Market Recap - week ending 02/12/10

Global events in China and Greece had a significant impact on US mortgage markets this week, but in opposite directions. In addition, demand was much weaker than average for the 10-year and 30-year Treasury auctions, which pushed up yields. The net result was a slight increase in mortgage rates from last week.

A surprise announcement Thursday night that China raised bank reserve requirements helped mortgage markets and hurt the stock market. The increase is a form of monetary tightening which is intended to slow economic growth in China. This likely means that China will buy fewer exports from other countries, slowing economic growth globally. Slower expected economic growth reduces inflationary pressures, which is positive for mortgage yields.

In recent weeks, large fiscal deficits in Greece have caused speculation that the country will default on its government debt, which resulted in an investor flight to the relative safety of US bonds. This week, the news that Greece will receive economic aid from other European Union nations prompted investors to reverse this flight to safety by selling US bonds, moving yields higher.

While it caused little immediate reaction, on Wednesday Fed Chief Bernanke revealed monetary policy strategies which may have important long-term implications for mortgage markets. Bernanke released the text of a speech which provided more details about the Fed's planned methods to tighten monetary policy when the economy has gained enough strength. One of the things the Fed intends to do is sell its portfolio of mortgage-backed securities (MBS). Due to concerns about disrupting mortgage markets, however, Bernanke suggested that this will be one of the last measures taken to tighten policy, and it will be done very gradually.

The most significant economic data next week will be the monthly inflation reports. The Producer Price Index (PPI) focuses on the increase in prices of "intermediate" goods used by companies to produce finished products and will come out on Thu rsday. The Consumer Price Index (CPI), the most closely watched monthly inflation report, will come out on Friday. CPI looks at the price change for those finished goods which are sold to consumers. In addition, Industrial Production, an important indicator of economic activity, will be released on Wednesday. The FOMC Minutes from the January 27 Fed meeting and Housing Starts are also scheduled for Wednesday. Import Prices, Leading Indicators, and Philly Fed will round out a busy week. In addition, the Treasury will announce the size of upcoming auctions on Thursday. Mortgage markets will be closed on Monday for Presidents Day.