Princeton Capital Blog

Monday Afternoon Market Update

August 8th, 2011

The horrible morning in stocks turned worse during afternoon trading as the selling accelerated, pushing the Dow down over 634 points. The Nasdaq suffered a bigger loss in percentage points than the Dow did, losing 174 points (6.9%).

As the major indexes spiraled lower this afternoon, funds were moved into bonds as protection, causing the bond market to close up nearly two full points. This carried over into the mortgage market as lenders revised rates lower, some updating more than once. Overall, pricing improved approximately .375 – .500 of a discount point from this morning’s rates.

Today’s sell-off in stocks has the Dow well below 11,000 and 2,000 points off of its recent high. But what is more concerning is that it closed at its low of the day today. This is a warning sign of potentially more weakness tomorrow. If that turns out to be the case, we could see further gains in bonds and possibly mortgage rates. However, in my opinion, we should proceed cautiously towards mortgage rates. This rapid decline in bond yields often translates into an upward spike shortly down the road. Such as what we saw this past Friday. Too much too quick is not considered ideal for mortgage rates, so until the market stabilizes, be very careful if still floating an interest rate.

Tomorrow has relevant events that may also influence the markets and mortgage rates. The first economic data of the week is the 2nd Quarter Employee Productivity and Costs data early tomorrow morning. It will give us an indication of employee output per hour. High levels of productivity are believed to allow the economy to grow without fears of inflation. I don’t see this being a big mover of mortgage pricing, but since it is the only data of the day it may influence rates slightly during morning trading. Analysts are currently expecting to see a decline in productivity of 0.6% and a 2.2% jump in labor costs. A stronger than expected productivity reading and a smaller than expected increase in costs could help improve bonds, leading to lower mortgage rates tomorrow.

The FOMC meeting is a single-day event tomorrow that will adjourn at 2:15 PM ET. It is expected to yield no change to key interest rates. Usually, the post-meeting comments seem to have more of an influence on the markets than the rate adjustments themselves, or a lack of one in many cases. Look for the statement to lead to volatility during afternoon trading if it hints at what the Fed’s next move may be and when it will come. Market participants will be looking for any indication of a move to help boost economic activity. If the statement does not give us new information, mortgage rates will probably move little after its release.

It could be another interesting day for the financial and mortgage markets, so please maintain contact with your mortgage professional- especially if still floating an interest rate. I would not be surprised to see more intra-day revisions to mortgage pricing again tomorrow.

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