Santa Fe Las Campanas Stock/Bond Market Report

Monday’s bond market has opened strong with the major stock indexes well into negative territory. The stock markets are reacting negatively to economic concerns from overseas and a financial move from Japan’s central bank that affected the value of the U.S. dollar versus their yen. The Dow is currently down 134 points while the Nasdaq has lost 26 points. The bond market is currently up 29/32, which will likely improve this morning’s mortgage rates by approximately .250 of a discount point. I would not be surprised to see the bond market rise further if stocks do not bounce back. If this is the case, we could see an improvement to mortgage rates later today. However, I remain cautious as we head into the week’s events, at least for the short-term outlook in rates. Therefore, be careful if floating an interest rate and closing in the immediate future.

 There is nothing of relevance scheduled for release today, leaving the stock markets to drive bond trading and mortgage pricing. The rest of the week brings us the release of four relevant economic reports for the markets to digest with two of them being much more important than the others. In addition to the factual reports, we also have another FOMC meeting, meaning we are likely to have another active week for mortgage rates.
The first release comes late tomorrow morning when the Institute for Supply Management (ISM) posts their manufacturing index for October. This index measures manufacturer sentiment, which is important because it gives us an indication of manufacturing sector strength. It is considered to be one of the more important reports we see each month, partly because it is the first report every month that tracks the preceding month’s activity. Tomorrow’s release is expected to show a reading of 52.1, indicating that manufacturer sentiment rose from September’s level. This means more surveyed business executives felt business improved during the month than in September, hinting at manufacturing sector growth. A smaller than expected reading would be good news for bonds and likely lead to lower mortgage rates.
This week’s FOMC meeting is a two-day meeting that begins tomorrow and adjourns Wednesday afternoon. There is no possibility of the Fed changing key short-term interest rates this week. But market participants will be looking at the post-meeting statement for any indication of when the Fed may make a move, particularly to help boost economic activity. The meeting will adjourn at 12:30 PM ET Wednesday, so look for any reaction to the statement to come during afternoon hours. The markets will actually be looking for news of another round of debt purchases by the Fed. If they do announce a sizable purchase program of government or mortgage debt Wednesday, we could see the bond market rally and mortgage rates move noticeably lower.
At 2:15 PM ET Wednesday, Fed Chairman Bernanke will host a press conference to answer questions about the Fed’s action (or lack of). These scheduled press conferences are new and just started this year. They are held four times a year, in an effort to keep the public current on the Fed’s thoughts and concerns. Since the minutes to the meetings aren’t released for a couple weeks after the FOMC meetings, these press conferences allow the press to interact directly with the Fed and in a much more timely manner. Therefore, expect the markets to react to his comments and any surprise answers during the Q&A portion.
Overall, the single most important day is likely to be Wednesday (FOMC meeting/press conference) or Friday (Employment report) but tomorrow’s data is also considered to be highly important. In addition to the economic reports and the FOMC meeting, I believe stocks will continue to experience volatility that will also impact bond trading. The key to the week will be Friday’s employment numbers or the FOMC statement and press conference, but any significant swings in the stock markets may also influence whether mortgage rates close the week higher or lower than this morning’s levels. By Al Bowman