Market Comment

MARKET COMMENT

Mortgage bond prices fell slightly last week pushing interest rates higher. Unfortunately the seesaw trading pattern continued with rates rising and falling throughout the week. We started the week with stronger than expected Industrial Production and Capacity Use data pressuring mortgage interest rates higher. Stocks fell mid-week following a shocking 27.2% decline in existing home sales and weaker than expected durable goods orders. This helped us recover some of the earlier losses. Friday was choppy with 1/4 point up and down swings occurring throughout most of the morning. Despite all the volatility we were able to stay relatively flat overall for the week as rates rose by about 1/8 of a discount point.

The employment report Friday will be the most important release this week. Expect more volatility.

LOOKING AHEAD

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Personal Income and Outlays	Monday, Aug. 30, 8:30 am, et	Up 0.3%, Up 0.3%	Important. A measure of consumers’ ability to spend. Weakness may lead to lower mortgage rates.
PCE Core Inflation	Monday, Aug. 30, 8:30 am, et	Up 0.1%	Important. A measure of price increases for all personal consumption. Weaker figure may help rates improve.
Consumer Confidence	Monday, Aug. 30, 10:00 am, et	51.3	Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.
ADP Employment	Tuesday, Aug. 31, 8:30 am, et	-20k	Important. An indication of employment. A large decrease in payrolls may bring lower rates.
ISM Index	Tuesday, Aug. 31, 10:00 am, et	53.3	Important. A measure of manufacturer sentiment. Weakness may lead to lower mortgage rates.
Construction Spending	Tuesday, Aug. 31, 10:00 am, et	Down 0.4%	Low importance. An indication of economic strength. A significant decrease may lead to lower rates.
Revised Q2 Productivity	Wednesday, Sept. 1, 8:30 am, et	Down 1.5%	Important. A measure of output per hour. Improvement may lead to lower mortgage rates.
Factory Orders	Wednesday, Sept. 1, 10:00 am, et	Up 0.5%	Important. A measure of manufacturing sector strength. Weakness may lead to lower rates.
Employment	Friday, Sept. 3, 8:30 am, et	9.6%, Payrolls -120k	Very important. An increase in unemployment or a large decrease in payrolls may bring lower rates.

PRODUCTIVITY

Productivity is the rate at which goods or services are produced. It is most commonly defined in terms of labor, which is the contribution of people to the process. Labor costs represent about two thirds of the value of the output produced. The Bureau of Labor Statistics of the US Department of Labor releases the most widely cited productivity statistics quarterly and annually. Increased productivity is often credited for economic growth with little signs of inflation.

Productivity is significant in that as it increases, businesses can produce more with the same or less input. This wealth building effect is vital to the US economy. As productivity increases, the US economy generally performs better. As productivity decreases, the economy generally suffers. While the bond market generally favors signs of weakness in the economy, bonds tolerate growth as long as the economic environment shows little or no inflationary pressures. Keep in mind that rates remain very favorable. Now is a great time to avoid the uncertainty surrounding continued market volatility.

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Chico’s Market Update

MARKET COMMENT

Mortgage bond prices were higher last week applying downward pressure on mortgage rates. Turmoil and volatility remain high with wide swings occurring in both stocks and bonds on an almost daily basis. The economic outlook remains clouded at best. Weekly jobless claims and the trade deficit remained high, hindering recovery in the jobs market. As expected, the Federal Reserve will restart the quantitative easing program by purchasing Treasury bonds.

Rates fell by about 1/4 of a discount point for the week.

The most important data this week will be the Producer Price Index Tuesday. Housing starts and LEI data may also move the financial markets.

LOOKING AHEAD

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Housing Starts	Tuesday, Aug. 17, 8:30 am, et	Up 2.2%	Important. A measure of housing sector strength. Weakness may lead to lower rates.
Producer Price Index	Tuesday, Aug. 17, 8:30 am, et	Up 0.2%, Core up 0.1%	Important. An indication of inflationary pressures at the producer level. Lower figures may lead to lower rates.
Industrial Production	Tuesday, Aug. 17, 8:30 am, et	Up 0.5%	Important. A measure of manufacturing sector strength. Weakness may lead to lower rates.
Capacity Utilization	Tuesday, Aug. 17, 8:30 am, et	74.5%	Important. A figure above 85% is viewed as inflationary. Weakness may lead to lower rates.
Weekly Jobless Claims	Thursday, Aug. 19, 8:30 am, et	450K	Important. An indication of employment. An increase in jobless claims may bring lower rates.
Leading Economic Indicators	Thursday, Aug. 19, 10:00 am, et	Up 0.2%	Important. An indication of future economic activity. Weakness may lead to lower rates.
Philadelphia Fed Survey	Thursday, Aug. 19, 10:00 am, et	5.10	Moderately important. A survey of business conditions in the Northeast. Weakness may lead to lower rates.

FED RESULTS

The Federal Open Market Committee kept rates unchanged last week at the historically low levels. The remarks following the meeting were bond friendly. They indicated the pace of economic recovery slowed in recent months. Inflation is expected to remain subdued for some time. Most importantly they confirmed the suspicions that they would restructure their quantitative easing actions in an effort to continue to keep rates low for an extended period of time and to spur the economy.

The Fed stated they would keep holdings of securities at current levels through reinvesting funds from maturing mortgage-backed securities into longer term US Treasuries. The Fed is concerned the recovery is waning and specifically noted that it was “more modest” than previously thought. Consumer spending increased gradually but there remain concerns that increasing unemployment along with tight credit conditions may limit increases in the future.

The Fed decision was a result of a 9-1 vote as the lone dissenter disagreed with stance of keeping rates low for an extended period of time. He was concerned that position would limit the Fed’s ability to raise rates in the future and also disagreed with the quantitative easing program.

