Present Day Fixed Income Challenges

As I write morning, Fed Chairman Bernanke just finished his monetary policy testimony to the Senate Banking Committee. Today’s appearance is part of his semi-annual trek to Capitol Hill to discuss the economy and monetary policy with members of Congress. In response to questions from committee members, Bernanke made it crystal clear that restoring financial market stability is job #1 at the Fed. Bernanke offered nothing new in terms of how exactly the Fed intended to achieve their primary mission – leaving little on which to pin hopes for notably lower mortgage interest rates on.
Just prior to Bernanke began his testimony the Labor Department reported that headline inflation at the producer level rose 1.8% in June as energy prices soared – pushing the overall Producer Price Index to its biggest monthly gain since November. Over the past twelve months producer prices are up 9.2% -- the strongest year-over-year gain since a jump of 10.4% in June of 1981. If there was any good news on inflation, it was that core producer prices (a value that excludes the more volatile food and energy components) edged up just 0.2% last month – a touch below most economists’ forecast calling for a gain of 0.3%. Look for mortgage investors to be very edgy for the balance of the day – the big gains in producer prices can only be absorbed by businesses income and balance sheets for so long before they are passed on to the consumer. We’ll find out if that time has come tomorrow morning when the June Consumer Price Index figures hit the news wires at 8:30 a.m. ET. A core consumer price index reading of more than 0.2% will likely bring the recent rally to lower note rates and higher investor prices to a screeching halt. Separately, the Commerce Department reported this morning that retail sales rose 0.1% in June, less than economists had forecasted. Excluding autos, retail sales rose 0.8% which was also below the consensus forecast. It appears the government rebate check effect faded sharply after supporting the May sales figures. Most bond investors had been anticipating a rather weak June retail sales report – so the actual numbers had little, if any direct effect on the current level of mortgage interest rates.

My old employer (National City Bank) has been in the news alot lately on fears of a similiar event of Indymac Bank. I have conducting a sizeable amount of research on National city and what exactly happened. I anticipate uploading this blog this evening.
It's something you don't want to miss!

This weeks' economic events:
Release Date & Time
Economic Indicator
Consensus Estimate
Analysis

Mon. July 14,
No data

Tue. July 15, 8:30 a.m. ET
June Producer Price Index
Core rate
+1.3% vs. last +1.4%
+0.3% vs. last +0.2%
Surging energy prices undoubtedly drove up costs at the producer level for the sixth straight month. The core rate, (a value stripped of the more volatile food and energy components) probably posted a gain of 0.3% last month. Investors have already priced-in a relatively “hot” read for June producer inflation. If the consensus estimate proves accurate look for a rather muted market reaction. Should the core producer price index post a gain greater than 0.3% -- mortgage interest rates will likely finish the day notably higher.

Tue. July 15, 8:30 a.m. ET
June Retail Sales
Excluding Autos
+0.4% vs. last +1.0%
+1.0% vs. last 1.2%
The expected gain in June retail sales will be heavily discounted as investors’ factor in the impact of government rebate checks on overall activity. Look for this data to be sharply overshadowed by the Producer Price Index report and Fed Chairman Bernanke’s testimony to the Senate Banking Committee later this morning.

Tue. July 15, 10:00 a.m. ET
May Business Inventories
+0.5% vs. last +0.5%
This bit of stale data will do nothing more than take up space on today’s calendar of events.
Tue. July 15, 10:00 a.m. ET
Fed Chairman Bernanke testifies to the Senate Banking Committee
Bernanke will be on the “hot seat” today as he will undoubtedly be grilled on everything from his take on the economy, to inflation and to the biggest question of all -- what, if anything, happens next in relation to the financial viably of Fannie Mae and Freddie Mac. Look for Bernanke to do a decent job of allaying the overwrought disaster scenarios whipped up by the media and, at least temporarily, soothing investor fears. If I’m right I don’t expect a rally to lower mortgage interest rates today – but I do think one of the preliminary stepping-stones for a bounce toward the end of the week will have been put in place.

Wed. July 16, 8:30 a.m. ET
June Consumer Price Index
Core Rate
+0.7% vs. last +0.6%
+0.2% vs. last +0.2%
In my opinion this is the “bigge” of the week with respect to the macro-economic reports scheduled for release. If the core rate (a statistical measure of inflation pressure at the consumer level that is net of the more volatile food and energy components) matches the consensus estimate, a second stepping-stone for a rally in the mortgage market later this week will have been moved into place. On the other hand, a core consumer inflation reading of 0.3% or higher will likely slingshot note rates higher while investor prices plummet. My personal opinion is that the actual core rate number will match the consensus estimate.

Wed. July 16, 9:15 a.m. ET
June Industrial Production &
Capacity Utilization
Unchanged
79.3 vs. last 79.4
The earlier Consumer Price Index and Fed Chairman Bernanke’s testimony later this morning will easily overshadow this data.

Wed. July 16, 10:00 a.m. ET
Fed Chairman Bernanke testifies to the House Financial Services Committee
His prepared text testimony will be exactly the same as he delivered yesterday before the Senate Banking Committee – and I bet the structure of the questions he will be called on the answer this morning won’t differ much either – likely making this event anticlimactic with respect to its likely impact on the trend trajectory of mortgage interest rates today.

Thurs. July 17, 8:30 a.m. ET
Initial jobless claims for the week ended 7/12
Up 34,000
Most investors tend to discount some of the jobless claims data this time of year to compensate for the volatility surrounding auto manufacturers’ temporary plant shutdowns for new model year retooling. An increase of more than 15,000 new jobless claims will tend to support steady to perhaps fractionally lower mortgage interest rates. If jobless claims fell by more than 15,000 last week look for investors to push mortgage note rates higher.

Thurs. July 17, 8:30 a.m. ET
June Housing Starts &
Building Permits
Down 1.5%
Down 1.8%
This report will have headline news but regardless of the figure, both starts and permits are broadly anticipated and therefore this data will likely have little, if any impact on the trend trajectory of mortgage interest rates today.

Fri. July 18,

Mon. July 21, 10:00 a.m. ET
June Leading Indicators
-0.1% vs. last +0.1%
This second tier report will likely draw nothing more than a passing glance from mortgage buyers.

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