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Mortgage Market in Review – July 6, 2015

Market Comment

Mortgage bond prices finished the week higher which pushed mortgage rates lower. Trading was volatile amid mixed data. Consumer confidence and ADP payrolls data were better than expected which pressured rates. Consumer confidence printed at 101.4 versus the expected 97.5. ADP payrolls rose 237K versus the expected 220K. Bond prices rose Thursday morning following the release of the weaker than expected monthly non-farm payrolls report. The US economy added 223K jobs, below expectations of 230K. The crisis in Greece provided some support early in the week. Mortgage interest rates finished the week better by about 1/2 of a discount point.

LOOKING AHEAD

Economic
Indicator
Release
Date & Time
Consensus
Estimate

Analysis
Trade Data Tuesday, July 7,
8:30 am, et
$41B deficit Important.  Affects the value of the dollar.  A falling deficit may strengthen the dollar and lead to lower rates.
Consumer Credit Tuesday, July 7,
3:00 pm, et
$15.87B Low importance.  A significantly large increase may lead to lower mortgage interest rates.
Fed Minutes Wednesday, July 8,
2:00 pm, et
None Important.  Details of the last Fed meeting will be thoroughly analyzed.
Weekly Jobless Claims Thursday, July 9,
8:30 am, et
268K Important.  An indication of employment.   Higher claims may result in lower rates.

Credit Demand

Inflation is typically the most important focus for the mortgage interest rate market.  Most of the recent increases in interest rates have come following stronger stocks, strength in the eurozone, and in response to reports of future Fed rate increases.  As stocks struggle we often see rates improve.  In the past, mortgage bonds benefited from global economic uncertainty as investors searched for safe havens amid economic concerns in the eurozone.  This flight to quality buying of mortgage bonds helped push prices higher and mortgage interest rates lower.  Unfortunately we have seen these positions unwind as the inverse occurs.

The level of interest rates reflects the balance between the supply of money from investors and the demand for money by borrowers.  Rising inflationary expectations and uncertainty about the performance of the bonds cause investors to require higher rates of return on investments.  This compensates for the erosion of the principal that eventually is returned to them or the risk of non-performance.  Regardless of inflation levels, rising economic activity can increase the demand for investors’ funds, and thereby lead to higher interest rates.  Investors pulling money out of bonds and into stocks could pressure mortgage rates.  The demand for money diminishes as the economy struggles.  The Fed lowers interest rates as an incentive to businesses and consumers to increase their borrowings.  The Fed hopes manufacturers will increase their investments in plants, equipment and inventories and that consumers will push housing construction along with consumer spending and with that, consumer debt.

Analysts will monitor this week’s consumer credit levels.  There is much debate in the financial community about the future.  Economists, market analysts, and traders all seem to have different opinions.  Even Fed officials are split.  One thing most market participants agree on is both the bond and stock markets are going to see additional volatility.  Interest rates remain historically favorable.  Now is a great time to take advantage of the low rates.


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