Market Comment - Week of February 2nd

Mortgage bond prices fell last week pushing rates considerably higher. The data the first portion of the week came in as a surprise with existing home sales and Leading Economic Indicators both stronger than expected. The majority of the other data pointed toward continued economic weakness. New home sales fell a record 14.7%. The Fed left rates unchanged as expected but bonds fell sharply following the announcement. Uncertainty dominated trading. The Fed bought $16.8 billion of mortgage bonds between January 22nd and the 28th but the purchases did little to help rates improve. For the week, interest rates on government and conventional loans rose by about 7/8 of a discount point. The employment report Friday will be the most important event this week. The other data releases may also result in mortgage interest rate volatility.

Economic Factors this Week:

Personal Income and Outlays
Monday, Feb. 2, 2009
Consensus Estimate: Down 0.4%, Down 0.9%
Analysis: Important. A measure of consumers' ability to spend. Weakness may lead to lower mortgage rates.

Construction Spending
Monday, Feb. 2, 2009
Consensus Estimate: Down 0.9%
Analysis: Low importance. An indication of economic strength. A significant decrease may lead to lower rates.

ISM Index
Monday, Feb. 2, 2009
Consensus Estimate: 32.0
Analysis: Important. A measure of manufacturer sentiment. A large decline may lead to lower mortgage rates.

Preliminary Q4 Productivity
Thursday, Feb. 5, 2009
Consensus Estimate: Up 1.0%
Analysis: Important. A measure of output per hour. Improvement may lead to lower mortgage rates.

Factory Orders
Thursday, Feb. 5, 2009
Consensus Estimate: Down 2.5%
Analysis: Important. A measure of manufacturing sector strength. A larger decrease may lead to lower rates.

Employment
Friday, Feb. 6, 2009
Consensus Estimate: Unemp. @ 7.4%, Payrolls -500k
Analysis: Very important. An increase in unemployment or a larger decrease in payrolls may bring lower rates.

Consumer Credit
Friday, Feb. 6, 2009
Consensus Estimate: Down $1billion
Analysis: Low importance. A significantly larger than expected increase may lead to lower mortgage interest rates.

ISM Index
The Institute for Supply Management (ISM), formerly the National Association of Purchasing Management (NAPM), releases the "Report on Business" on the first working day of each month. Part of this report is the "diffusion index," which tracks the economy's ups and downs fairly well.

In conducting this survey, the ISM questions purchasing executives from over 250 industrial companies compiling data on production, orders, commodity prices, inventories, vendor performance, and employment. Each of the respondents is asked to rank the categories as "up" or "down." Various weights are applied to the individual components to form the composite index. A composite index reading of 50 can be thought of as a "swing point." A reading above 50 implies an increase in economic activity, while a reading below 50 indicates a decline. As a general rule of thumb, when the index approaches 60, investors begin to worry about an overheated economy. A slide below 40 suggests that recession is at hand.

The ISM report is difficult for economists to forecast because there is little data upon which to base an educated guess. Economists often look to regional Purchasing Managers' reports that are released prior to the full report, in a further effort to anticipate the results of the full report.

The ISM report has a large "surprise factor" and can often prompt a significant market reaction. Be cautious heading into the data this week.