Mortgage Market Update - Week of October 20, 2008

Market Comment - Week of October 20th, 2008

Mortgage bond prices remained nearly unchanged last week holding mortgage rates steady. Trading remained extremely volatile with daily movements in discounts points often exceeding 3/4. Much of the volatility in bonds was tied to the stock market where the Dow Jones Index rose by 933 points only to fall 733 later in the week. Trading in the financial markets remains in disarray as governments around the globe grapple with the credit crisis than has spilled over into most facets of their respective economies. One bright spot on the horizon is the continued decline in oil prices. For the week, interest rates on government and conventional loans fell by 1/8 of a discount point.

Fed Chairman Bernanke's testimony to Congress will likely be the most important event this week. The financial markets remain volatile amid uncertainty. Expect the up and down trading pattern to continue.

Leading Economic Indicators

The index of leading economic indicators (LEI) is a weighted average of eleven economic variables that "lead" the business cycle. It is constructed for forecasting future aggregate economic activity. The eleven variables that make up the LEI measure workers' hours, initial unemployment claims, new factory orders, vendor performance, contracts and orders for plant and equipment, new housing permits, changes in unfilled orders, prices of raw materials, stock prices, money supply and consumer expectations.

Each of the variables that comprise the index has a tendency to predict (or lead) economic activity. For example, new orders for manufactured goods, new orders for plant and equipment, and new building permits are all direct measures of the amount of future production being planned for the economy.

Analysts monitor the LEI in an effort to predict future economic growth. When the LEI report is up, mortgage market participants expect credit demand to increase and inflationary pressures to build. Thus, when the LEI report is rising, interest rates tend to rise as well.

The LEI report is a valuable forecasting device that correctly predicts most economic turning points. The percentage change in the LEI is reported monthly and is an indication of the activity that will occur within the next three to six months. The LEI tends to turn down before peaks in the business cycle. Continuous declines are generally accepted as evidence that a recession is underway.

One of the eleven components that make up this index are known before the release of the report, so the index is easy for economists to predict. Thus, although this is important predictive data for market participants, market volatility does not usually surround the release of this data. However, considering there are few data releases this week mortgage interest rates may have a stronger than normal reaction to any disparity between the consensus estimate and the actual result of the release.

Take advantage of the current low interest rate environment. It is possible for rates to improve. However, if rates move higher, they are likely to spike fast and furiously.