Your Chicago Mortgage Minute or Two

Interest rates rose slightly last week, but it could have been a lot worse! Good economic news released early in the week was offset by negative news at the end of the week. This coupled with a large decline in the price of oil caused mortgage rates to end the week very close to where they began.

First a recap on the news that was:
On Monday, Personal Income for July were reported at +.1%, which was higher than expected, but much lower than the +1.8% that was reported for June. The difference from month to month was a reflection of most of the stimulus package checks going out in June. At the same time, Personal Spending for July came in at +.6%, slightly better than the market was expecting. Also included in this report was the Federal Reserve's favorite inflation gauge - the Personal Consumption Expenditure (PCE) index, and the PCE core index (excluding food and energy). Both of these numbers came in at the high end of expectations, and showing a yearly rate of inflation that is higher than the Fed likes to see. These reports got the mortgage bond market off to a bad start for the week. Tuesday brought the Industrial Supply Manager's Services index, which came in much stronger than expected and much stronger than the month before. The Fed announce in the afternoon that they were leaving short term interest rates unchanged, signaling that the danger of a slowing economy was worse than the obvious increase in inflation. They also announced that they expected inflation to abate towards the end of the year. The recent 20%+ decrease in oil prices may help this prediction to come true, barring a turnaround. The market took this as a hint that the Fed will not raise interest rates anytime soon. The stock market rallied on this news, closing up over 300 points. The fear that the Fed will not be vigilant against inflation and the rally in stocks caused a sell-off in mortgage bonds, and rates jumped. On Wednesday, the only economic news reported was an increase in U.S. Crude oil inventories. The mortgage bond market continued it's sell-off, but then reversed course during the day and rallied into the close, probably on oversold conditions. Thursday brought word that first time unemployment claims, which had spiked the week before, continued their increase and jumped to 455,000 claims. This caused the four week moving average of this number to spike to its highest level since July, 2003. The labor market is still experiencing some pain. Mortgage bonds continued the rally they started on Wednesday on this news. Finally on Friday, it was reported that productivity in the U.S. rose at a 2.2% annual rate, slightly lower than anticipated. Although it was lower than expected, it was still a good number for an economy that has given up 165,000 jobs in the last quarter. It shows that productivity is up even though the number of workers is down. This was good news for the economy and on the inflation front. In the week ahead, some important news will be released that will give us an idea whether the recent rise in inflation is starting to slow down or reverse course.

This could be a volatile week for mortgage rates, depending on where the numbers come in. Here's what to expect:
Wednesday - Retail Sales are expected to have increased by .5% in July, up from +.1% in June. (HIGH impact report)
Wednesday - Retail Sales, excluding auto sales, are expected to have increased by .6%, down from +.8% in June. (HIGH impact report)
Wednesday - Crude Oil inventories are to be released (typically a moderate impact on rates, but an increase in inventories would be very positive)
Thursday - First time unemployment claims will be released (typically a moderate impact, but last week this negative number sparked a rally in bonds)
Thursday - The Consumer Price Index (CPI) is expected to show a +.2% increase, vs. a +.3% increase in June. (HIGH impact report)
Thursday - Core CPI (excluding volatile food and energy costs) is expected at +.4%, down from a whopping +1.1% in June (HIGH impact report)
Friday - Empire State Index (NY area economy) is expected to show a decrease from its June number (Moderate impact report)
Friday - Capacity Utilization and Industrial Production will be reported (Moderate impact reports)
Friday - University of Michigan Consumer Sentiment Index is expected to show a slight increase over its last report (Moderate impact report)

Although I indicate "moderate" or "high" impact report, any number that comes in a lot different than expected can have a "high" impact on mortgage rates. Also, any events, whether they are political or economic reports, that have a big impact on the stock market can have a big impact on mortgage bonds. For instance, the war that erupted over the weekend between Russia and Georgia could cause havoc with worldwide markets until it is resolved.