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On time this week!

Mortgage Market News for the week ending December 14, 2007

Events This Week:

Inflation Higher
Retail Sales Stronger
Pending Sales Up
Manufacturing Mixed

Events Next Week:
Mon 12/17
Empire State
Tues 12/18
Housing Starts
Thurs 12/20
Final GDP
Philly Fed
Fri 12/21
Core PCE
Sentiment

A Roller Coaster Week

Last week's main event was the release of the Fed's statement on Tuesday announcing their decision on interest rates. While some investors hoped for a larger cut, the Fed lowered rates by one quarter point, and its statement was very similar to the last statement with few surprises. Many stock investors were disappointed that the Fed did not take more aggressive action, and the Dow finished down about 300 points. On the other hand, the smaller, less stimulative rate cut was well received in mortgage markets, which ended the day modestly improved.

What a difference a day made, however! Wednesday morning, the Fed announced that they would be coordinating a new plan with other major world central banks. Through a series of auctions and other channels, essentially the Fed will be providing more liquidity to major financial institutions, in an attempt to alleviate the credit crunch. In the minds of stock investors, this unprecedented plan made up for the lack of aggressive action the day before, and the Dow initially rallied 300 points on the news. Meanwhile, mortgage investors did not like the inflationary implications and pushed rates higher.

While last week's reports on economic growth were mixed, the inflation data came in higher than expected across the board. Investors typically prefer to watch the core inflation rate, which excludes the volatile food and energy components. Thursday, the November Core Producer Price Index (PPI) increased at double the expected rate. Friday's more closely watched Consumer Price Index (CPI) showed a rise in the core level of inflation at a 2.3% annual rate, the highest level since March. Higher energy prices also caused the overall inflation rates of both PPI and CPI to far exceed the consensus forecasts, which is made more significant since the Fed recently announced an increased focus on overall inflation in addition to core inflation. In response, mortgage rates rose again on both Thursday and Friday, leaving a small net increase for the week.

Also Notable:
Due to higher energy prices, the November PPI inflation index rose at the fastest monthly pace since 1973
October Pending Home Sales, a leading indicator of future housing market activity, increased slightly from the prior month
The Wall Street Journal compared the magnitude of the current mortgage crisis to the Savings & Loan meltdown in the 1980s
A Fed official stated that they will continue seeking additional methods to provide liquidity to financial institutions

Average 30 yr fixed rate:
Last week:+0.10%
This week:+0.07%

Stocks (weekly):
Dow:13,436-210
NASDAQ:2,660-49

Week Ahead

The Economic Calendar will not be as crowded during the final two weeks of December. Next week's biggest report will be Friday's Core PCE price index, the Fed's preferred inflation indicator. Housing Starts on Tuesday will provide a read on conditions in the housing market. The final revisions to third quarter Gross Domestic Product (GDP) will come out on Thursday. GDP is the broadest measure of economic activity. Consumer Sentiment and two regional manufacturing indexes will round out the schedule. Further Fed announcements may also provide a spark next week.

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