Mortgage Times

[Adam in CO]

Mortgage Market News for the week ending November 2, 2007

Events This Week:

Employment Strong
GDP Higher
Inflation Steady
Manufacturing Down

Events Next Week:

Mon 11/5
ISM Services

Wed 11/7
Productivity

Fri 11/9
Trade Balance
Import Prices
Sentiment

Which Way Will it Go?

A wide range of major economic news came out last week, and a high degree of volatility appeared in mortgage markets, but the net effect of many offsetting items was a small drop in mortgage rates for the week. The current economic data indicates that the economy is healthy and that inflation is under control, which is a good situation. The question for mortgage investors is whether the impact of the credit crunch and the housing market slowdown will be felt more severely in upcoming months, which could develop into a bigger drag on the economy and result in lower inflation. Alternately, the worst may be behind us, and a stronger economy could produce inflationary pressures. Until a clearer picture develops, volatility may be common.

As widely anticipated, the Fed cut interest rates by one-quarter point on Wednesday. The accompanying statement held a few surprises, though. The Fed emphasized the risks of higher future inflation, while downplaying the threat to economic growth from the credit crunch. After the statement, investors considered the possibility that the Fed may be on hold in the near term, and the likelihood of a rate cut at the next FOMC meeting on December 11 declined.

Last week's economic data showed current conditions consistent with a "Goldilocks" economy, with healthy economic growth and tame inflation. The October Employment report showed a gain of more than twice as many new jobs as predicted. Average Hourly Earnings, a proxy for wages, came in slightly lower than expected, with modest inflationary pressure from this source. Third quarter Gross Domestic Product, the broadest measure of economic activity, also showed growth far above the consensus forecast. As expected, housing was a major drag, but the rest of the economy performed very well, led by a surge in exports. The core PCE price index, the Fed's most closely watched inflation indicator, showed an increase at a moderate 1.9% annual rate.

• Also Notable:
• As expected, the Unemployment Rate remained at 4.7% in October
• The Fed cut rates by one-quarter point and emphasized the risks of higher future inflation
• The October 20-city home price index showed a decline of 4% from one year earlier
• Oil prices rose to a record high due to an unexpected decline in inventories and continued geopolitical tensions

Average 30 yr fixed rate:
Last week:-0.08%T
his week:-0.02%

Stocks (weekly):
Dow:13,535-198
NASDAQ:2,799+11

Week Ahead

After the packed Economic Calendar last week, next week looks sparse in comparison. The ISM Services index will be released on Monday. The most significant report of the week will be the Productivity data on Wednesday. The long term health of the economy depends greatly on sustained increases in productivity, and it has an impact on inflation as well. Import Prices, the Trade Balance, and Consumer Sentiment will come out on Friday, but they are not typically market moving news. On other fronts, next week Fed speakers may elaborate on the decision to cut rates, and Treasury Auctions will take place.


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