Daily Market Update

Daily Market CommentaryLast Updated: 12/11/2007
TUESDAY AFTERNOON UPDATE:
Today's FOMC meeting has adjourned with an announcement of another quarter point rate cut by Mr. Bernanke and friends. This was the most popular move with analysts and market participants, but as expected, the markets have reacted strongly. Stocks have dropped considerably while bonds have rallied since the announcement. The Dow currently stands down 177 points from yesterday's closing level while the Nasdaq has fallen 35 points. The bond market is now up 42/32, which will likely improve this afternoon's mortgage rates by approximately .25 of a discount point over this morning's rates.This was the third consecutive meeting with a rate cut, which will mean immediately lowered credit card and home equity loan rates for consumers and cheaper borrowing costs for corporate borrowers. In the post-meeting statement, the Fed indicated that more rates cuts may be needed to prevent the economy from slipping into a recession, but also hinted that inflation still a concern. Still, bonds are rallying hard while stocks are falling. I think this afternoon's bond strength is partly being fueled by the stock weakness than directly by the Fed's rate cut or statement.I am shifting to a float recommendation across the board simply to capture this afternoon's and possibly tomorrow morning's improvements. I will likely be moving back towards locking before we get to this week's key data, especially since two of them address inflationary pressures.There was no relevant economic news released today. We will see October's Goods and Services Trade Balance report posted early tomorrow morning. This report gives the size of the U.S. trade deficit, but it is the week's least important release. It is expected to show a $57.0 billion trade deficit. Unless it varies greatly from forecasts, I don't expect it to affect mortgage pricing.The first important data of the week comes early Thursday morning with the release of November's Retail Sales report. This data is very important to the financial markets because it measures consumer spending. Since consumer spending makes up two-thirds of the U.S. economy, any related data is watched closely. Current forecasts call for it to show a 0.6% increase in sales from October's levels. If it reveals weaker than expected sales, the bond market should thrive and mortgage rates should fall as a result. A stronger than expected reading could fuel stock market gains and push mortgage rates higher Thursday morning. Also Thursday and just as important as the sales data, the Labor Department will release November's Producer Price Index (PPI). This index measures inflationary pressures at the producer level of the economy. There are two portions of the index that are used- the overall reading and the core data reading. The core data is the more important of the two because it excludes more volatile food and energy prices. If Thursday's release reveals stronger than expected readings, indicating that inflationary pressures are rising, the bond market will probably react negatively and should drive mortgage rates higher. If we see in-line or weaker than expected numbers, the bond market should fair well and mortgage rates should fall. Current forecasts are showing a 1.5% rise in the overall index and a 0.2% rise in the core data.

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