for a volatile week and mortgage rates made a big jump. According to Freddie Mac's
weekly survey rates hit a 4-year high as the benchmark 30-year fixed-rate mortgage rose to a average of 6.71 percent, up from 6.63 percent the previous week. The 30 year fixed has not reached these heights since May 31, 2002. Other products followed. Rates on the 15-year fixed-rate mortgage increased to 6.36 percent, up from the previous week's 6.25 percent. Short term rates broke a streak as well. The one-year adjustable rate mortgage rose to 5.75 percent, up from the previous week's 5.66 percent and the highest level since one-year ARMs averaged 5.77 percent the week of Aug. 3, 2001.
This all brings us to this week's big event. At the conclusion of their meeting Thursday afternoon, the Fed’s
Federal Open Markets Committee will have raised their key rate 25
basis points to 5.25%. This action is almost universally expected. Since Investors are still unsure about the prospects of future Fed hikes, the Fed's statement following the meeting will be closely scrutinized. The effect on mortgage rates will depend on the perceived prospect for future hikes and the perception of the Fed’s success in fighting the battle against inflation. All borrowers should lock rates as soon as possible. The lead up to the Fed meeting will probably cause rates to slowly move upward throughout the week.
While the Fed Meeting will overshadow most other events on the
economic calendar, there are a couple additional events to watch. They may prove to have some impact on rates as well. Housing sector data on
New and
Existing Home Sales will come out on Monday and Tuesday. These two reports will give us some insight into the effects of higher rates. Additionally, the
final revision to first quarter Gross Domestic Product, the broadest measure of economic activity, will be released on Thursday. On Tuesday and Wednesday,
2 year and
5 year Treasury auctions are on the schedule and investors will watch closely for demand from foreign investors. And finally Friday will bring the
Personal Income report and the
Chicago PMI manufacturing index. Again lock those rates, because this week will be a bumpy ride.
Rate Watch
Inflation is still in the air and mortgage investors don't like it. After a brief hiatus in rising rates, mortgage rates continued their upward trajectory. Freddie Mac reported in their
weekly survey that rates on 30-year fixed-rate mortgages (FRM) averaged 6.63 percent, up very slightly from the previous week's 6.62 percent. Other programs followed. Rates on 15-year FRM increased to 6.25 percent, up from 6.23 percent the previous week and one-year adjustable rate mortgages rose to 5.66 percent, up from the previous week's 5.63 percent.
Last week, the two top inflation reports, the
Consumer Price Index and the
Producer Price Index, showed a higher than expected level of inflation. Wednesday’s closely watched Consumer Price index showed inflation rising at a 2.4% annual rate. The Fed typically likes to see prices rising no higher than 2%. The bad news led to rising rates through the rest of the week.
Of course, this means that we can more than likely expect an additional rate hike by the Federal Reserve next week. Additionally, the financial markets reflect a 50/50 chance that there will be a second rate hike before the end of 2006. Investors believe the Fed is willing to risk a slowdown in economic growth in order to control inflation, which is comforting from a bond investor standpoint. However, it does mean that interest rates will continue to rise slowly for the foreseeable future.
All of the big economic data to be released before next week's Fed meeting is in the public domain. However, there will be two notable
economic releases this week.
Housing Starts on Tuesday will provide insight on how the industry projects the damage of rising interest rates. Then on Friday,
Durable Orders will be released, providing insight into the demand for big ticket items like 18-wheelers, boats, refrigerators, etc.
Despite the absence of any big economic releases, the markets are expected to be volatile in anticipation of the next Fed meeting. Borrowers should lock their rates at their earliest convenience.
