Seth Jacobs – Maine Mortgage Banker / Broker

MARKET WRAP: The devastation in Japan continued to rock the markets today forcing investors to panic sell in the equity markets pushing the Dow Jones down nearly 300 points before paring more than half of those losses by the time the Stock markets closed at 4:00pm ET. The selling of equities lifted the Bond markets but Bonds reversed course and shed many of those gains as the day progressed, especially after the Fed was more upbeat on the economic recovery and noted commodity inflation in its FOMC statement. The benchmark 4% coupon finished at 98.88 after being as high as 99.31 up 22bp for the session. The Dow fell 137.74 to 11,855.42, the S&P 500 Index fell 14.52 to 1,281.87 while the Nasdaq dropped 33.64 to 2,667.33. Oil settled at $97.19/barrel down $4.01. Tomorrow’s data includes Housing Starts/Building Permits along with the Producer Price Index.

Mortgage bond prices opened slightly higher Wednesday morning adding to the gains seen Tuesday afternoon. Rates are finding support from bond friendly economic news released this morning.

In news released at the open, consumer prices rose 0.2% last month and the core rate, which excludes the volatile food and energy costs were unchanged. Economists expected CPI to rise 0.4% and 0.1% respectively. That data was bond friendly.

On the housing front, housing starts stood at 519k, lower than expectations for a read of 600K. This is further evidence the housing market is facing some stiff headwinds.

Traders are now waiting for stocks to begin trade at 9:30 to help gauge interest rate direction.

Mortgage bond prices were lower for last week pushing mortgage interest rates higher.  The Treasury auctions were mixed with generally decent foreign demand but rather lackluster overall results. The weekly jobless claims data came in lower than expected which was not bond friendly and pushed rates considerably higher Wednesday.  The bond market was closed Thursday for the holiday, which likely contributed to the volatility with thin trading conditions surrounding shortened trading week.  For the week interest rates finished worse by about 7/8 of a discount point.

The retail sales data Monday will set the tone for trading this week.  The inflation data on Tuesday and Wednesday have the greatest potential to move the financial markets.

LOOKING AHEAD – 11.15 to 11.19

Low Rates

Mortgage interest rates remain near historic lows.  Borrowers that choose to float in this environment expose themselves to an upside risk in mortgage interest rates.  The Fed has specifically stated, “Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability.”  This means the Fed believes inflation levels should increase.  Inflation, real or perceived, generally erodes the value of fixed income securities causing prices to fall and rates to rise.  If the Fed has its way it is very possible to see mortgage interest rates increase.  However, there are no certainties even with the Fed’s stated goals.  The Fed does not directly dictate mortgage interest rates but its activities have an indirect effect on rates.

Recent history attests to spikes and drops in rates on almost a weekly basis.  Last week was a prime example.  A cautious approach to interest rate exposure is prudent.