David Bruce

September 22nd, 2008

9/19/08 Historic Week in Financial Markets!

This was a historic week in financial markets. One major investment bank declared bankruptcy, another sold itself, and the world’s largest insurance company needed a government bailout. Central banks around the world had to inject hundreds of billions of dollars into the banking system to calm the markets. Through all this, mortgage rates ended a volatile week little changed.

The government’s primary response to the market turmoil was a broad relief program. The program includes major elements intended to stabilize credit markets and restore confidence. Directly affecting the mortgage market, a government entity will be established to acquire underperforming mortgage assets, manage the assets, and sell them in an orderly fashion. This will remove troubled assets from financial institutions and replace them with fresh capital, which will then be available for future lending opportunities. In addition, the Treasury doubled the amount of mortgage securities that it will buy in the open market for its own holdings. Fannie Mae and Freddie Mac will be allowed to increase their mortgage portfolios, as well. One result of these actions should be increased liquidity for future investment in mortgage assets.

A Fed meeting is usually the most significant event in a week, but this week it took a back seat to the other news. While many investors expected a rate cut on Tuesday to relieve credit markets, the Fed held the fed funds rate unchanged at 2.0% in a unanimous vote. According to its statement, the Fed expects inflation to moderate later this year, but they are concerned about the upside risks. The Fed also noted slower economic growth, partly due to tight credit, weakness in the housing market, and a slowdown in exports.

The economic calendar will be light next week. Existing Home Sales and New Home Sales will be released on Wednesday and Thursday. Durable Orders, an important indicator of economic activity, will come out on Thursday. The final revisions to second quarter Gross Domestic Product (GDP) will be released on Friday. GDP is the broadest measure of economic activity. Consumer Sentiment is also scheduled for Friday. In addition, investors will be watching for more details about the relief program.

This entry was posted on Monday, September 22nd, 2008 at 2:12 pm and is filed under Mortgage Info. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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