Market Comment

Mortgage bond prices finished the week a little higher which helped rates fall. Most of the improvements came Thursday as stocks struggled. Retail sales rose 0.6% versus the expected increase. The ex-auto component rose 0.5%. Analysts expected that to increase 0.3%. Weaker than expected housing starts data Wednesday kept rates in check. Industrial production rose 0.2% versus the expected 0.3% increase. Capacity use was 76.7% as expected. LEI rose 0.3% as expected. Weekly jobless claims were 232K. Analysts expected a reading of 242K. The Philadelphia Fed business conditions index came in at 18 versus the expected 17 mark. The minutes from the last Fed meeting showed a spirited debate among policymakers over inflation, stock prices and financial regulation. We ended the week better by approximately 1/8 of a discount point despite some negative movement Tuesday.


LOOKING AHEAD

Durable goods orders are generally believed to be a precursor of activity in the manufacturing sector because manufacturing must have an order before considering an increase in production. Conversely, a decrease in orders eventually causes production to be scaled back; otherwise the manufacturer accumulates inventories, which must be financed.

Unfortunately, durable goods orders data has many drawbacks. The first problem with the orders data is that they are extremely volatile. The volatility of the data usually is attributed to the civilian aircraft and defense components of the figure. For example, if Boeing has a big order for one of its jumbo jets, the civilian aircraft category can change by $3-4 billion. The same scenario is evident when an aircraft carrier is ordered, surges in the defense category result. The second problem with the data is that orders are continuously being revised. There are many times in the past when the advance report on durables showed an increase while a revision a week later showed a decrease. The revised data is found in the report on manufacturing orders, shipments, and inventories. 
Since the data is very volatile and difficult to forecast, there is quite often a huge disparity between the actual release and the initial projections. 

Despite the variances the report has the potential to cause mortgage interest rate volatility. Therefore borrowers should be cautious heading into the data.


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