Interest rates remain historically favorable. The demand for bonds remains high pushing rates lower. Anytime prices rise substantially there is always a danger of a correction. The big unknown is if or when that correction may come. For now it remains wise to take advantage of mortgage interest rates at their current levels.

Market update

MARKET COMMENT

Mortgage bond prices were near unchanged last week holding rates in check. Stock strength the early part of the week caused bonds to struggle. Weaker than expected personal income, outlays, PCE Core, and factory orders data helped bonds bounce back a bit. Stocks extended their gains Wednesday once again at the expense of bonds. Higher than expected weekly jobless claims had investors jittery heading into the employment report. The jobs report released Friday confirmed fears that unemployment remains high in the US.

Rates fell by about 1/8 of a discount point for the week.

The most important event this week will be the Fed meeting Tuesday. The Treasury auctions may also move the markets.

LOOKING AHEAD

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Preliminary Q2 Productivity	Tuesday, Aug. 10, 8:30 am, et	2.8%	Important. A measure of output per hour. Improvement may lead to lower mortgage rates.
3-year Treasury Note Auction	Tuesday, Aug. 10, 1:15 pm, et	None	Important. $34 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates.
Fed Meeting Adjourns	Tuesday, Aug. 10, 2:15 pm, et	No changes	Important. Few expect the Fed to change rates, but some volatility may surround the adjournment of this meeting.
Trade Data	Wednesday, Aug. 11, 8:30 am, et	-42.3B	Important. Affects the value of the dollar. A falling deficit may strengthen the dollar and lead to lower rates.
10-year Treasury Note Auction	Wednesday, Aug. 11, 1:15 pm, et	None	Important. $24 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates.
30-year Treasury Bond Auction	Thursday, Aug. 12, 1:15 pm, et	None	Important. $16 billion of bonds will be auctioned. Strong demand may lead to lower mortgage rates.
Consumer Price Index	Friday, Aug. 13, 8:30 am, et	Unchanged Core up 0.1%	Important. A measure of inflation at the consumer level. Lower figures may lead to lower rates.
Retail Sales	Friday, Aug. 13, 8:30 am, et	Down 0.2%	Important. A measure of consumer demand. Weakness may lead to lower mortgage rates.
U of Michigan Consumer Sentiment	Friday, Aug. 13, 10:00 am, et	67.2	Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.
Business Inventories	Friday, Aug. 13, 10:00 am, et	Up 0.1%	Low importance. An indication of stored-up capacity. A significantly large increase may lead to lower rates.

BOND PURCHASES

There was talk last week that the Fed may resume the purchases of mortgage-backed securities in order to try to boost the struggling US economy. Generally when there is more demand for a bond the price increases and rates fall. This could push mortgage interest rates even lower than their current historic levels. The Wall Street Journal reported that the Fed might make “a modest but symbolically important change” in how they manage their securities portfolios. Analysts indicate the Fed could use proceeds from maturing mortgage bonds to restart their MBS buying. We should hear some news regarding this following the Fed meeting this week.

Chico’s Market Update

MARKET COMMENT

Mortgage bond prices rose last week pushing mortgage interest rates lower. Tame inflation readings and lower than expected US economic growth figures helped mortgage interest rates remain very favorable. The employment cost index came in as expected while the gross domestic product data showed a smaller than expected increase. The Treasury auctions generally went well and trading in stocks remained choppy.

Rates fell by about 3/8 to 1/2 of a discount point for the week.

The most important data this week will be the employment report Friday. PCE inflation data and ADP employment may also move the markets.

LOOKING AHEAD

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Construction Spending	Monday, Aug. 2, 10:00 am, et	Down 1.0%	Low importance. An indication of economic strength. A significant decrease may lead to lower rates.
ISM Index	Monday, Aug. 2, 10:00 am, et	53.5	Important. A measure of manufacturer sentiment. A large decline may lead to lower mortgage rates.
Personal Income and Outlays	Tuesday, Aug. 3, 8:30 am, et	Income up 0.2%, Outlays up 0.1%	Important. A measure of consumers’ ability to spend. Weakness may lead to lower mortgage rates.
PCE Core	Tuesday, Aug. 3, 8:30 am, et	Up 0.1%	Important. An indication of inflation. A lower figure may lead to lower rates.
Factory Orders	Tuesday, Aug. 3, 10:00 am, et	Up 0.8%	Important. A measure of manufacturing sector strength. Weakness may lead to lower rates.
ADP Employment	Wednesday, Aug. 4, 8:30 am, et	Up 30k	Important. An indication of employment. Weakness in payrolls may bring lower rates.
Employment	Friday, Aug. 6, 8:30 am, et	Unemp. @ 9.6%, Payrolls -116k	Very important. An increase in unemployment or a large decrease in payrolls may bring lower rates.
Consumer Credit	Friday, Aug. 6, 3:00 pm, et	Down $3b	Low importance. A significantly large increase may lead to lower mortgage interest rates.

CORE PCE

The US Department of Commerce’s Bureau of Economic Analysis releases the core PCE price index. The report provides the average increase in costs for personal consumption expenditures excluding food and energy. As of July 2009 the figure now includes food services in the figure.

The report is significant in that the Fed uses the PCE in determining inflation as opposed to the prior use of the consumer price index. The reports vary in that the CPI uses a predetermined pricing of a basket of goods and services for several years while the PCE data uses pricing of expenditures the changes from quarter to quarter. An important difference is also the fact that PCE includes the price of spending for and on behalf of households. This includes health care spending paid for a household by a business. The CPI only reflects out of pocket expenses paid directly by consumers.

While inflation fears remain subdued as of late there are concerns that inflation could eventually emerge. Taking advantage of rates at these historically low levels makes sense with so much uncertainty in the US economy.