Rate Update September 16, 2008

Rates are effectively unchanged this morning.

There is A LOT to talk about this morning as crisis in the financial markets persists. Here is a summary of the major stories we’re falling that are likely to impact the direction of mortgage rates:

→ AIG: The nation’s largest insurer is close to insolvency. Analysts are suggesting that the troubled insurer needs to raise $75 billion in fresh capital to stay afloat. The failure of this firm would be unprecedented because of it’s vast reach & volume of obligations. AIG operates in 130 countries and is a major player in the credit default & life insurance sector. AIG’s failure would likely cause a major disruption in the financial markets which could drag other firms down with it. Although rates may benefit from this news in the near term, in the long run this would be a disaster.

→ Federal Funds Rate: The Fed is scheduled to announce their interest rate policy decision this afternoon. Last week at this time there was a 0% chance that the Fed would alter rates. However, analysts now assume a cut of at least .25% and possibly even .50%. Remember that in and of itself the Fed cutting rates will not directly impact mortgage rates. However, what they say following their announcement can.

→ Consumer Price Index: Finally, the Labor Department released the monthly CPI report. The report came in line with expectations reflecting a 5.4% increase year-over-year. When stripping out volatile food and energy prices year-over-year inflation rose by 2.5%. Although these figures are relatively high compared to the past couple years the announcement did not surprise the markets.

Current Outlook: floating

Rate Update for August 19,2008

Rates are unchanged again this morning.

Last Thursday the Labor Department issued the monthly Consumer Price Index (CPI) report which showed that prices at the consumer level in our economy grew at the fastest pace in 17 years. 

Today, the Labor Department released the monthly Producer Price Index (PPI) report which reports on prices at the wholesale/ manufacturing level of our economy.  The report indicated that prices increased by 1.2% in the month of July alone & 9.8% on a year-over year basis!  This marks the fastest growth in wholesale prices in over 20 years! 

This double shot of hit inflation news ordinarily would be terrible for mortgage rates but they have yet to move higher.  Why?

It may be because traders believe that much of the cause for the rapid increase in prices can be credited to higher oil prices in July.  Since oil prices have declined in August they may believe that the increases in July are temporary. 

Furthermore, stocks are not taking the inflation data well so we are also seeing a “flight to quality” in the financial markets.

Current Outlook: neutral

Rate Update for August 14, 2008

Rates are effectively unchanged this morning despite worse than expected inflation data. 

The Labor Department reported earlier this morning that the Consumer Price Index (CPI) rose by .8% in July alone.  On a year-over-year basis CPI rose by 5.6% which is the biggest rise in consumer prices since 1991.  Core CPI, which strips out volatile food and energy prices, rose by .3% in July and 2.50% year-over-year. 

As we know inflation is the enemy of mortgage rates.  Today’s report is not likely to help mortgage rates move lower anytime soon.  However, the markets were bracing for a poor report so the bond market is not reacting too terribly bad yet.

From a technical standpoint a negative trend line has developed since mid-July.  If you look at the chart below you’ll see a blue line which is acting as a ceiling of resistance.  This resistance level will make it hard for rates to move lower. 

 Current Outlook: locking

Rate Update for August 13, 2008

Rates are slightly lower this morning as volatility in the financial markets continues.  In the past four days of ‘rate update’ we’ve reported changes (up or down) in interest rates which is a rare occurrence.

Much of the credit for lower mortgage rates can be credited towards a weak stock market.  Yesterday the markets dropped approximately 1% on renewed credit fears and today the Dow Jones Industrial Average is off by over 150 points thanks to a weak retail sales report.  For an explanation on how a weak stock market can help lower mortgage rates read this link.

Tomorrow brings the Consumer Price Index (CPI) report.  Should Core CPI come in less than it did last month it would be a good sign for mortgage rates.  However, should Core CPI edge higher we would likely see higher mortgage rates by the end of the day.  We’ll report back tomorrow with results.

Current Outlook: neutral ahead of CPI