Economy and Equity Markets 

LAST WEEK RECAP: Stocks were higher out of the gate last Monday, after the first weekly loss for the S&P 500 Index in 2012, as Greece approved austerity plans to secure rescue funds. A report showing retail sales growth trailed economists’ estimates sent stocks lower and Treasuries higher on Tuesday. Stocks continued their southerly trek on Wednesday as investors digested data from Europe suggesting the region is headed for recession. Better-than-expected housing data and jobless claims, and a report that euro-zone central banks will swap Greek debt for new bonds  drove U.S. equities higher on Thursday,  with  the Dow Jones Industrial Average hitting its highest close in almost four years. The market closed the week muted as investors took a breather going into the long weekend and ahead of a big meeting on Monday, when European finance ministers are slated to sign off on Greece’s economic reform proposal.

Oil spikes on Iran fears Prices for Brent crude oil rose to their highest level since April 2011 this week on fears that Iran might halt shipments of oil to Europe. Brent crude spiked more than 1.8 percent last Wednesday to $119.53 per barrel, following reports that the Iranian government was suspending shipments of crude oil to six European Union countries. The Iranian government denied the action. The price of Brent has been steadily rising over the past several weeks as investors grow increasingly worried about Iran's nuclear ambitions, with the United States, United Kingdom and Europe all imposing sanctions to restrict Iran's ability to sell oil. Of the 2.2 million barrels of oil Iran exports a day, about 18 percent is bound for European markets, according to the U.S. Energy Information Administration (EIA). The world consumes about 89 million barrels of oil per day. However, analysts say that if Iran does suspend shipments to some European countries, it would have little impact on oil prices. The European Union had already planned to halt oil shipments from Iran in July, when a grace period for current contracts expires. (Source: CNN).

Last Week in Review

A tale of three stories. That's a great way to describe last week's news, as a string of positive economic reports, news out of Greece, and hints that inflation is heating up all worked together to impact Bonds and home loan rates. Here are the details!

A breakfast buffet of better than expected economic data hit the wires last week. In the housing arena, Housing Starts came in better than expected, while both the New York Empire State Index and the Philadelphia Fed Index reported positive manufacturing news. There was also decent labor market news, as Weekly Initial Jobless Claims fell by 13,000 in the latest week to 348,000 - the lowest level since March 2008! Meanwhile, Retail Sales rose in January by 0.4%, the largest gain since October.

Remember, strong economic news often cause money to flow out of Bonds and into Stocks, as investors hope to take advantage of gains. That's partly what caused Bonds (including Mortgage Bonds, to which home loan rates are tied) to worsen late last week.

Also weighing on Bonds was the news that inflation is heating up. Despite the Fed's claim that inflation is moderating, the Core Consumer Price Index (CPI), which strips out volatile food and energy, rose to its highest levels since October 2008. Meanwhile, as you can see in the chart, the wholesale measuring Core Producer Price Index (PPI) rose double the expectations of 0.2%, coming in at 0.4%. Any hints of inflation can serve to spook Bond investors - causing both Bonds and home loan rates to worsen - as inflation can reduce the value of fixed investments like Bonds. This is one story to keep a close eye on in the weeks ahead.

The drama in Greece is another key story to monitor, as it also impacted Bonds and home loan rates last week. Greece sent the markets into the weekend with assuring messages that a deal for them to avoid default is close, and this sense of optimism weighed on Bonds and home loan rates. US Bonds and home loan rates have benefitted from all the uncertainty in Greece, as investors have seen the US Bond Market as a safe haven for their money. Time will tell whether this uncertainty and safe haven trading will continue.

Forecast for the Week

The capital markets were closed on Monday due to Presidents' Day and the economic calendar is light the rest of the week with just a few reports.

• On Wednesday Existing Home Sales will be released, followed by the New Home Sales report on Friday. The reports come after last week's positive Housing Starts data.
• Thursday brings the weekly Initial Jobless Claims Report, which has steadily declined this year to a more job-friendly level.
• On Friday, the Consumer Sentiment Report will be released.

In addition to those reports, a number of news stories may move the markets, including additional news out of Greece, the Treasury Department's auction of $99 Billion worth of government securities, and movement in the Stock Market. All of those news stories have the potential to negatively impact the Bond Market, depending on how they develop.

Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve, while strong economic news normally has the opposite result. The chart below shows Mortgage Backed Securities (MBS), which are the type of Bond that home loan rates are based on. When you see these Bond prices moving higher, it means home loan rates are improving - and when they are moving lower, home loan rates are getting worse.  To go one step further - a red "candle" means that Mortgage Backed Securities (MBS) worsened during the day, while a green "candle" means MBS improved during the day. Depending on how dramatic the changes were on any given day, this can cause rate changes throughout the day, as well as on the rate sheets we start with each morning.  As you can see in the chart below, good economic news late last week reversed the improving trend Bonds and home loan rates experienced early in the week.

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At Castle Financial, we employ a conservative, tactical approach to managing client portfolios combining ETF’s (exchange traded funds with low expense ratios) and select tactical mutual funds in a “Post” Modern Portfolio Theory.  Money Managers do not need a bull or bear market for potential profits.  This innovative and conservative strategy blends the science of risk management with the fundamentals of traditional asset allocation to manage portfolios for profits in a complex and volatile world and protect and grow our valued clients’ money. 

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