What a week we had. It just proved we live in a mad, mad, mad, mad world. The week started off with worldwide chaos as "rogue trader" Jerome Kerviel caused French Bank Societe Generale $7.1 Billion Dollars. The loss created a need to correct the bank’s positions, which created a financial meltdown panning the globe. In fact, this "rogue trader" even got the Fed to do an emergency rate cut out of panic.
The markets went on a wild roller coaster ride as a result with bonds initially taking off, then came crashing back down, finally edging back up a little. Overall, the week ended basically in the same spot as it started, so mortgage rates are virtually unchanged.
This coming week is going to see that roller coaster ride continue, so be ready for it. The week is fully loaded with data on virtually all fronts. There are actually 3 big events; FOMC Meeting, PCE, and Friday’s Jobs Jamboree. If the Fed disappoints the markets like they did last month, stocks will tumble which will be good for mortgage rates, at least initially.
I have warned that inflation can get out of control in a rate cut environment as we currently have. The last two PCE reports have been increasing and I expect that trend to continue. Since inflation is the arch enemy of bonds, bonds could tumble on the news.
On the Jobs front, the latest initial jobless claims have indicated the jobs front isn’t as bad as it appears to be. Since the jobs report has been known to be inaccurate, it will be interesting to see what the numbers are, as well as revisions to the previous reports. Another surprise to the Feds may be in the works.
Here is the rundown on what is regularly scheduled this week:
- Monday – New Home Sales (10:00)
- Tuesday – Durable Goods Orders (08:30), Consumer Confidence (10:00)
- Wednesday – Gross Domestic Product (08:30), Chain Deflator (08:30), FOMC Meeting (2:15)
- Thursday – Personal Consumption Expenditures Index (PCE and Core PCE) (08:30), Employment Cost Index (ECI) (08:30), Initial Jobless Claims (08:30), Personal Spending (08:30), Personal Income (08:30), Chicago PMI (09:45), Crude Inventories (10:30)
- Friday - Non-farm Payrolls (08:30), Hourly Earnings (08:30), Unemployment Rate (08:30), Average Work Week (08:30), ISM Index (10:00), Consumer Sentiment (10:00)
As you can see, this week will be huge for shaping the mortgage bonds market and key to the direction of mortgage rates, probably for weeks to come. The long-term trend has been higher overall, but a lot has been fueled by fears. If these fears do not show a basis this week, and I suspect they won’t, mortgage rates will suffer, so I am recommending locking as the week goes on.
Fed stimulus package may have unexpected effect on conforming interest rates. Will mortgage giants FNMA / FHLMC have to re-think pricing model offset risk of new loan limits?
Robert — The last time rate cutting became an Olympic event, it didn’t stop until 1% was reached. Why didn’t we have significantly high inflation back then?
I realize the RE market went nutso, but the inflation rate stayed in the high 1’s to low 2’s, occasionally hitting 3.
It seems the state of the economy in general, i.e. it is either able to absorb the increased money supply or it isn’t. What’s your take?
In the past, inflation here was checked by increased globalization and the rapid economic expansion of China and India. Some at the Federal feelthis may no longer be the case. China is facing its own inflationary pressures. According to Donald L. Kohn:
“In addition, import prices have risen at about the same average pace as core consumer prices over the past several years and thus no longer appear to be acting as a significant restraint on inflation in the United States. This step-up in the rate of change of import prices obviously reflects, to some extent, recent movements in the dollar, especially its depreciation in 2004. However, it also reflects large increases in the prices of a number of imported commodities, which have been attributed in part to the rapid expansion of activity in China and other Asian countries.”
http://www.federalreserve.gov/newsevents/speech/kohn20060616a.htm
Of course, making money cheaper isn’t the same as providing increased access to it. Money was cheap during the Great Depression but credit was so tight that it didn’t matter. If borrowers can’t borrow we won’t have inflation but we will have recession / depression.
http://eh.net/encyclopedia/article/parker.depression
Gina — Excellent info, thanks.
You correctly said — Of course, making money cheaper isn’t the same as providing increased access to it. Money was cheap during the Great Depression but credit was so tight that it didn’t matter. If borrowers can’t borrow we won’t have inflation but we will have recession / depression.
Why was there the credit so tight?
The answer might very well be the genesis of Bernanke’s strategy. There are some solid parallels to the 1927-33 set of circumstances.
The wild card here is possibly what you brought up with the world market. The difference today though, might be that we’re in a transition to a truly world economy in which America will merely be a huge player — not nearly as dominant.
What do you think?
I think you are right. We will go the way of Rome, Portugul, Spain, England, and other once-powerfuls. You can only stay fat, dumb, and happy for so long before someone hungrier than you takes over.
I don’t wanna go the WHOLE Roman way. All the nations you mentioned were reduced to virtual pawns, not huge players.
I’d just as soon not follow say, the latest example which was England. Let’s hope the end game here results in us remaining at the ‘big boys’ table.
At this point, I’d say the biggest worry is deflation. When oil prices start dropping on fears of a US recession and reduced consumption, that is one real wakeup call. Tough days ahead.
Sorry guys, stuck on an airplane all day behind schedule yesterday and catching up still right now.
Interesting discussion that you have developed here and here is my take on it…
One of the chief concerns I have on the inflation side is that of a drastically devalued dollar. We tend to rely heavily on foreign products and those costs are increasing subject to currency based inflation, though no one seems to discuss that. With the latest readings on PCE ticking higher and breaking 2%, the next report may be even higher and the Fed should be acknowledging that fact, not minimizing it. My opinion is that the increased money supply, both real and “credit”, will allow inflation to take hold.
I am glad to see someone else highlighting the globalization issues. Other central banks around the world are not lowering their rates (UK did, but have already shown resistance to further decreases at this time). Whether or not the US remains a “big dog” remains to be seen, but I feel we are on the wrong path in that area.
I can personally attest that travelling internationally is more expensive virtually anywhere you go these days due to the devalued dollar. I remember seeing Ron Paul leave Bernanke speechless when addressed with that fact.
Time will tell, but obviously I have some concerns about where we are headed. The good news is this week will shed some more light on where we are headed. Hopefully I am wrong.
My beef is that all of this is to “build confidence” in the market. No one is proposing a change to the way the mortgage industry actually works, and no one is proposing that we take a step back to decide whether or not the way we’ve done things for the past 25 years is a good idea.
We will go the way of the other powers, at least in terms of economic clout, if we continue down a path that focuses more on “confidence” than on solid changes.
Confidence in the market? Does anyone still have confidence in the market?
As for mortgage reform, be careful what you ask for. There were good loan programs, including the Option ARM that got destroyed because of abusing their intent, not to mention many mortgage professionals put money above the homeowner’s best interest. Most of those programs are gone or really hard to come by now even though some could benefit immensely from them. Mortgage reform, in the government hands, will likely do more harm for the consumer than good.
Don’t get me wrong as there are some things that do need to be changed, but they have to be well thought out, not rushed as the government has been trying to do. The industry will likely be better off by letting itself correct the problems.