Houston's Rate Sheet

Rate Watch

Mortgage rates slightly up, after volatile week

The markets were especially volatile last week. The volatility began even before the markets opened on Tuesday (the markets were closed on Monday in observance of MLK Day). Futures trading of the Dow Jones industrial average suggested that the equity markets would have one of the largest slides in American History. Also, the Federal Reserve became aware that the French Bank, Societe Generale, would need to write down $7.1 Billion Dollars, due to the fraudulent activities of a single trader. Due to the write down, the bank was forced to reallocate many of its positions, which caused a major shake-up in financial markets across the globe.

In response to these 2 developments, the Federal Reserve would announce an emergency cut of the Federal Funds Rate by 75 basis points. The cut helped to stave off a meltdown of the US equity markets, and it had the immediate effect of pulling down mortgage rates. The cut also had the effect of convincing investors in the equity markets to buy. The rise in the stock markets pulled money away from the mortgage markets, which pushed mortgage rates back up. For the balance of the week, the stock market would move up and down, and the mortgage markets would move in the opposite direction.

Mortgage rates would eventually finish up on the week. Bankrate.com’s overnight average on the 30-year fixed rate mortgage rose to 5.47 percent, up from last Monday’s 5.42 percent. The 15-year fixed rate mortgage, which is a very popular product for refinances, rose to 4.98 percent, up from last week’s 4.93 percent. Thanks to the Fed cut, the 5-year Adjustable Rate mortgage (ARM) moved in the opposite direction. The popular ARM program fell to 5.09 percent, down from last Monday’s 5.12 percent. Fed cuts typically have a greater impact on short-term interest rate programs, such as ARMs.

This week will be a very, very big week for mortgage rates and the whole of the economy. The economic calendar is jammed packed with data. On Tuesday, the Durable Goods orders report will provide us some insight into the strength of US manufacturers. Durable goods orders reflect the new orders placed with domestic manufacturers for immediate and future delivery of long-lasting hard goods, such a appliances, cars, etc. Also, on Tuesday, the Consumer Confidence survey will provide us some insight into the psychology of the nation’s consumers. Consumers make up two-thirds of economic activity, so their opinion counts big time.

On Wednesday, an advance reading of 4th quarter Gross Domestic Product (GDP) will be released. GDP is the broadest measure of economic activity and encompasses every sector of the economy. It will provide us with some important insight into the extent of the economic downturn. Also, on Wednesday, the Federal Reserve will have their scheduled meeting to determine their future policy direction. It is widely expected that they will cut interest rates an additional 25 basis points.

On Thursday, the Personal Consumption Expenditure (PCE) Index will be released. This reading of the average increase in prices for all domestic personal consumption is a very important reading of inflation. This inflation measure is watched very closely by Fed Board members.

Finally, on Friday, the most important economic report of the month will be released, the Employment Report. The employment data provides the most comprehensive measure of how many people are looking for jobs, how many have them, what they're getting paid, and how many hours they are working. These numbers are an excellent measure of the future direction of the economy. It will be particularly important as the markets determine the likelihood of recession.

posted by Vincent Biondillo @ 3:36 PM