Florida Mortgage Trends

Federal Reserve keeps rates the same - Whew - But rates are still going up!

December 14th, 2010 11:34 PM by Scott Bray

Rate Lock Advisory - Tuesday Dec. 14th


Today’s FOMC meeting has adjourned with no change to key short-term interest rates, as expected. The post meeting statement seemed to be favorable for bonds with points such as the economy not growing fast enough to improve unemployment, business spending has slowed compared to earlier this year and employers unwilling to add payrolls. These all suggest that the economy is growing much slower than the Fed would like, and accordingly they are continuing with their $600 billion Treasury security purchase campaign.

So, bad news about the economy from the Fed is good news for the bond market, correct? Not today. The stock markets have had little reaction to the release and remain near this morning’s levels. However, in keeping pace with the illogic trading patterns of late, the bond market went into selling mode again. The benchmark 10-year Treasury Note’s yield is now 3.39%, leaving the recent resistance levels in the dust. This means that the previous ceilings are now levels of support on the yield, which translates into higher mortgage rates. We will certainly see upward revisions to mortgage rates this afternoon. They will likely be around .250 - .375 of a discount point from this morning’s pricing, possibly more if bonds continue to sell into closing.

There were two highly important economic reports posted this morning. The first was November's Retail Sales data. It revealed a 0.8% increase in retail-level sales last month, exceeding forecasts by a pretty good margin. Analysts were expecting to see a 0.5% rise, meaning consumers spent more in November than many had thought. Even a secondary reading within the report that tracks sales excluding more volatile auto transactions showed strength. That reading rose 1.2% when it was expected to increase 0.6%. The problem with this data is that consumer spending makes up two-thirds of the U.S. economy. Therefore, strength in consumer spending helps fuel economic growth and makes long-term securities such as mortgage-related bonds, less attractive to investors.

November’s Producer Price Index (PPI) was the morning’s second report, giving us a key measurement of inflation. The Labor Department said this morning that the overall index rose 0.8% last month while the core data reading rose 0.3%. Analysts were expecting increases of 0.5% and 0.2% respectively, meaning that inflationary pressures were stronger at the producer level of the economy than what was forecasted. This is also negative news for bonds and mortgage rates because rising inflation erodes the value of the fixed interest payments on long-term securities, making them less appealing to investors.

Tomorrow brings us one of the most important economic reports we see each month when November’s Consumer Price Index (CPI) is posted during early morning trading. It is similar to today’s Producer Price Index, except it tracks inflationary pressures at the more important consumer level of the economy. Current forecasts call for an increase of 0.2% in the overall index and a 0.1% rise in the core data reading. The core data is watched more closely because it excludes more volatile food and energy prices, giving a more stabile reading for analysts to consider. This data is one of the most watched inflation indexes, which is extremely important to long-term securities such as mortgage related bonds. Rising inflation erodes the value of a bond’s future fixed interest payments, making them less appealing to investors. That translates into falling bond prices and rising mortgage rates.

Posted in:General
Posted by Scott Bray on December 14th, 2010 11:34 PM


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