For the longest time, economic indicators like consumer confidence, new home sales, GDP, durable goods orders, and retail sales moved mortgage rates in a significant fashion. If the Federal agencies in charge of economic statistics released data that was either widely positive or negative, mortgage rates could jump or fall by .375 – 1.00% in a single day. As powerful as these market indicators were in the past, they don’t hold the same sway as once before. Instead, we look to Greece, Japan, Italy, Germany, Spain and Portugal for indications as to where rates are headed nowadays and it has now become the norm.
During the month of April, the traditional domestic indicators were released to the public. Surprisingly, there was barely a mention of the announcements. At best, the market will move .125% in one direction or the other once the announcement is made and then settles down by the end of the trading session. This year, new home sales didn’t do much. Gross Domestic Product (GDP) didn’t receive any Dow Jones attention whatsoever, and even the market-moving initial jobless claims report stirred up only .125% – .25%. The two closely aligned heavyweights–the unemployment rate and the Non Farm Payroll reports can still send the markets gyrating wildly out of control, but by and large, domestic economic indicators aren’t driving market movements like they used to.
Now, let’s expand our worldview. Last year, when the Japanese Tsunami hit and worldwide supply chains were decimated, the markets and interest rates fell. Recently, we’ve seen the French elections rocking the market too, as worries that conservative leader Nicolas Sarkozy may lose his presidential post to Socialist leader Francois Hollande. The markets lost over 100 points and interest rates fell .25% – .5%, (depending on the lender queried) as fears that Mr. Hollande will oppose Germany’s Chancellor, Angela Merkel who favors austerity as a remedy to France’s large budget deficit and slow economy.
Over the last six months, the domestic manufacturing index had no effect on interest rates in the US, Greece’s financial woes did. A deepening financial recession, political instability, and an unhappy public setting fire to the streets of Athens, put the world’s financial markets into a daily tail spin as traders, bankers, and investors teetered on the edge of their seats, waiting to find out if Greece would accept or reject a European Central Bank (ECB) brokered bailout package. News from the Netherlands also struck the markets as well during the last week of April. Reports that their prime minister resigned amid budget deficit woes and high debts caused the Dow to give back 102 points and fall below 13,000 for the first time in weeks. The flight to safety within Treasury bonds sent its rate down .34% in less than one hour with mortgage rates correspondingly falling not to far behind.
Clearly, as we watch the drama unfold, it’s no longer just Federal Reserve Chief Ben Bernanke and/or Treasury Secretary Timothy Geithner who roil the markets as we dissect their every word. Additional voices that we need to lend our ears to and gain insight from include Mario Draghi, head of the European Central Bank (ECB), Christine Lagarde, head of the International Monetary Fund, Mervyn King, governor of the Bank of England, and Zhou Xiaochuan, governor of the Central Bank of China. The advancement of trade across borders has facilitated cross-cultural growth. This has opened up the investment in goods, services, stocks, bonds, and currency between nations, which has a direct effect on domestic finance within the U.S. The trillions of American dollars which are held in Chinese foreign currency reserves (a liability for the U.S.) and the billions of dollars of mortgage backed securities on the balance sheets of not only Swedish banks, but other financial institutions across the European Union, render our markets vulnerable not only to domestic economic swings, but also world wide volatility. Consequently, we learn that we need to be students not only of our country, but students of our world in order to survive.
Finally, ABC World News Tonight now has a new significance to me. In the past, I just wanted a glimpse of what the rest of the world looked like. As a kid, I found the international news stories fascinating and good material for supplemental information to put into my third grade book reports. Nowadays, I tune into world events because they can cripple a deal pipeline in a matter of seconds. Currently, what Ben Bernanke says doesn’t concern me half as much as what Mario Draghi feels that the ECB is going to have to do to keep Europe from going off a financial cliff; if Angela Merkel has to butt heads with a new French President; if Greece burns through its bailout funds; if Spain continues to experience 28% unemployment; or if China decides to dump its trillion dollar holdings of Treasury bills on the open market, we will have front page news from “Main Street to Wall Street” and interest rate gyrations to go along with it. Therefore, we should expand our worldview, not only for dinner conversation, but also for economic survival in our industry. Previously, I may have said that with regards to interest rates, we pray for bad news. This is still true. Bad economic news usually means lower rates. Now, we are praying for bad news at a worldwide level, as it currently give us more bang for our buck (pun intended).
Preston Howard is a mortgage broker and Principal of Rose City Realty, Inc. in Pasadena, CA. Specializing in various facets of real estate finance, he can be reached at email@example.com.