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Mortgage rates down on Bernanke Speech and Countrywide troubles

Last week was relatively slow on the economic data front. However, two events had an impact on mortgage rates, a speech given by Fed Chairman Ben Bernanke and the sale of Countrywide Financial to Bank of America.

On Thursday, Fed Chairman Ben Bernanke gave a speech to Women in Housing and Finance Association. The speech covered the Fed’s responsibilities during the current economic troubles. In the speech, the Chairman pledged that the Federal Reserve will “…stand ready to take substantive additional action as needed" to offset rising risks created by the real estate and credit industries. This statement provided a rare level of transparency from the Fed. The market now widely expects a 50 basis point cut to the Federal Funds rate at the Fed Announcement on January 30th.

Secondarily to the Chairman’s statements, news of Countrywide Financial’s financial woes were of particular interest to the market. Countrywide, the largest home loan lender in the US, first made the news on Wednesday when the company reported a jump in delinquencies and foreclosures. It was rumored that the company was on the verge of filing Bankruptcy, a rumor the company flatly denied on Thursday. That same day, rumors started to circulate that Bank of America would buy the company. This rumor was proven true on Friday when the two companies announced that Bank of America, the nation’s largest bank, would buy the troubled mortgage lender for $4 billion.

As of this morning’s report, Bankrate.com’s overnight averages were down across the board. The 30-year fixed rate mortgage fell to 5.52 percent, down from last Monday’s 5.57. The 15-year fixed rate mortgage fell to 5.03 percent, down from 5.11 percent. Since short-term interest rates typically fall a little more steeply on Fed news, the 5-year Adjustable Rate mortgage experienced a more significant slide. The popular ARM product fell 10 basis points to 5.26 percent, down from 5.36 percent.

This week will be much more plentiful in economic data. On Tuesday, the Producer Price Index (PPI) and the Retail Sales report will be released. The Producer Price Index (PPI) is the average price that US producers get for their goods. PPI is a key measure of inflation. Retail sales measures the total receipts at stores that sell durable and nondurable goods. Since, consumer spending accounts for two-thirds of GDP, this report is a particularly important measure of economic health. On Wednesday, the Consumer Price Index (CPI) and the Industrial Production report will be released. CPI measures the average cost of consumer goods. Since consumers make up two-thirds of GDP, this inflation measure is of particular importance. Industrial Production measures the physical output of the nation's factories, mines and utilities. Finally on Thursday, the Housing Starts report will provide us with a future indicator of the nation’s residential construction industry.

With the vast amounts of data available to the markets this week, the Wall Street consensus could change drastically by the end of the week. Of particular importance will be the PPI and CPI inflation numbers. Rising inflation has made the decisions for the Fed much more complicated. In a rising inflation environment, the Fed will typically move to raise, not lower them. With the economy leaning towards recession, the Fed would prefer to cut rates without worries of rising inflation.

posted by Vincent Biondillo @ 1:51 PM