Mortgage Review for February 4, 2008

Posted on: February 04, 2008

Last Week in Review
“A GOOD CONSPIRACY IS UNPROVABLE. I MEAN, IF YOU CAN PROVE IT, IT MEANS THEY SCREWED UP SOMEWHERE ALONG THE LINE.” Mel Gibson as Jerry Fletcher in the movie, “Conspiracy Theory” And those who believe in the conspiracy theory that the Fed has access to economic data in advance of the official release dates sure felt their position was proven correct last week…let’s take a look.

The main financial event of the week was the Fed, cutting the Fed Funds Rate another .50%, on top of their surprise .75% cut just eight days before. This brings the Fed Funds Rate down to 3.00% and will lower rates for business and consumer loans as well as Home Equity Lines of Credit and Adjustable Rate Home Loans – so please give me a call to discuss how this may help you. Bonds and home loan rates moved with volatility throughout the week, yet ended up close to where they started on Monday.

But the economic calendar stacked up such that two significant economic reports would come just after the Fed decision – the inflation measuring Personal Consumption Expenditure (PCE) Index, and the heavy hitting monthly Jobs Report. While inflation numbers were relatively in-line and as expected…the Jobs number was one of the worst in years, showing no job creations at all, but instead a net loss of 17,000 jobs. Although future revisions may erase this negative number, this weak indicator made the Fed move look pretty smart, whether the conspiracy theory is true or not.

Forecast for the Week
After the last few weeks frenzied and jam packed economic calendars – this weeks schedule takes a much needed rest, with only a few mid-level reports of interest due for release. But with all the explosive market action that has been seen in the last several weeks – don’t get too relaxed just yet.
The chart below shows how Bonds and home loan rates have overall been moving “sideways” since the surprise cut the Fed made about two weeks ago, which means the open and closing price of Bonds have been within a pretty tight range. And if you didn’t know better – you’d think this would mean home loan rates have been pretty stable. However – here’s a quick primer on Japanese Candlesticks, which tell a very different story of volatility.

The red and green markers on the chart below are called Japanese Candlesticks, and have been used by savvy traders over the years to gain more information on a Stock or Bond than a simple open and closing price will provide. A red candle means the closing price was lower than the open, and a green candle means the closing price was higher than the open…but it’s the “wicks” on the candles that often tell the real tale. A wick on the top of the candle shows the highest trading point reached throughout the day, and a wick on the bottom of a candle shows the lowest trading point reached during the day.

Now look at the chart again…you can see that last week was actually very volatile for Bonds and home loan rates throughout the trading days, although the open and closing prices alone wouldn’t indicate so. And even with a light economic calendar ahead – more volatility likely lies ahead as well.

Chart: Fannie Mae 5.5% Mortgage Bond (Friday Feb 01, 2008)

The Week’s Economic Indicator Calendar
Remember, as a general rule, weaker than expected economic data is good for rates, while positive data causes rates to rise.