Inflation was on the hot seat this week, making up the only eventful economic data and Fed Chief Ben Bernake’s speech addressing the value of the dollar. The Producer Price Index came in less inflationary for October, and core prices saw the largest decline since July 2006. The Consumer Price Index was up slightly higher than expectations due to higher energy costs. However, core consumer prices were up a tame 1.7% compared to one year ago. Bernake started the week by addressing the Economic Club of New York, assuring investors the Fed is closely watching exchange rates, and that the current dollar weakness was no cause for alarm. Bernake did not anticipate a need to raise interest rates prematurely, reminding investors of continued high unemployment levels and a fragile economy surviving on government stimulus. Currently the 30 Year Fixed sits at 4.500% (4.679% APR) and the 15 Year Fixed is at 4.125% (4.432% APR). Thanksgiving week is full of economic data, including GDP, New and Existing Home Sales, Consumer Confidence and the Fed is auctioning $118 billion of 2, 5 and 7-year notes.
The falling dollar could put upward pressure on mortgage rates in the future. Foreign investors historically have been a large buyer of US debt, including mortgage-backed securities (MBS). Today, about half of all US Treasury debt, and approximately 17% of MBS, is held by foreigners. China dominates the non-US interests with almost $800 billion of all US Treasury debt, or 10%. When the dollar falls, the value of US assets to foreign investors declines, making US investments less rewarding. The Fed is currently scaling back its MBS purchases, currently at $16-$18 billion a week, with most expecting the program to conclude sometime near the end of the first quarter 2010. A drop in foreign demand would further pressure yields higher to attract investors. The outlook is even darker if foreign investors begin to sell US Treasury debt and MBS into an already saturated market.
Central Coast Lending, Inc.