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01/19/2007 AJs Economic Buzz for 01/15/2007

AJ’s Economic Buzz for January 15^th

Alan “AJ” Nisen My goal is to build lifetime relationships with every client!

Bank of America Mortgage
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Last Week’s Economic Retrospective:

The disappointing Bond price performance and home loan rates last week was largely the result of some unexpected news that left home loan rates about .125% higher across the board. Good economic news tends to be bad for Bond prices and home loan rates for two reasons. First, because Stocks and Bonds compete for the same investor dollar and good economic news would cause many investors to pull money out of Bonds and place it into Stocks, which generally benefit from a healthy economy. Second, good news for the US economy can also mean inflation, which impacts Bond prices negatively and thus home loan rates, since inflation erodes the true value of a fixed return that a Bond provides.

The positive housing sector news arrived in the form of the Mortgage Applications Index showing the largest percentage increases in home loan applications for purchasing and refinancing since the middle of 2005. This was bad news for Bonds and home loan rates because Bonds react poorly to potentially inflationary news. The increase in home loan applications points to a healthier housing sector and economy which could increase inflationary pressures. The good news with respect to inflation was that home loan rates, currently are favorable, and most markets are stabilizing in terms of home values. Some housing reports suggest that the housing market bottom out in 2006 and now is the time to purchase or refinance. This also supports a healthier housing sector and economy leading to an increase in home inflation.

Last week’s Retail Sales news suggested a very healthy holiday season. When factoring out vehicle purchases, it was the best number in over a year. Again, more good economic news but this news was not good for Bond prices or home loan rates. More unexpected bad news arrived when the Bank of England (equivalent to our Federal Reserve Bank) surprised international financial markets by raising its benchmark interest rate (like our Fed Funds Rate) by 0.25%, sparking a sharp drop in their markets as investors became uneasy. The sharp sell-off in Great Britain quickly spilled over to the US, as their rates are on par with ours so now their Bonds will become more competitive as compared to our own US Bonds.

This Week’s Economic Forecast:

This coming week will certainly provide some movement but the direction will depend totally on the inflationary direction of the news. There is the Producer Price Index (PPI) on Wednesday and the Consumer Price Index (CPI) on Thursday. There will also be news from the Manufacturing sector sprinkled throughout the week, and Housing will gain some attention on Thursday with the latest Housing Starts and Building Permits data. If the economic data comes in suggesting a slower economy and lower inflation, Bonds will likely regain their legs and help home loan rates improve. But if the news has that familiar hint of inflation, Bond prices will head lower and bond yield as well as home loan rates will worsen.

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AJ Nisen

Alan ‘AJ’ Nisen, MBA, Notary