Market Comment - Week of February 1st, 2010
Mortgage bond prices fell last week pushing mortgage interest rates slightly higher. Most of the data early in the week was bond-friendly. Unfortunately the Fed's reminder that their purchases of
mortgage bonds would cease after the first quarter sent bond prices tumbling Wednesday afternoon. This was followed by stronger than expected gross domestic product, employment cost index, and PCE price data Friday morning. Bonds were helped Friday afternoon
as stocks remained jittery. Interest rates rose by about 1/8 of a discount point for the week.
The employment report Friday will be the most important event this week. Income, outlays, ISM Index, productivity, and factory orders data may also move the market. The ADP payrolls data will be carefully watched even though the release does not always reflect
the results of the employment report. It still provides another view of the employment situation.
The Institute for Supply Management (ISM), formerly the National Association of Purchasing Management (NAPM), releases the "Report on Business" on the first working day of each month. Part of this
report is the "diffusion index," which tracks the economy's ups and downs fairly well.
In conducting this survey, the ISM questions purchasing executives from over 250 industrial companies compiling data on production, orders, commodity prices, inventories, vendor performance, and employment. Each of the respondents is asked to rank the categories
as "up" or "down." Various weights are applied to the individual components to form the composite index.
A composite index reading of 50 can be thought of as a "swing point." A reading above 50 implies an increase in economic activity, while a reading below 50 indicates a decline. As a general rule of thumb, when the index approaches 60, investors begin to worry
about an overheated economy. A slide below 40 suggests that recession is at hand.
The ISM report is difficult for economists to forecast because there is little data upon which to base an educated guess. The report has a large "surprise factor" and can often prompt a significant market reaction. Be cautious going into the data.