Market Recap - Week Ending August 20, 2010

The economic environment for mortgage rates was little changed this week. Weaker than expected economic data and continued low inflation supported low rates, and investor demand for bonds remained high. As a result, mortgage rates again ended the week a little lower.

As the economic recovery has lost steam recently, investors are closely watching for signs that growth will slow even more. The economic data released during the week was generally weaker than expected. In a sign that the labor market is not improving, Weekly Jobless Claims rose to 500K, the highest level since November 2009. After a series of positive readings, the Philly Fed manufacturing index surprisingly fell to -7.7. Readings below zero indicate a contraction in the sector. Slower economic growth typically leads to less inflationary pressure, which is positive for mortgage rates.

On Tuesday, a conference was held to discuss the future of Fannie Mae and Freddie Mac, and participants offered a wide range of ideas. While no clear consensus was reached, a few hints emerged about what to expect. Treasury Secretary Geithner suggested that the government should retain a role in providing guarantees for mortgages, but that taxpayers should be exposed to less risk. The Obama administration has announced that it will produce a proposal to address these issues by January 2011. In almost any scenario, changes will be phased in very slowly over a period of many years to avoid disruptions to the housing market.

Next week's economic data will begin with housing market reports. Existing Home Sales will be released on Tuesday. New Home Sales will come out on Wednesday. Durable Orders, an important indicator of economic growth, will also be released on Wednesday. Revisions to second quarter Gross Domestic Product (GDP) will come out on Friday, along with Consumer Sentiment. There will be Treasury auctions on Tuesday, Wednesday, and Thursday.

Market Recap - Week Ending August 20, 2010