Wild Market Searching for Identity

“If you don’t like the weather, wait a minute”…That’s a saying heard often in places where the weather can turn on a dime, making it very difficult to forecast. And while the weather patterns can change direction quickly, the recent movement of stocks and bonds rivals the rides at an amusement park.

“Turbulent” and “volatile” best describe the action in the markets. Stocks and bonds have had wild swings of late as the possibility of a recession loom. The Federal Reserve is concerned about a recession, but doesn’t want to cut rates too deeply because it may stoke the flames of inflation. In a speech last Thursday, Fed Chairman Ben Bernanke signaled the Fed will step in with interest rate cuts as necessary in an effort to prevent a full-blown recession from taking place. It sure looks like the Fed will break off a 50 basis point (1/2%) interest rate cut in its battle to fight a potential recession when the Fed next meets to determine monetary policy on January 30th.

But remember that because Fed rate cuts may add to inflation pressures, home loan rates may actually increase after a cut by the Fed. We have seen this type of chilly response to Fed cuts many times before. Just back in September, the Fed cut by 50 basis points, but home loan rates worsened by 0.25% in just 3 days!

THE MARKET ACTION SURE IS HEATING UP, BUT IT MAY BE TIME TO PUT A FREEZE ON YOUR CREDIT PROFILE TO STOP IDENTITY THEFT. FIND OUT IN THIS WEEK’S MORTGAGE MARKET VIEW!

Forecast for the Week

A steamy week of economic news is about to begin. Considering the already ultra high level of volatility in the financial markets, the heavyweight news items to be unleashed could cause more sharp moves for both stocks and bonds. Retail Sales and Consumer Inflation will both carry a punch that could push rates significantly higher or drop them down to levels not seen since mid 2005.

The 2007 holiday shopping season may have been soft, which is good for bonds and home loan rates. But higher energy costs may pump up inflation and that’s bad for bonds. We will find out the results and market reaction over the next few days.

A look at the chart below shows a clear pattern of Bond prices zigzagging through a trading channel. Notice how prices are currently near the top of this range, which would suggest that prices are more likely to worsen. This puts added emphasis on the economic news, which drives price direction. Notice how there is a lot more to lose than there might be to gain.

Remember that lower bond prices equal higher home loan rates and vice versa.

Click here to read my Mortgage Market View report.