Monday Market Commentary: Inflation Prospects, Stocks Driving Mortgage Rates

by Alex Stenback on June 30, 2008

Last Week:
A statement from the Fed that talked tough on inflation but stopped short of suggesting an imminent shift to anti-inflation rate hikes, helped mortgage rates improve by .125-.25% last week.  This improvement also was driven in large part by flight to quality action as money moved from a beleagured stock market  – this was the worst June for the DOW since the great depression – into the relative safe-harbor of bond investments like mortgage back securities.

Over the long haul, the Fed’s outwardly passive stance and attempts to jawbone inlfation expectations down may not work, and set the table for rates to move upward, but for last week anyway, stocks poor performance saved the day.

This Week:
We’ll continue watching the stock market early in the week as mortgage bonds will be content to take their cues from equities – stocks – until the economic calendar tosses some raw meat into the trading cages.  Speaking of which, the employment report for June will be released a day Early – Thursday, rather than Friday, due to the 4th of July holiday Friday.  The economy is expected to have shed 50,000  jobs – any markedly worse number here could help mortgage rates, but beware of a miss to the positive side, which could spur a bounceback rally in Stocks (testing a level 20% down from last October) which would hurt mortgage rates.

The ISM Report/Index (a measure of manufacturing activity and health) on Tuesday also bears watching, and holiday shortened weeks can exhibit high-volatility and risk aversion.  Unless the chips fall just so, the path of least resistance may be for rates to rise this week.

Despite the improvement in mortgage rates we have seen in recent weeks, inflation is an elephant in the room. Oil is cruising above $140 per barrel, the Eurpoean union is dealing with out of range inflation and may hike rates.  Inflation is one thing that mortgage rates won’t just absorb over the long haul – eventually, they will be forced up.  This fact tempers our optimism for mortgage rates going forward unless we see some bona-fide inflation fighting from the Fed and other central banks, we may be stuck in a cycle that makes it easier for rates to rise than fall.


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