2006 August

The big news of the day is the FOMC meeting that will adjourn at 2:15 PM. Many think the Fed will break the streak of rate hikes by pausing at this meeting. If they do make another quarter point increase without signaling it to be the last, I expect to see the markets drop sharply, pushing mortgage rates significantly higher this afternoon.

Tuesday’s bond market has opened down slightly following this morning’s economic news. The stock markets are showing early gains with the Dow up 40 points and the Nasdaq up 6 points. The bond market is currently down 3/32, which will push this morning’s mortgage rates higher by approximately .125 of a discount point in expectation of the FOMC meeting results.

If they do pause at this meeting, whether or not the markets react favorably or negatively likely depends on the post meeting statement. If it appears to only be a short pause meaning more rate hikes are expected, we could see bond prices drop and mortgage rates rise this afternoon and tomorrow morning. For the markets to react favorably to the news, I think we need a pretty strong hint that the Fed has shifted to a “wait and see” mode meaning that they aren’t sure if more rate hikes will be needed.

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The first day of August’s bond market has opened down slightly again after the release of stronger than expected manufacturing data. The stock markets have reacted negatively to the news also with the Dow down 79 points and the Nasdaq down 28 points. The bond market is currently down 3/32, but we will likely not see an increase in this morning’s mortgage rates as a result of strength in bonds late yesterday.

The first important report of the week came early this morning with the release of June’s Personal Income and Outlays data. It showed a rise in income of 0.6% and that spending rose 0.4%. Both of these readings matched forecasts and hasn’t affected mortgage rates this morning.

The Institute for Supply Management (ISM) said late this morning that their manufacturing index rose to 54.7 for July. This index measures manufacturer sentiment by surveying trade executives about business conditions during the previous month. It was expected to show a reading of 53.5, meaning that more surveyed executive felt business improved during the month than was expected. This is bad news for bonds because stronger manufacturing activity indicates economic growth and keeps inflation concerns in the spotlight.

There is no relevant economic news scheduled for release tomorrow. Thursday morning brings us the release of June’s Factory Order s data. This report also helps us measure manufacturing sector strength by tracking orders for both durable and non-durable goods. It is similar to last week’s Durable Goods Orders report that tracks orders for big-ticket items. Since a significant portion of the data was released last week, this report may not have as big of an impact on the markets as you may think. Analysts’ are expecting to see an increase of approximately 1.7% in new orders.

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