The Fed Speaks But Not on QE3

In This Issue

Last Week in Review: The Fed met, but was there mention of more Bond buying? Forecast for the Week: A full slate of economic reports is ahead, with news on  inflation, manufacturing, and the job market.  View: Cinco de Mayo is right around the corner. Use these great conversation  pieces when talking with clients.

Last Week in Review

"I’m still standing – yeah, yeah, yeah." Elton John. And after last week’s Fed  meeting, Bonds and home loan rates are still standing near record best levels. Read  on for details. After last week’s  regularly scheduled  meeting of the  Federal Open Market   Committee (FOMC),  Fed Chairman Ben  Bernanke acknowledged  that conditions in our  economy are improving  modestly, but he noted  that the housing  market remains  depressed. One example  of this is New Home  Sales, which fell 7.1%  in March to 328K units on  an annual rate.  Bernanke also noted that inflation is higher in the short-run due to higher energy  costs, but that the Fed expects prices to moderate and remain in check longer-term.  Remember, inflation hurts the value of fixed investments like Bonds (including Mortgage  Bonds, to which home loan rates are tied)...so inflation staying in check is crucial when  it comes to home loan rates remaining near record best levels.  One important subject the Fed didn’t mention in their Policy Statement was another  round of Bond buying to stimulate our economy (known as Quantitative Easing or QE3).  This wasn’t much of a surprise because — after several moves to prop up the economy  — the Fed must see where upcoming economic reports go before venturing to  underwrite the economy further. If the housing market remains depressed and the  economy doesn't pick up steam, QE3 could be a very real possibility.  And there was a bit of a sluggish read on our economy last Friday, after the Fed’s  mid-week meeting. The advanced (first of three readings) of Gross Domestic  Product (GDP) for the 1st Quarter of 2012 came in at 2.2%, well below expectations.  This was also well below the 3% final 4th Quarter 2011 GDP reading. Within the  report it showed that the personal consumption expenditure inflation reading rose at  the fastest pace since the 2nd Quarter of 2011. This is definitely something the Fed  is watching closely.  As 2012 continues to unfold, inflation, the housing market, our sluggish economy,  and our ever-growing debt are important issues that the Fed and our government need  to address. Seeing the debt crisis in Europe escalate must put a sense of urgency on  our government to reign in our annual budget deficit and overall debt. This mix  of factors will continue to impact the direction in which Bonds and home loan rates move  in the weeks ahead.  The good news is that now continues to be a great time to purchase or refinance  a home, as home loan rates remain near historic lows. Let me know if I can  answer any questions at all for you or your clients.

Forecast for the Week

Chart: Fannie Mae 3.5% Mortgage Bond (Friday Apr 27, 2012) A slew of economic reports are set for release this week, and investors and traders will be watching the data closely for any signs of an economic slowdown: Right off the bat on Monday the Personal Income and Spending data will be released along with the closely watched Core Personal Consumption Expenditure (PCE) report. The Core PCE is the Fed's favorite gauge of inflation and comes after Fed Chairman Ben Bernanke said last week that inflation in the short-term has been pressured higher by rising energy costs.       In the manufacturing sector, the Chicago PMI will be released on Monday with the national ISM Index delivered on Tuesday.  On Wednesday, the ADP Employment Report will be released ahead of the government's monthly Non-farm Payrolls and the Unemployment Rate on Friday.          Initial Weekly Jobless Claims will be released on Thursday. The recent couple weeks of elevated Jobless Claims is disturbing…and if it continues, rest assured QE3 chatter will re-emerge. Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve, while strong economic news normally has the opposite result. The chart below shows Mortgage Backed Securities (MBS), which are the type of Bond that home loan rates are based on.  When you see these Bond prices moving higher, it means home loan rates are improving — and when they are moving lower, home loan rates are getting worse. To go one step further — a red “candle” means that MBS worsened during the day, while a green “candle” means MBS improved during the day. Depending on how dramatic the changes were on any given day, this can cause rate changes throughout the day, as well as on the rate sheets we start with each morning.  As you can see in the chart below, Bonds and home loan rates continue to hover near record best levels. I’ll stay on top of this week’s news to monitor how Bonds and home loan rates are impacted.

The Mortgage Market Guide View...

Cinco de Mayo: The Story You May Not Know In a few days, we’ll mark the celebration known as Cinco de Mayo. Although many people have heard of this celebration, most people don’t realize that the event being commemorated may have actually played an important role in shaping the United States that we know today. Feel free to share the interesting facts below with clients and friends in the coming days! You may surprise them with what you’re about to read. What Does Cinco de Mayo Commemorate? Many people believe that Cinco de Mayo is the day that recognizes Mexico's independence from Spain. To set the record straight, that conquest happened on September 15th, 1810. Cinco de Mayo, on the other hand, celebrates an event that took place over 50 years later. On May 5, 1862, the Mexican cavalry, under the command of Texas-born General Zaragosa, defeated the French at the battle at Puebla, a city 100 miles east of Mexico City. The French army, having not suffered a defeat in nearly 50 years, landed in the port of Vera Cruz and headed toward the capital city with a specific mission. Fearless of any opponent, the French sought to overthrow the capitol and gain control of Mexico, even bringing along a Hapsburg prince to oversee the would-be empire. Cinco de Mayo’s Connection to the United States The goal of France's leader, Emperor Napoleon III, was to gain proximity to the US in hopes of supplying the Confederate Army in their fight against the North. He had a vested interest in sustaining the division within America. To America's benefit, the undersized Mexican cavalry used their knowledge of the terrain to defeat the powerful French army. This victory enabled the northern states to build the greatest army in the world at that time. Fourteen months later, the North soundly defeated the Confederate Army in the battle at Gettysburg, thus ending the civil war. Union troops were subsequently rushed to the Texas/Mexican border to help expel the French from Mexico. For this reason, Cinco de Mayo is celebrated in both countries. More importantly, it's a great occasion to honor freedom and liberty. Economic Calendar for the Week of April 30 - May 04 Date ET Economic Report For Estimate Actual Prior Impact Mon. April 30 08:30 Personal Income Mar NA 0.2% Moderate Mon. April 30 08:30 Personal Spending Mar NA 0.8% Moderate Mon. April 30 08:30 Personal Consumption Expenditures and Core PCE Mar NA 0.1% HIGH Mon. April 30 08:30 Personal Consumption Expenditures and Core PCE Mar NA 1.9% HIGH Mon. April 30 09:45 Chicago PMI Apr NA 62.2 HIGH Tue. May 01 10:00 ISM Index Apr NA 53.4 HIGH Wed. May 02 08:15 ADP National Employment Report Apr NA 209K HIGH Thu. May 03 08:30 Productivity Q1 NA 0.9% Moderate Thu. May 03 08:30 Jobless Claims (Initial) 4/28 NA 388K Moderate Fri. May 04 10:00 ISM Services Index Apr NA 56.0 Moderate Fri. May 04 08:30 Non-farm Payrolls Apr NA 120K HIGH Fri. May 04 08:30 Unemployment Rate Apr NA 8.2% HIGH Fri. May 04 08:30 Hourly Earnings Apr NA 0.2% HIGH Fri. May 04 08:30 Average Work Week Apr NA 34.5 HIGH

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