Mortgage Market in Review from Monte Hill week of 4/09/2007

Mortgage Market in Review

Week of April 9, 2007                                                       Volume 14, Issue

Trade Data

Prior to the 1980’s the US economy tended to be viewed as relatively unaffected by economic activity in other countries.  However, increased trades with other countries and an increased reliance on foreign purchases of US debt have generated a market awareness of trade-related issues.  The exchange rate of the dollar and foreign trade flows are interrelated.  One must buy dollars to purchase US exports, and sell dollars to buy imports.  Likewise, foreign investment in US debt requires the purchase of US dollars, and is thus affected by exchange rates.

Each month the Commerce Department gathers an enormous amount of detailed data on exports and imports.  The data is broken between goods and services trade.  The overall trade balance is the dollar difference between US exports and imports on a seasonally adjusted basis.  The report also highlights trade flows between the US and various partners.  Since the mid-1970’s, US imports of consumer and capital goods have exceeded exports, so a merchandise trade deficit has existed.  The US has always maintained a service trade surplus, and because this surplus is not enough to offset the merchandise trade deficit, a net export deficit has resulted.

Due to the overwhelming amount of data considered, trade is difficult to forecast, and can

present surprises.  For a variety of reasons, the financial markets will often be unaffected by surprises in trade data.  However, the data still has the ability to cause mortgage interest rate volatility.

A higher than expected trade deficit could hurt gross domestic product estimates.  Lower growth expectations have historically caused stocks to fall and bonds to rise.

The general sentiment among market participants is that mortgage bond prices will trade in this range or possibly a bit lower until inflationary pressures subside and the Fed can cut rates to stimulate the economy.  Keep in mind that market corrections are typically fast and furious.  Any future data releases showing strength in the economy could lead to mortgage interest rate volatility.