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Inflation Puts Pressure On Financial Markets

Stocks and bonds are both down today on worse than expected inflationary news.

Mortgage bonds are being hit today by worse than expected inflation reported in the Personal Consumption Expenditure (PCE) report.  Even though bonds are off of their lowest levels of the day, the figures show that inflation for the month of June was up 0.8% – the highest single month increase in 27 years.

As we have discussed before, what is bad for bonds is usually good for stocks, but not inflation.  Traders on both sides of the isle hate inflation, so the trend is likely to be down in both markets today.

The FED is meeting today and will be anouncing the results of its meeting at 2:15 PM EST tomorrow.  The markets are currently predicting a 93% chance that short term lending rates will not change due to current market conditions.

Based on the current state of the markets, it looks like floating your rate in the short term is the best course of action to see how the markets continue to react to today’s economic news.  If you will be closing soon, I recommend locking to avoid possible negative impacts.


Inflationary Concerns Holding Back Mortgage Bonds

We had a lot of news out today, all of which was bad.  The Retail Sales report came out today at a 0.1% rise over last month.  This is considerably lower than the projected 0.4% increase, and the lowest increase since the February Retail Sales Report.

The Producer Price Index (which measures wholesale inflation) came in at 1.8% on a seasonally adjusted basis in June.  This is not good news for inflation, and as the biggest gain since November 2007, it will continue to chip away at investor confidence in the mortgage bond sector.

FED Chairman Ben Bernanke will be delivering his semi-annual monetary outlook to the Senate Banking Committee today.  The expectations for his prepared speach are already creating concerns with investors and causing a sell off in stocks based on the assumption that continued problems with growth and unemployment will not ease in the near future.

All of this leads to a less than stellar environment in mortgage bonds.  Normally, a stock sell off is good news for the bond market and mortgage rates in general.  But with continued uncertainty about inflation, it is having little or no affect on bonds.  My suggestion would be to lock your rate at current levels to protect against future loss on any active mortgage loan you have working.

Wednesday June 25, 2008

The FED will discuss the economy and how inflation and oil prices enter the mix.

As I write this post (at 11:07 CT), we are a little over 2 hours away from the press conference to reveal the results of this month’s FED meeting.  No one on the street expects the FED to move on interest rates (up or down), and mortgage bonds are trading flatly because of it.

It is understood that there are many factors at play in today’s economy, but there is very little argument that rising oil prices are at the forefront of the discussion.  Again, we can discuss the “chicken or the egg” scenario of why we got where we are today.  Did oil prices cause inflation?  Did inflation cause a devaluation in the dollar leading to higher oil prices?  Does inflation really exist, or is it a self fulfilling prophecy from the lack of consumer confidence?

Based on the numbers and definition of a “recession”, we are not currently in one.  However, if you asked 100 people on the street that same question, I believe that 95 of them would believe that we are in a recession.  This is actually important because if people are uncomfortable about the state of the economy, they tend to spend less.  This Consumer Sentiment can help to fuel a recession, or even create one because as people tighten up their wallets, businesses suffer, the employees of those businesses suffer through cut pay or layoffs.  Those employees are forced to look for a job in a market where 100’s of their counterparts are looking for the same thing, leading them to spend less on discretionary spending, and so on and so on.

There is little doubt that we are in a rough economy, whether you want to label it as a recession or not.  But the question is how do we fix it when raising rates to strengthen the dollar puts another nail in the coffin of the already strugling real estate market.  At the same time, lowering rates may give a boost to the real estate market (or maybe not), but in turn, it lessens the value of the dollar even further giving oil prices nowhere to go but up.

These are difficult times with no easy answers, but ultimately without a stronger dollar, we are in real trouble in the global economy with the deficiency between the Euro and the Dollar, and the fact that oil prices are tied to the US Dollar.

If you have an active mortgage file, you might as well float the rate until the contents of the meeting hit the street at at 2:25 ET, then hold on to your seat if they say anything other than extreme concern about inflation.