Market Recap - Week Ending August 06, 2010

A slow economic recovery and the possibility of a Fed policy change helped mortgage rates move a little lower again this week. As a result of recent weak economic data, the Fed is reportedly considering the purchase of additional mortgage-backed securities (MBS) to replace maturing securities. These factors, along with limited inflation, make current economic conditions supportive of low mortgage rates.

In particular, Friday's weaker than expected Employment data was positive for mortgage rates. Against a consensus forecast for a loss of -90K jobs, the economy lost -131K jobs in July. This included the loss of -143K census positions. Private employers added 71K jobs, below expectations of 100K. The Unemployment Rate remained at 9.5%. Average Hourly Earnings, a proxy for wage growth, rose at a tame 1.8% annual rate.

To stimulate the economy, the Fed purchased $1.25 trillion in mortgage-backed securities (MBS) in 2009 and early 2010. Due to defaults, refinancings, and maturities, some MBS "roll off" the Fed's portfolio every month. Until recently, investors expected the Fed to let its portfolio slowly shrink in this fashion. Tuesday, though, a Wall Street Journal article suggested that Fed officials are considering a plan to replace those securities with new purchases to further stimulate the economy. Investors are divided about whether recent economic data has been weak enough for the Fed to decide to do this. It may be addressed at the August 10 FOMC meeting. While the demand created by this action would be small compared to the original MBS purchase program, it would further support low mortgage rates.

The big story next week will be Tuesday's Fed meeting. No change in rates is expected, but the Fed may announce new actions to stimulate the economy. The most important economic data next week will be Friday's Consumer Price Index (CPI), the most closely watched monthly inflation report. CPI looks at the price change for those finished goods which are sold to consumers. In addition, Productivity will be released on Tuesday. The Retail Sales report will come out on Friday. Retail Sales account for about 70% of economic activity. The Trade Balance, Import Prices and Consumer Sentiment will round out the schedule. There will be Treasury auctions on Tuesday, Wednesday, and Thursday.


Market Recap - Week Ending August 06, 2010