Market commentary

Greetings! Here's your Daily Commentary report compliments of Alan Russell & Princeton Capital! Call me today for current rates and market information at (650) 947-2296.           Tuesday’s bond market has opened in positive territory following weaker than forecasted inflation news. The stock markets are also posting minor gains with the Dow up 40 points and the Nasdaq up 8 points. The bond market is currently up 4/32, but due to weakness late yesterday we will still see an increase of approximately .125 of a discount point in this morning’s rates if comparing to Monday’s early pricing. If your lender revised rates upward yesterday afternoon to reflect that weakness, you may see a small improvement or no change in this morning’s pricing. The Labor Department gave us this morning’s only relevant economic data with the release of August’s Consumer Price Index (CPI) at 8:30 AM ET. They announced that the overall and core readings both rose 0.1%, falling just short of the 0.2% increases in both that were expected. Since this data tracks inflationary pressures at the consumer level of the economy and rising inflation is bad news for the long-term securities such as mortgage-related bonds, we should consider this morning’s results favorable for bonds and mortgage rates. Tomorrow has multiple items scheduled, but it is the afternoon calendar that we need to prepare for. August's Housing Starts will start tomorrow’s activities at 8:30 AM ET. This report will probably not have much of an impact on the bond market or mortgage rates. It gives us a measurement of housing sector strength and mortgage credit demand by tracking construction starts of new homes, but is usually considered to be of low importance to the financial and mortgage markets. It is expected to show an increase in new home starts between July and August. I believe we need to see a significant surprise in this data for it to have any impact on tomorrow's mortgage rates since what follows later in the day is much more important to the markets. Fed Chairman Bernanke and friends will take center stage tomorrow afternoon. Actually, Chairman Bernanke will do so literally. The fund starts with the 2:00 PM ET adjournment of the FOMC meeting that began yesterday. It is widely expected that Fed won’t change key short-term interest rates at this meeting, but there is a great deal of speculation in the markets that they will take the first step towards winding down their bond buying program (QE3). Tapering talk has been widespread over the past several months and we have finally reached the day of reckoning for all those predictions. I would not be surprised to see a small token reduction in the monthly bond purchases, more or less to break the ice or get that first step out of the way. However, I don’t believe that economic growth has gained momentum at the rate that the Fed was expecting over the summer months, at least not enough to justify a significant reduction. They are currently buying $85 billion a month in government and mortgage-related securities. Generally speaking, a reduction in the purchases will be negative news for the bond market and mortgage pricing. This is partly because it is mortgage-related bonds being purchased that affect mortgage rates. An announcement that they will continue to buy these bonds at the current pace should cause a bond rally and lead to lower mortgage rates while a sizable reduction ($20+ billion) will probably lead to a significant sell-off in bonds and a spike in mortgage rates. I would not be surprised to see stocks and bonds move the same direction in reaction to the Fed’s move, or lack of a move. It is my guess that a token reduction will be announced to take the first step, still maintaining the objective of the program. My estimate reduction is in the neighborhood of $5 billion or $10 billion a month. This would be an amount that gives the Fed the option to hold that level for as long as needed yet still have started the unwinding process and allows the markets to react to the fact they have started to taper. But that is just my guess and please be assured that the Fed does not confer with me before making their decisions not does my opinion have any impact on them. Also, this FOMC meeting is one that will be followed by updated economic predictions and a press conference with Chairman Bernanke. Traders will be looking for any revisions to the Fed's outlook on unemployment, GDP growth and their timetable for keeping key interest rates at current levels. The meeting will adjourn and the economic forecasts will be released at 2:00 PM ET while the press conference will start at 2:30 PM. All this means there is a very high probability of seeing a great deal of volatility in the financial and mortgage markets tomorrow afternoon. Therefore, please proceed cautiously if still floating an interest rate and closing in the near future. If I were considering financing/refinancing a home, I would.... Lock if my closing was taking place within 7 days... Lock if my closing was taking place between 8 and 20 days... Lock if my closing was taking place between 21 and 60 days... Float if my closing was taking place over 60 days from now...       Alan Russell 161 South San Antonio Rd. | Los Altos, CA 95022 Ph: 650-947-2296 | Fax: 408-335-1118 alanrussell@princetoncap.com CLICK HERE TO STOP RECEIVING OUR REPORT