Volatility Rules the Markets

Standard and Poor's downgrade of the United States' credit rating from AAA to AA+ led to an especially volatile week, with the Dow Jones Industrial Average falling over 600 points and the S&P 500 Index experiencing its worst day since December 1, 2008-and that was just on Monday! The extreme volatility continued through the week, including Tuesday after the Fed released their Policy Statement, which was rather downbeat on the economy. In fact, Fed Chairman Ben Bernanke said, "Economic growth so far this year has been considerably slower than the Committee had expected."

So where does our economy go from here?

The incoming economic data will be under a microscope, as global markets try to decipher if the US (and the world) is slipping back into a recession, or just experiencing a slow patch. If economic reports here in the US show even modest strength and an improvement from the recent weak news, Stocks could retrace some lost ground, which would come at the expense of Bonds and home loan rates. We saw some of this happen late last week, after Initial Jobless Claims fell below 400,000 for the first time in weeks and Retail Sales for July had their biggest increase in four months.

That being said, the current and ongoing concerns out of Europe should continue to provide a safe haven bid into the US Bond market... and this will help Bonds and home loan rates. But as you can see, with so many if's, about the only thing we can be sure of is more volatility.

Wherever we go from here, the key takeaway is that RIGHT NOW, home loan rates remain near some of the best levels we've ever seen. If you've been thinking about buying or refinancing a home, contact your mortgage consultant to learn how you can take advantage of this situation.

The Downgrade and Home Loan Rates

Standard & Poor's (S&P) downgrade of the United States' credit rating from AAA to AA+ was historic-and Stocks have certainly been volatile since the downgrade.

But US Bonds and home loan rates haven't been crushed by the news. If you've heard questions about the downgrade and home loan rates, keep the following points in mind:

• Despite the downgrade, there are a number of factors that bode well for US Bonds and home loan rates.
• S&P is currently the only credit rating agency that has downgraded the United States.
• Both credit rating agencies Moody's and Fitch have maintained the United States' AAA rating.
• More importantly, the ongoing credit crisis in Greece and other parts of Europe means that US Bonds are still considered one of the safest places to invest.

QE3 may be coming after all.

In a dramatic turnabout, market participants now believe the Federal Reserve is more likely than not to resume purchasing assets during the next year in a third round of quantitative easing (QE), the August CNBC Fed Survey shows.

About 46 percent of the respondents said the Fed will resume QE, according to the results of the CNBC Fed survey.

"There is no doubt that over the last week the odds of seeing another round of asset purchases has risen significantly ," says Tom Porcelli, chief U.S. economist at RBC Capital Markets. "This doesn't mean we think it will have any more success than QE2. What this simply reflects is a Fed with few remaining options. "

Meanwhile, the 60 respondents--who include economists, stock and bond strategists and portfolio managers--disagree with the S&P decision to lower the U.S. credit rating from Triple-A to Double-A plus.

Fully 70 percent of market participants gave the U.S. the top Triple-A rating, a higher percentage than France and the UK, which are rated Triple-A.

After the Fed's promise this week to keep interest rates low until mid-2013, 46 percent of respondents said the Fed will resume QE, up from 19 percent in the July survey; 37 percent said the Fed will not do QE, compared with 68 percent in July.

Of those who believe the Fed will resume QE, the asset purchases are expected to average $628 billion, up from $377 billion in July.   Mike Deuker of Russell Investments predicts: "Look for the Fed to initiate QE3 if the 10-year Treasury yield lingers below 2.25 percent, which is a sign of Japan disease."

Three regional Fed presidents dissented from the decision to keep rates low, but market participants were in greater agreement with the Fed chairman.

The bottom line is that home loan rates remain near their historic best levels, but about the only thing that is certain in the markets right now is the volatility.   Remember, as a general rule, weaker than expected economic data is good for rates, while positive data causes rates to rise.