TUESDAY, AUGUST 16

I WAS OUT OF THE OFFICE YESTERDAY SO HERE IS YESTERDAY'S MARKET UPDATE:

Second verse - same as the first.


The mortgage market continues to idle as investors watch trading action in the stock market for clues on where to set their interest rates. Higher stock prices will tend to drive mortgage interest rates fractionally higher while lower stock prices will probably prove supportive of steady to perhaps fractionally lower mortgage interest rates.


Recent economic data suggest second-half economic growth will be softer than first thought. Unemployment has remained stuck near 9.0%, raising speculation the Federal Reserve may have to be more aggressive in its monetary policy in order to revive the labor market. Inflation data on Wednesday and Thursday will give Fed Chairman Bernanke and his fellow central bankers a sense of how much fuel they can add to the economy's growth engine without awakening the inflation beast.


Here's the "so what" factor attached to all this mumbo-jumbo. A key reason stocks have rebounded so aggressively from a nearly 20% slump was the Fed's decision to make an unprecedented pledge to keep their benchmark interest rates near zero for another two years while they explore other options for breathing life back into the economy.


If the Fed is successfully in their efforts to rekindle job creating economic growth - stocks will likely move notable higher from current levels at the expense of higher mortgage interest rates. On the other hand, if the Fed fails in their effort to revive the sputtering economic growth engines - stocks will almost certainly turn notably lower. A major sell-off in the stock markets will undoubtedly prove supportive of the prospects for steady to perhaps fractionally lower mortgage rates.


the 11,200 price level as indexed to the Dow Jones Industrial Average represents the demarcation line for mortgage interest rates. As long as the DJIA trades above the 11,200 mark -- it will likely prove difficult, if not impossible for mortgage interest rates to make a sustained move to notably lower levels.
Today's economic news did nothing but confirm mortgage investors' current expectations for slow growth - but not so slow the economy slips into another recessionary spiral.


July Industrial Production increased a stronger-than-expected 0.9% after an upwardly revised 0.4% gain in June. Capacity Utilization - a general measure of slack in the manufacturing sector - rose to 77.5% in July from 76.9% in June. This is the highest level of capacity utilization since August 2008. Until/unless the capacity utilization rate exceeds 80.0% on a sustained month-over-month basis mortgage investors will not be concerned about the potential of inflation producing production bottlenecks developing within the economy.



To no one's surprise, the Commerce Department reported this morning that housing starts fell 1.5% in July. Building permits, a proxy for future construction, declined 3.2% on a month-over-basis. Mortgage investors gave this data nothing more than a passing glance.