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Joe Shamie

Weekly Update 2-1-10

Monday, February 1, 2010 - Article by: Joe Shamie - First Choice Loan Services - Message

Last Week in Review

"THE NINE MOST TERRIFYING WORDS IN THE ENGLISH LANGUAGE ARE: I'M FROM THE GOVERNMENT, AND I'M HERE TO HELP." Ronald Reagan. And regardless of if those words do indeed terrify you or perhaps give you confidence, the government held center stage last week, with a pivotal Federal Reserve Board Policy Statement, President Obama's first State of the Union address, and Ben Bernanke's confirmation for another term as Fed Chairman. First, let's start with the Federal Reserve Board, who on the heels of their most recent meeting reiterated their important line, "rates will remain low for an extended period" in their Policy Statement. This tells us that the "carry trade" which has pushed Stocks, Commodities and even Bonds higher may continue, as the driving force of this trade - low interest rates - will likely provide a tailwind. This piece of the Statement was good news for Bonds and home loan rates. However, this was offset by further confirmation that the Fed's Mortgage Backed Security purchase program will indeed end March 31st, 2010. This was bad news for Bonds and home loan rates, and overrode the "extended period" statement in terms of Bond market and home loan rate action.

Then on Wednesday evening, President Obama delivered his first official State of the Union address, and just like in his initial post-election speech, a big theme was job creation. He discussed a new jobs package, but no details on how much the package would cost or where the resources would be spent have been provided yet. With lots of money already spent with this goal in mind during 2009, and the jobs picture still worsening, hopes are high that future plans will be carefully crafted and targeted to achieve this important goal. And finally - Ben Bernanke ultimately received a hard-won Senate confirmation for his second four-year term as Chairman of the Federal Reserve, but it was a bit of a bruising confirmation fight. Bernanke has been under some criticism as he led the Fed in taking a series of extraordinary measures to protect the economy during the financial crisis, including the decision to help home loan rates stay low during 2009 and early 2010 via the aforementioned $1.25T Mortgage Backed Security purchase plan.

In other economic report news - last week's Advanced read on 4th Quarter Gross Domestic Product (GDP) showed a climb of 5.7%, and as you can see from the chart below, that was the best reading since the 3rd Quarter of 2003. And while it's nice to see positive gains on this broad read on the economy, we need to take the report with a grain of salt. Last Friday's report was only the first or the Advanced reading. So we still have two more reports - the Preliminary and the Final - due out regarding the 4th Quarter GDP. And in the past, we've seen some of the gains go away when the additional reports were released. In fact, just last quarter, the GDP reading dropped 2.2% from the Advanced reading to the Final report. It wouldn't be surprising to see a similar revision lower this time, as when the economy slowed, businesses reduced their inventory rather than keeping their shelves full...and in the 4th Quarter, many businesses began to restock their shelves, with restocking accounting for 3.4 of the 5.7 percentage points in GDP growth. The problem is that sales haven't increased along with the restocking. In fact, Consumer Spending actually declined when compared to the previous quarter. This means last week's GDP report probably overstated the level of growth and, as a result, will likely be revised lower in the future.

Overall - Bonds and home loan rates experienced quite a bit of mid-week volatility while absorbing all the news, but ultimately ended up very close to where they had started.

Forecast for the Week

This will be a busy week for economic reports, starting off with the Personal Consumption Expenditures report on Monday. This report measures consumer price changes, and also gives us a look at inflation.

We'll also get a glimpse at Personal Income and Personal spending on Monday, as well as the Institute of Supply Managers Index, which is the king of all manufacturing indices, and is considered the single best snapshot of the factory sector. By mid-week, the labor market will lead the big news. In addition to the latest Initial Jobless Claims numbers, ADP's Employment Report will also be delivered. These two data points will lead the way to Friday's official Jobs Report from the Labor Department. This report includes the latest information on job losses and the unemployment rate, as well as the average work week and hourly earnings. With all the recent talk about the job market, it will be important to get a current read on the situation.

Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve, while strong economic news normally has the opposite result.

Mortgage Bonds traded in a tight technical range last week between a ceiling of resistance at the 100-Day Moving Average and a floor of support at the 200-Day Moving Average - and as always, I'll be watching carefully to see which way Bonds and home loan rates are headed.

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