Weekly Economic Summary –December 21, 2011

From bank Of America
Not only was last week’s Initial Jobless Claims reading of 366,000 the lowest level since May of 2008, there was a double dose of good news in the manufacturing sector, as both the Philadelphia Fed Index and the Empire State Index were both well above expectations. Normally, good economic news causes money to move out of bonds and into stocks as investors like to take advantage of gains and this would typically hurt home loan rates, as they are tied to mortgage bonds.

However, the continued uncertainty out of Europe helped keep bonds and home loan rates on an improving trend, as the U.S. dollar and U.S. bonds (including mortgage bonds, which home loan rates are based on) are benefiting from safe haven buying. Ultimately, Europe needs to provide a large financial backstop for their banks and sovereign debt in order to fix their problems longer-term. Until this happens, uncertainty should benefit the U.S. dollar and U.S. bonds, and keep home loan rates relatively low.

Inflation remains a factor, however. Despite the Fed stating again last week that inflation is moderating, core consumer level inflation has continued to inch higher every month. Also, last week’s Producer Price Index showed that inflation at the wholesale level was slightly higher in November. 



As you can see in the chart below, uncertainty out of Europe continues to help bonds and home loan rates, though they are facing resistance.

Chart: Fannie Mae 4.0% Mortgage Bond (Friday, December 16, 2011)