Rate Watch
Inflation concerns continue to drive mortgage rates up
As we’ve discussed before, inflation are interest rate’s worst enemy. Inflation erodes the value of a bonds value overtime, and lenders must factor in a premium to compensate for inflation. Lenders and Investors can only use their best guess of what inflation will be over the long-term as they price mortgage rates. As inflation rises, lenders re-adjust their expected future inflation figures and the market in turn adjusts causing interest rates to rise. Since, consumers make up two-thirds of economic activity, Consumer Price Index (CPI) is watched more closely than any other inflation metric. So, on Wednesday of last week, when CPI hit its highest year-over-year average in more than 2 and a half years, the market quickly adjusted their expected inflation numbers and the mortgage rates rose sharply. CPI rose an uncomfortable 0.4 percent for a second straight month, putting the year-on-year rate at 4.3 percent. With high oil prices, the market would typically shake this number off. However, CPI less food & energy rose 0.3 percent. Since, consumers are already hurting from a weak job market and declining economic growth, this news could have a greater impact on economic growth. Inflation hits right at the consumer’s pocketbook and could further curb consumer spending. It will also be very difficult for the Federal Reserve to justify further cuts to the Federal Funds rate, if these inflation indicator remain high.
This week, Bankrate.com’s overnight average on the 30-year fixed rate mortgage came in at 5.95 percent, up from last Monday’s 5.81 percent. Other products followed. The 15-year fixed rate mortgage, a popular product for refinances, averaged 5.44 percent, up 20 basis points from 5.34 percent. Even short-term rates were not immune, the 5-year Adjustable rate Mortgage averaged 5.10 percent, up from last Monday’s 5.00 percent.
Inflation will continue to be a concern on this week’s economic calendar. On Tuesday, the Producer Price Index (PPI) will be released. PPI measures the averaged change in prices received by domestic producers for their output. Although, PPI is not as widely followed as CPI, it is still a very important measure of inflation. On Friday, the Personal Consumption Expenditures (PCE) price index will be released. The PCE price index is the Federal Reserve’s most liked measure of inflation. It measures the average increase in prices for all domestic personal consumption. If both of these reports show a high level of inflation, it could force interest rates even higher on the week. Since, inflation is expected to remain high, Borrowers are encouraged to lock interest rates as soon as possible.
Also, on the calendar this week, the Durable goods orders report will be released on Wednesday. Durable goods orders reflect the new orders placed with domestic manufacturers for those goods that don’t quick wear out, such as automobiles, large appliances, etc. This report is a good measure of the health of the economy. On Thursday, the 2nd reading on Gross Domestic Product (GDP) for the 4th quarter of 2007 will be released. Since, GDP encompasses all economic activity for a given quarter, it takes the compilers a couple of tries to get it right. Obviously, this reading will have less impact than the initial reading.
Rate Watch
Mortgage rates skyrocket on Inflation and Bond Insurance Concerns
In a typical market, bad economic growth news usually forces mortgage rates down. However, this is not a typical market. Last week, despite a less than positive Retail Sales report and a dreary outlook given by Fed Chairman Ben Bernanke, mortgage rates rose rather significantly. The reasons for the rising interest rates lead back to two concerns: bond insurance and inflation.
Investors are having some very serious concerns regarding the health of the nation's bond insurers. Bond insurance is a service whereby holders of a bond pay a premium to a insurer. The insurer will reimburse interest and capital repayments to these bondholders if the debt holder defaults on repayment of the bond. Not surprisingly, the bond insurance industry's troubles have been caused by the high default rates in the mortgage industry. As mortgage default rates rise, it has become apparent that these bond insurers do not have the capital reserves to meet their obligations. Because bond insurance has typically had the effect of lowering the risk of bonds and thereby reducing the price, it has helped to push down yields and interest rates. However, investors are now pricing bond as if there were no bond insurance at all, which is beginning to move interest rates higher than historic levels.
As for inflation, prices remain a big concern for mortgage investors. On Friday,
import/export prices report, a rarely followed metric, showed a substantial increase in the import price index. Import prices have rose 1.7 percent in January, pushing the year-on-year rate to 13.7 percent, which is the largest increase in 25 years. Since, inflation eats into the interest paid on bonds, this news pushed rates even higher.
Mortgage rates moved up across the board. According the Bankrate.com’s
overnight average, the 30-year fixed rate mortgage averaged 5.81 percent, up 26 basis points from last week’s 5.55 percent. The 15-year fixed rate mortgage came in at 5.24 percent, up from last Monday’s 5.04 percent. Short-term rates were a little bit more stable on the week. The 5-year Adjustable rate Mortgage (ARM) rose only 2 basis points to 5.0 percent.
