Mortgage Market Update

What a wild ride for bonds last week, especially since it was all do to Fed speeches, namely Dallas Fed Fisher. Since Fisher was the only vote against the rate cuts at the last meeting, his words were words to drive markets, and they did.

Fisher made one of the best quotes for a Fed during his speech in Mexico City..

“Monetary policy acts with a lag. I liken it to a good single malt whiskey or perhaps truly great tequila: It takes time before you feel its full effect. The Fed has to be very careful now to add just the right amount of stimulus to the punchbowl without mixing in the potential to juice up inflation once the effect of the new punch kicks in.”

He then went on to say basically that the Fed needs to take a breather and see what is really happening before they act again. He is clearly concerned about inflation, something I have been talking about for awhile.

Since it takes a while before the effects are seen, the reality is that we have yet to see the real effects of the first cut and now we are down over 200bp. The effects on inflation of a move that big and that quick may send inflation out of control since it is not the same world economy we had back when the Fed dropped the rate all the way down to 1%.

Needless to say, bonds did not like the words Fisher had to say and bonds tumbled, ending the week on the down side and forcing mortgage rates about .125% higher for the week.

Ok, so what’s in store for this week? Well, nothing much except for more market driving dribble. There are a few reports due out, which will weigh more on the markets than normal due to bonds grabbing onto anything in this fearful market. Besides Retail Sales, markets will focus more on speeches by the President, Paulson, Bernanke and others which will likely create more volatility this week.

Here’s this week’s main lineup…

• Wednesday: Retail Sales (8:30), Crude Inventories (10:30)
• Thursday: Balance of Trade (8:30), Initial Jobless Claims (8:30)
• Friday: Empire State Index (8:30), Industrial Production (9:15), Capacity Utilization (9:15), Consumer Sentiment (10:00)

Starting out this week, I recommend floating with extreme caution, probably locking for sure later this week as the roller coaster ride goes nuts. Pay close attention to what the speeches contain and keep an itchy trigger finger.