Events This Week:

Inflation Lower

Retail Sales Fell

Pending Sales Flat

Sentiment Rose

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Events Next Week:

Mon 12/15
Industrial Prod.
Empire State

Tues 12/16
Fed Meeting
CPI
Housing Starts

Thur 12/18
Philly Fed

Rates Approach Record Lows

Since the Fed announced a plan to purchase $500 billion of mortgage-backed securities on November 25, mortgage rates have moved progressively lower, and the trend continued this week. Conforming fixed-rate mortgage rates dropped to levels last seen in 2003. Weak Retail Sales data and low inflation figures released during the week also supported the move lower.

As the government strives to offset the current weakness in the economy, its actions have exerted a much stronger than usual influence on mortgage rates. Programs to purchase mortgage-backed securities and to provide capital to financial institutions have been favorable for mortgage rates, while a bill introduced in Congress this week could have the opposite effect if passed.

The bill would permit bankruptcy judges to modify troubled mortgages by reducing the principal and payments. The goal would be to help prevent foreclosures, which is a worthy objective. However, opponents of the plan are concerned that investors may require higher mortgage rates to compensate for the increased risk that loan contract terms may be changed. At this point, it's not certain when the bill will come up for a vote.

Current loan modifications by lenders to avoid foreclosures may come to a sudden stop. A lawsuit was filed late this week by a group of investors that hold these notes, is seeking an injunction to prevent lenders from granting loan modifications. The group in their filing argues that the notes they hold have no provisions for the terms of each note to be modified and that lenders have no right to modify them without approval by the investors who purchased these notes. A date in which the federal judge will make a ruling is unknown.

Also Notable:

* The auto industry rescue package stalled in Congress
* October Pending Home Sales were nearly unchanged from September
* Continuing Jobless Claims rose to the highest level since 1982
* The Treasury sold 4-week notes at a 0% yield for the first time

Weekly Base Mortgage Rates from 4 of Hawaii’s Largest Lenders (12/8-12/08)

Average 30 yr fixed rate:

Last week:

-0.08%

This week:

-0.32%

Stocks (weekly):

Dow:

8,629.68

-5.74

NASDAQ:

1,540.72

-31.41

Week Ahead

During the first half of next week, Pending Home Sales on Tuesday will be the only economic data. Import Prices and the Trade Balance will come out on Thursday. Friday will be the big day with the PPI inflation data, Retail Sales, and Consumer Sentiment. The Producer Price Index (PPI) focuses on the increase in prices of "intermediate" goods used by companies to produce finished products. The Retail Sales report is a major indicator of spending levels by consumers, who account for about 70% of economic activity. Treasury auctions and Fed speakers may also have an impact next week.