Market Recap - Week Ending May 21, 2010

This week, uncertainty about the pace of the economic recovery caused investors to shift to relatively safer assets, including government insured mortgage-backed securities (MBS). Also positive for mortgage markets, the economic data released this week showed that inflation remains extremely low. As a result, mortgage rates declined during the week, reaching the lowest levels of the year.

Concern about the level of global economic growth drove financial markets this week. Troubled European countries will be forced to reduce government spending, and Chinese officials indicated that they will tighten monetary policy to reduce inflation. In the US, it's not clear to what degree the new financial regulation bill will cause banks to reduce lending, leading to slower economic growth. In response to periods of uncertainty such as this, investors seek to reduce risk by moving to safer assets such as bonds, and greater demand for MBS pushes mortgage rates lower.

This week's news from the housing sector was mixed. April Housing Starts increased above the consensus forecast to the highest level since October 2008. Building Permits, a leading indicator, declined moderately. The May NAHB Homebuilder confidence index rose to the highest level since August 2007. Even with the end of the homebuyer tax credit, the builders surveyed remained optimistic about the next six months.

Next week, a wide mix of economic data will shed some light on the level of economic growth. Existing Home Sales will be released on Monday, and New Home Sales will come out on Wednesday. Durable Orders, an important indicator of economic activity, will also be released on Wednesday. Thursday, a revised figure for first quarter Gross Domestic Product (GDP) will come out. The Chicago PMI manufacturing index and Personal Income are scheduled for Friday. Consumer Sentiment and Consumer Confidence will round out the Economic Calendar. In addition, there will be Treasury auctions on Tuesday, Wednesday, and Thursday.

Market Recap - Week Ending May 21, 2010