Mortgage Times

[Adam in CO]

Mortgage Market News for the week ending May 30, 2008

Events This Week:


Core Inflation Flat
GDP Higher
Manufacturing Mixed
New Home Sales Up


Events Next Week:


Mon 6/3
ISM Manufacturing
Construction
Tues 6/4
Factory Orders
Wed 6/5
ISM Services
Productivity
Fri 6/6
Employment


Inflation Fears Hit Mortgage Rates



Investors' outlook for inflation worsened during the week, and mortgage rates moved higher. While the economy remains relatively weak and the recent inflation data has held steady, many signs point to higher levels of inflation down the road. The Fed's Fisher summarized it well, saying that inflation expectations continue to worsen "even in the face of an anemic (economy)." Higher energy prices are behind the inflation fears. Dow Chemical announced this week that it will boost the price of its products by as much as 20% due to its higher energy costs. Until now, manufacturers have mostly absorbed higher production costs, rather than raising the price of their goods. The action by Dow Chemical and several other major suppliers may be an indication that companies are beginning to aggressively pass along their rising costs.

Adding to the concerns of investors, Fed officials have been consistently warning about the risks of higher inflation, and the next move from the Fed is expected to be a rate hike later in the year. The most recent inflation data showed that the overall April PCE price index, the Fed's preferred inflation indicator, rose at a 3.2% annual rate. The Core PCE price index, which excludes the food and energy components, increased at a significantly lower 2.1% annual rate, although this level still would have to decline below 2.0% to fall within the Fed's "comfort zone." Investors fear that the opposite outcome is more likely, however, and that future readings will be higher.

In the housing sector, April New Home Sales rose modestly from March. Inventories of unsold new homes fell slightly, and median prices were higher. Separately, the S&P/Case-Shiller home price index showed that first quarter prices for existing homes declined 14% from one year earlier. Bigger picture, though, the data indicated that home prices are still 60% higher than at the start of the decade.

Also Notable:

• May Consumer Confidence fell to the lowest level since October 1992
• The Fed's Fisher suggested that a change in monetary policy may occur "sooner rather than later"
• Congress is working on legislation that would permanently raise the ceiling for loans by Fannie and Freddie
• Oil prices declined to $127 per barrel, but are still up 32% this year

Average 30 yr fixed rate:
Last week:+0.09%
This week:+0.22%

Stocks (weekly):
Dow:12,651+137
NASDAQ:2,520+79

Week Ahead


Next week's main event will be Friday's Employment report. As usual, this data on the number of new jobs created, the Unemployment Rate, and wage inflation will be the most highly anticipated economic data of the month, since the health of the labor market is perhaps the single biggest factor in the performance of the economy. Early estimates are for a loss of 50K jobs in May.

The biggest report prior to the Employment data will be Monday's ISM national manufacturing index. Construction Spending will also be released that day. Factory Orders will come out on Tuesday. Productivity and ISM Services are on the schedule for Wednesday. Fed speakers will also play a role next week.

admin@corefinancegroup.com.