Rate Watch
Thanks in large part to the previous week's employment report we got some lower mortgage rates last week. Freddie Mac’s
weekly survey reported that rates on 30-year fixed-rate mortgages averaged 6.62 percent, down from 6.67 percent the previous week, which had been the highest level in nearly four years. It marked only the second rate decline in the past 11 weeks. Other popular programs followed. Rates on 15-year fixed-rate mortgages fell to 6.23 percent, down from 6.26 percent, and rates on one-year adjustable rate mortgages were also down for the week, falling to 5.63 percent. They had been 5.68 percent the previous week.
Although much of last week’s movement was caused by items we discussed in last week’s
Houston Rate Sheet. The week was at least interesting. Fed Chairman Ben Bernanke
spoke last Monday at a conference held by the American Bankers Association. Bernanke expressed a strong personal concern about the recent rise in inflation, and expressed a strong commitment to slaying the inflation beast. Investors interpreted the comments to mean that the Fed will risk slower economic growth to offset inflation. This led to a falling stock market, but not surprisingly the bond market stayed firm. Since, every up tick in inflation destroys of the value of bond securities, bond investors are especially concerned about the topic. So even though the Fed might raise rates in their next meeting and cause rates to move slightly higher, bond investors know that the integrity of their investment's value has a champion in the Fed and Bernanke.
This leads us to the
economic calendar ahead. Inflation will be the data point of discussion as the
Producer Price Index and
Consumer Price Index are released respectively on Tuesday and Wednesday. Almost without exception, higher inflation leads to higher interest rates, and PPI and CPI are the most widely watched indicators of inflation. PPI focuses on the increase in prices of “intermediate” goods used by companies to produce finished products, while CPI looks at those finished goods which are sold to consumers. These two reports will be a major indicator in judging the effects of the previous Fed rate hikes.
Another big release this week will deal with
Retail Sales. Consumers account for about 70% of economic activity, and this report is a major indicator of spending by consumers.
Industrial Production, a broad measure of business related economic activity, will be released on Thursday. Rounding out the full schedule will be
regional manufacturing reports and
Consumer Sentiment.
The next couple of weeks leading up to the Fed
meeting on June 28th are expected to be volatile, so borrowers should lock their rates at their earliest possible convenience. This is especially true today. No one wants to be on the wrong side of a negative inflation report.
Links of the Week
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Rate Watch
Last week, the Fed minutes revealed FOMC member concerns about inflation which eventually led to higher Freddie Mac weekly survey averages. The benchmark 30-year fixed rate mortgage (FRM) rose to 6.67 percent, up 5 basis points from the previous week. Other products followed. The average for the 15-year FRM came in at 6.26 percent, up from the previous week's average of 6.23 percent and one-year Treasury-indexed ARMs averaged 5.68 percent, up from the previous week when it averaged 5.61 percent.
If the above was all I told you about last week's activity, you would think that the trend of rising mortgage rates was continuing. However, the Employment Report, always the most important economic data of the month, produced a rally on Friday that should prove to bring mortgage rates back down. If you know any thing about the bond market, it can sometimes thrive on economic misfortune and this instance is one of those times. Against forecasts of 170K, the Non-farm Payrolls report revealed that only 75K new jobs were added in May, and the totals from prior months were revised lower by 37K. Average Hourly Earnings also fell short and only rose at a 3.7% annual rate. Slower economic growth, fewer new jobs, and less inflationary pressure from rising wages, and you’ve got some happy little bond investors. As a result, 10-year Treasury yields fell to 4.99% from 5.04%.
This week the economic calendar will be pretty light. Today, Fed Chairman Ben Bernanke will speak at a conference and the ISM data will be released. On Thursday, the 10-year Treasury auction will go down and foreign participation in that auction will be the main item of interest. And the International Trade figures will be release on Friday; however it will probably have little impact on the mortgage markets.
Despite the lack of any big releases this week, it is not safe to assume that rates will stay pat. The markets will look more closely at geo-political developments, like Iran, which could serve to boost rates. So even though we might get a little relief early in the week courtesy of Friday’s Employment report, I would still suggest that borrowers lock their rates as soon as possible.
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