Market Comment - Week of July 20th, 2009

Mortgage bond prices fell pushing rates higher following stronger than expected inflation data last week. The producer price index and consumer price index both came in higher than expected fanning inflation fears. Inflation fears generally cause bond prices to fall and interest rates to rise, which we saw last week. Stronger than expected housing starts, retail sales, and industrial production data piled on to help equities rally at the expense of mortgage bonds. It appeared the Fed tried to step in Thursday to stem the losses. For the week interest rates rose by over a full discount point.

The leading economic indicators data will set the tone for trading this week. With so few data releases expect oil and stocks to factor into trading.

Consumer Sentiment

In the US the consumer is often seen as the driving force of the economy. A large percentage of the total economic output is for personal use. Analysts attempt to predict the future spending patterns of consumers to gauge economic activity.

The Michigan consumer sentiment index is one piece of data used to measure consumer attitudes. The index is derived from a telephone survey, which gathers information on consumer expectations of the overall economy. The preliminary report is released around the 10th of each month and then is revised throughout the remainder of the month. It is significant in that it provides a precursor into consumers' willingness to spend in the months ahead. However, many analysts point out that willingness to spend does not always convert to actual expenditures.

Despite economic uncertainty, liquidity issues, housing market weakness, and high energy costs, American consumers continue to spend. However, many analysts question whether consumers can continue to buoy the economy. The most recent sentiment data showed continued uncertainty. "Consumers concluded that the economic downturn would last longer and their personal finances would not recover as quickly as they had previously expected," the University of Michigan Survey said in a statement.

This week's release will be eagerly anticipated. Look for any variation from estimates to cause mortgage interest rate volatility. Signs of eroding consumer confidence could lead to improvements in mortgage interest rates. However, stronger than expected figures could spike rates higher.

Remember that mortgage interest rates remain historically favorable and are subject to change on a daily basis. Last week was a prime example of the danger of floating into the economic data. Rates worsened Tuesday and Wednesday with the higher than expected inflation figures. Capitalizing on current levels is wise.

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