Fixed Rates End Higher Following a “Scary” Trading Week
Boston – Tuesday, November 04, 2008
Treasury prices rose Friday, pushing yields slightly lower as economic data showed the largest drop in consumer spending in four years. The benchmark 10-year Treasury bond price was up about 4/32, with the yield falling 1 bp to 3.96%; much higher than this time last week. The Labor Department reported that the 3rd Quarter Employment Cost Index (ECI), which tracks employer costs for salaries and benefits, rose 0.7% last quarter. This was right in line with economists’ forecasts. September’s Personal Income and Outlays report revealed a 0.2% rise in income and a 0.3% decline in spending. The income reading was slightly higher than expected, meaning that consumers had a little more income to spend, but he drop in spending was somewhat larger than anticipated, meaning consumers were less willing to spend that “extra” income.
Because of the mixed results, this report failed to push the markets either way. University of Michigan’s revision to their Index of Consumer Sentiment for OCT showed a reading of 57.6, which nearly matched forecasts of “no change” to the 57.5 preliminary reading. As published in the Wall Street Journal today, on October 31, 2008, the Prime Rate has changed to 4.00%.Earlier this week: The Conference Board’s Consumer Confidence Index (CCI) fell this month to its lowest reading ever. The reading of 38.0 was significantly lower than the 52.0 that was forecast and indicates that consumers are too concerned about their own financial situations to make large purchases in the near future. The Commerce Department reported this morning that Durable Goods Orders for September rose 0.8% when they were expected to fall 1.0%. This means that manufacturing activity was stronger than expected, which is considered to be bad news for bonds and mortgage rates. The Fed (FOMC) meeting adjourned on Wednesday and the committee decided once again to cut their key rate by .50% to 1.00. This will have an immediate impact on the Prime Lending Rate (see above).
The 3rd Quarter Gross Domestic Product (GDP), considered to be the benchmark measurement of economic growth as a sum of all goods and services produced in the U.S., revealed a decline of 0.3%, its worst reading in seven years. It also was only the fifth time in 17 years that the quarterly GDP has fallen. However, analysts were expecting to see a 0.5% decline, therefore, the numbers still were better than forecast.
The Labor Department posted weekly Unemployment Claims this morning, reporting that 479,000 new claims were filed last week. This was nearly unchanged from the previous week, but was slightly higher than forecasts.
Looking ahead: Next week is fairly active in terms of economic releases for the markets to digest. Monday brings us the first with the release of the Institute for Supply Management’s (ISM) Manufacturing Index, which is expected to show that manufacturer sentiment slipped further in October. The rest of the week brings us some important data including Factory Orders, Chain Store Sales, Productivity and Costs, weekly Unemployment Claims, October’s monthly Employment figures, Pending Home Sales, Wholesale Trade and Consumer Sentiment. Friday will be the “busiest” day and could bring some additional market volatility.
Worth Noting: In yet another move designed to strengthen the banking industry, the IRS snuck in a new ruling that will encourage bank acquisitions. Under the new ruling, acquiring financial institutions will have no limit on the amount of acquired losses they may write off against their own earnings. Many say this ruling encouraged Wells’ acquisition of Wachovia.
Just for Laughs (new, because we all need a little humour right now):Former Fed chairman, Alan Greenspan was in Washington last week, and he called the current financial crisis a “once-in-a-century occurrence”, to which John McCain wryly replied, “He’s right… and I’ve been through three of them.”
Summary: Fed comments like, “a strong likelihood of further market deterioration” have done nothing to help bolster investors’ faith in any of the major markets, but it seems that mortgage bonds and securities may be seeing a better share of buyers going into next week. I am shortening my LOCK recommendation to include immediate closings only. But keep a sharp eye on the markets as the week progresses. If I were considering financing/refinancing a home, I would… LOCK if my closing was taking place within 7 days… FLOAT if my closing was taking place between 15 – 30 days… FLOAT if my closing was taking place between 31 – 60 days… FLOAT if my closing was taking place over 60 days from now.
This is my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of any/all other borrowers.