Market Comment
Mortgage bond prices finished the week significantly lower which put upward pressure on rates. Rates worsened most days with some slight respites Wednesday afternoon and Thursday afternoon. The fear of inflation dominated trading. The Fed left rates unchanged and signaled no planned rate changes until well past 2023. Investors fear they are content with inflation pushing higher for a bit while their focus is spurring economic activity. Inflation, real or perceived, erodes the value of fixed income investments such as mortgage-backed securities. This causes prices to fall and rates to rise. Retail sales fell 3% vs 0.5%. Industrial production fell 2.2% vs the expected 0.7% increase. Capacity use was 73.8% vs 76.0%. NAHB housing data was 82 vs 83. Weekly jobless claims were 770K vs 700K. The Philadelphia Fed business conditions index was 61.6 vs 39.5. Leading economic indicators rose 0.2% vs 0.3%. Mortgage interest rates finished the week worse by approximately 5/8 of a discount point.
Looking Ahead
| Economic Indicator | Release Date & Time | Consensus Estimate | Analysis |
| Existing Home Sales | Monday, March 22, 10:00 am, et |
6.51M | Low importance. An indication of mortgage credit demand. Significant weakness may lead to lower rates. |
| New Home Sales | Tuesday, March 23, 10:00 am, et |
875K | Important. An indication of economic strength and credit demand. Weakness may lead to lower rates. |
| Durable Goods Orders | Wednesday, March 24, 8:30 am, et |
Up 1.2% | Important. An indication of the demand for “big ticket” items. Weakness may lead to lower rates. |
| Q4 GDP | Thursday, March 25, 8:30 am, et |
Up 4.1% | Very important. The aggregate measure of US economic production. Weakness may lead to lower rates. |
| Trade Data | Friday, March 26, 8:30 am, et |
$84.5B deficit | Important. Affects the value of the dollar. A falling deficit may strengthen the dollar and lead to lower rates. |
| Personal Income and Outlays | Friday, March 26, 8:30 am, et |
Down 0.6%, Up 0.1% |
Important. A measure of consumers’ ability to spend. Weakness may lead to lower mortgage rates. |
| PCE Core Inflation | Friday, March 26, 8:30 am, et |
Up 0.2% | Important. A measure of price increases for all domestic personal consumption. Weaker figure may help rates improve. |
| U of Michigan Consumer Sentiment | Friday, March 26, 10:00 am, et |
83.0 | Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates. |
Mortgage Rates Volatile
Mortgage interest rates continued to fluctuate wildly with major spikes higher last week despite the continued Fed multi-billion-dollar daily MBS purchases. Economic recovery, stimulus spending, and inflation fears pressured rates higher.
The core challenge investors and the financial markets face is pricing anything in this environment. Risk models that worked during periods of stability do not necessarily return an accurate picture of risks during a global viral pandemic. For example, what is the value of a hotel chain if few customers are traveling? In the case of a stock the value would plummet as the risk increased. The same is true for mortgage- backed securities (the bonds the dictate mortgage interest rate pricing.) What is the value if the performance of the investment could be in question? Will an MBS perform in the future like it has historically? The point is that the MBS market is subject to all the current uncertainty that has struck every facet of life and business. Be very cautious in these volatile times.
