Market Recap - week ending 02/26/10

After several weeks of focus on Fed actions and events in foreign markets, domestic economic data was the primary influence on mortgage markets this week. Weaker than expected results from the data helped mortgage rates, which ended the week lower.

While it is rarely a big market mover, this week's Consumer Confidence report shocked investors. The index declined to 46.0, far below the consensus forecast of 55.0, and the lowest level in nine months. Consumers are clearly worried about the labor market, and an increase in Jobless Claims in recent weeks has amplified the issue. The decline in confidence has potentially negative consequences for the economy. Consumer spending accounts for about 70% of economic activity, and this data raises concerns about the level of future spending. Also, home sales suffer during periods of low consumer confidence, and the housing data released this week reflected consumer insecurity. Of course, slower economic growth is favorable for mortgage rates, which fell after the report came out.

In contrast to the weakness seen in many of the consumer-driven economic reports, the manufacturing sector has been demonstrating strong performance in recent months. Fourth quarter Gross Domestic Product (GDP), the broadest measure of economic activity, rose at a brisk 5.9% annual rate, largely due to a pickup in manufacturing. The added boost from manufacturing may be temporary, however. During the financial crisis, companies drew down inventories as much as possible to conserve capital. As the economy has shown improvement, companies have been increasing inventories closer to pre-crisis levels. When the inventory rebuilding is complete, manufacturing is expected to return to more normal levels.

The biggest economic event next week will be the important Employment report on Friday. As usual, this data on the number of jobs, the Unemployment Rate, and wage inflation will be the most highly anticipated economic data of the month. Early estimates are for a decrease of about -20K jobs in February. Before the employment data, Personal Income and the ISM manufacturing index will be released on Monday. ISM Services and the Fed's Beige Book will be released on Wednesday. Pending Home Sales, a leading indicator for the housing market, will come out on Thursday. Productivity, Construction Spending and Factory Orders will round out the schedule. In addition, the Treasury will announce the size of upcoming auctions on Thursday.