As stated before, the Consumer Price Index (CPI) will be released this week. CPI measures the average price of goods purchased by US consumers. It is the most widely followed inflation report of the month. This week’s report could have a big impact on mortgage rates, as investors try to anticipate the Federal Reserve’s next move.
Besides the CPI report, the calendar will be rather slow this week. The markets are closed on Monday in observance of President’s Day. On Wednesday, the
Housing Starts report will provide us with some insight into the health of the nation’s homebuilders. And on Tuesday and Friday, voting members of the FOMC board will give speeches on the state of the US economy. All of these events could have a positive or negative impact on mortgage rates. It continues to be a very volatile market, and borrowers should lock in rates as soon as possible.
Rate Watch
Mortgage Rates Move Up on Fed Member commentsWith no economic data of note, Federal Reserve Board members took the opportunity to place their opinions into the economic picture. As expected, these speeches by the powers that be had the biggest impact on last week’s mortgage rates. Investors were all ears as they looked for clues into the likelihood of future interest rate cuts. The clues that the Fed members gave were not very promising.
On Thursday, Dallas Federal Reserve President Richard Fisher expressed concerns about further slashing of the Federal Funds Rate. Fisher, the lone dissenter in the previous decision to cut rates, believes no further cuts should be made and the threat of inflation is more ominous than the threats to economic growth. Fisher’s views appear to be gaining support with other voting members of the Federal Reserve
FOMC board. Philadelphia Fed President Charles Plosser and Richmond Fed chief Jeffrey Lacker voiced similar concerns regarding inflation and rate cuts. The views of these Fed Members suggest a bloc of resistance to future rate cuts.
In response to these speeches, investors sent bond prices lower and mortgage rates higher. Bankrate.com’s
overnight average on the 30-year fixed rate mortgage rose to 5.55 percent, up from last week’s 5.47 percent. The 15-year fixed rate mortgage came in at 5.04 percent, up from 5.47 percent. Adjustable Rate mortgages appear to be more resilient at the moment. The 5-year Adjustable Rate mortgage (ARM) rose only 1
basis point to 4.98 percent.
This week will have a bit more economic data, however, the Fed Members will still take the spotlight. Fed Reserve Presidents will give speeches on Monday, Tuesday, Thursday, and Friday, and Fed Chairman Ben Bernanke will handle questions from the Senate Banking Committee on Thursday. Investors will be looking for further clues into the policy preferences of these Fed members.
On Wednesday, the very important
Retail Sales report will be released covering the month of January. Since, consumers make-up two-thirds of economic activity, this report on the total receipts at the nation’s cash registers is a key indicator of economic health. The only other economic report of significance will be the
Industrial Production report to be released on Friday. The Industrial Production report measures the physical output of the nation's factories, mines and utilities, and provides a good indication of economic health as well. If either of these reports present a picture of a rebounding economy, then rates could continue to move up.
Rate Watch
Fed cuts rate additional 50 basis points, short-term mortgage rates fallLast week, the Federal Reserve’s FOMC board moved to
cut their key interest rate an additional 50
basis points. The decision came just eight days after the Fed board cut their key rate 75 basis points in an emergency session. Following the Fed Announcement, the markets began a rough and tumble week of volatility.
Jobless claims came in extremely high and the
Employment Report’s numbers were weak. However, inflation moderated a bit as the
Personal Consumption Expenditure (PCE) Index came down from the previous month and average hourly earnings rose only slightly by .2 percent. Also, the advance reading on
Gross Domestic Product (GDP) for 4th quarter 2007 came in weak increasing only by .6 percent.
After the volatile week, mortgage rates remained unchanged to slightly down on the week. Bankrate.com’s
overnight average on the 30-year fixed rate mortgage remained unchanged at 5.47 percent. Short-term rates faired a little bit better thanks to the Fed cut. The Federal Funds rate tends to have a much greater impact on shorter-term bonds. The 15-year fixed rate mortgage averaged 4.95, down from last week’s 5.98 percent. And the 5-year Adjustable Rate Mortgage (ARM) averaged 4.97, down from last Monday’s 5.09 percent.
This week’s economic calendar will be much more light than last week’s. The only items on the calendar are a slew of speeches given by the Federal Reserve’s Board of Governors. These speeches will obviously have an impact, depending on the opinions expressed. Other than that, the calendar is quite bear. Look for the markets to react more to geopolitical concerns and the movements in the overseas markets.
