KEY ITEMS LAST WEEK

·         Mortgage bonds and home loan rates ended the week about where it began. 

·         Stocks and Bonds continue to battle for investing dollars and trade in seesaw fashion.  There was more pessimistic news out of Europe last week, as German leader Angela Merkel said that Europe is going through its toughest times since World War II, plagued by political unrest and a severe debt crisis. Reports showed there was a slowing in manufacturing to the point where recession fears have now gripped Europe .  Here lies another enormous problem for Europe : One way--and probably the biggest way--to lower government deficits, is to grow your way out and elevate Gross Domestic Product (GDP). However, many of the Southern Europe economies are on the brink of recession, which will make lowering the deficit through economic growth impossible.

·         So what does all of this mean for home loan rates here in the United States ?  The problems in Europe should continue to support the US Dollar and US Bonds (including Mortgage Bonds, on which home loan rates are based) to some degree, as investors will view our Bonds as a safe haven for their money. Yet, if we continue to see better-than-expected economic data here like we did last week, this will offset the continued uncertainty surrounding the European crisis. And this is part of the reason that the Bond markets and home loan rates saw limited gains last week. 

·         Some of the good news last week included tamer than expected wholesale inflation in the form of the Producer Price Index (PPI) and improved New York Manufacturing.  Also the year-over-year headline Consumer Price Index (CPI) is down from the previous reading, which is good news for people concerned about inflation. However, the closely watched Core CPI rose by 0.1%, and though this was inline with estimates, it did push the year-over-year rate to 2.1% from 2%...a touch above the Fed's comfort zone. 

 TODAY’S MARKET

·         Currently, the Mortgage Bonds market is UP 12 bp’s. 

·         There may be a better word to describe the "Super" Committee, the bi-partisan Congressional group assembled with the simple task of cutting at least $1.2T from the budget over the next ten years.  It now appears this group will come up short and not be able to come to an agreement by this Wednesday's deadline, setting the stage for an automatic reduction of $1.2T, starting in 2013.  What is very frustrating, is the cuts amount to about 0.7% of the annual budget (remember these cuts are spread out over 10 years).  So if we can't get elected officials to come to agreement on such a relatively paltry amount, it is impossible to see them address some of the most pressing issues, like entitlement reform and the tax code. 

·         So how does the market respond to our dysfunctional government?  Stocks are starting the day quite a bit lower - but Bonds, especially Mortgage Bonds are only a tad higher on the day.  Longer-term it is reasonable to think the US will endure another debt downgrade, as Bond rating firms cite a lack of government leadership to address the debt problems.  And while US debt remains the "cleanest shirt in the dirty laundry"  relative to other government debt around the world, it will be very interesting to see how Bonds respond to another ratings cut. It would not surprise us to see US Bonds move lower. 

If you have any questions or need scenario’s run please call me!    

Warmest regards,

Matthew A. Frey
Home Mortgage Consultant
NMLSR ID 653914
Mobile phone -  949-632-5682

E-mail - Matthew.A.Frey@bankersfundingcompany.com