The week ahead is pretty light on economic data.
- Ben Bernanke will be speaking to the Council on Foreign Relations and taking questions. Anytime Bernanke is giving a speech, investors will be listening and there is a potential for the markets to move.
- 3 Year Treasury Note auction. With the added supply of treasuries being auctioned, there could be pressure on mbs to move lower in price which results in higher interest rates.
- 10 Year Treasury Note Auction. The government needs to raise money to fund the huge spending/stimulus bills passed by Congress, and how they raise the funds is to sell Treasuries. With more supply of treasuries, which is a fixed income investment similar to mbs, it might cause the price to fall which increases the yield they pay to the investor. Since treasuries and mbs are both fixed income investments, when treasuries move lower in price, they will apply pressure on mbs to follow which could result in higher mortgage rates. Remember, mbs and treasury price to yield has an inverse relationship. As the price moves higher, the yield moves lower. When a mbs moves higher in price, the yield or mortgage rates move lower.
- Retail Sales, economists are expecting a drop of -0.5% after last months surprising 1.0% increase. Retail sales measure the total sales at stores that sell durable and non durable goods. Consumer spending accounts for 2/3rds of GDP so any increase in retail sales is seen as a positive indicator for economic growth. Lower retail sales leads to lower corporate profits which is a negative for the stock market but a positive for mbs.
- Retail Sales excluding autos, economists expecting a -0.2% drop after last months 0.9% increase. This report measures the total sales at stores excluding automobiles.
- International trade, economists expecting a $-38.1billion after last months $-39.9billion. This report simply measures the difference between what we import and what we export.
- Import prices, economists expecting a -0.8% after last months -1.1%. This report measures the month over month change in the prices for products bought in the US but made over seas. Since inflation is the biggest enemy to low mortgage rates, a lower number would be seen as a positive for mbs.
- Consumer Sentiment, economists expecting a 55.0 reading after last months 56.3. This report is completed by the University of Michigan’s Consumer Survey Center, where they survey 500 households each month on their financial condition and attitude about the economy. Since consumer spending makes up 2/3rds of our GDP, when consumer sentiment is higher than expected, it is seen as a positive for the stock market and a negative for the fixed income market.
So, not much this week in the form of economic data, but we do have the treasury auctions which could cause mbs to move in a big way. If there is high demand at these auctions, especially by foreign investors, that would be a positive for mbs and help to keep mortgage rates low. As always, we need to pay attention to headline news items which also can cause mbs to move so the speech and Q & A sessioln by Ben Bernanke on Tuesday will be very important.
So far this morning, mortgage backed securities have given back some of the gains from last Thursday’s rally. They are currently down a few ticks and I suspect lenders rate sheets should have par 30 year conventional rate mortgages anywhere from 4.75% to 5%. Dow futures are pointing to another bad day for equities which could cause money to flow into mbs and treasuries, which I refer to as the flow of money. In general terms, as an investor you either invest in equities or debts. The equity market is the stock market, when you buy a share of a company; you own a share or equity in that company. When an investor buys a treasury or an mbs, they are buying someone’s debt. Your mortgage is a debt to you’ but it is an investment to an mbs investor. Typically when the stock market moves lower what happens is that investors sell stocks and move their money to the fixed income debt markets. This is why it is very common on days when the stock market rallies, mbs move lower(higher rates) and when the stock market moves lower, mbs move higher(lower rates).