Comments Off on The Week In Review (December 24, 2007) : What To Watch For

The Week In Review (December 24, 2007) : What To Watch For

2007
12.24

Mortgage rates moved away from the best levels of the year last week with force, and this week could resemble last.

Markets have been grappling with conflicting signals about the U.S. economy.

On one hand, there is evidence of inflation in the form of higher cost of living. On the other hand, there is evidence of a recession in the form of hiring and housing slowdowns.

Because market players had expected recession for so long, just the threat of inflation is enough to reverse markets.

Inflation erodes the value of bonds and investors don’t want to be caught holding too many of them.

As mortgage bonds are sold, the extra supply drops their price. This causes mortgage rates to increase.

On most weeks, new evidence of inflation would cause a gradual rise in rates. But this is no ordinary time of year. With so many traders leaving for vacation last week, the rise was anything but gradual.

Fewer buyers and fewer sellers starved the market of liquidity and that helped contribute to the rapid movement in mortgage rates.

This week figures to be more of the same.

There are no major data points to watch this week so expect that stories about the U.S. consumer’s holiday spending will take center stage.

If store receipts are higher, it shows that consumers may spend their way out of a potential recession and mortgage rates should rise in response. By contrast, if receipts are low, expect mortgage rates to idle or fall.

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