Sub-prime mortgage news dominated the headlines this past week as the Chicken Littles were out in full force. Perhaps the fears of a credit crunch are overblown, but then again, perhaps there’s reason to worry.
Like everything else in the world of economics, it all comes down to expectations.
Markets makes predictions about the future health of the economy and then they place bets to reinforce their predictions. This week, there will be several “expectation setters” to keep an eye on.
The major expectation setter will be Wednesday as Ben Bernanke and the Federal Open Market Committee meet to discuss U.S. monetary policy. After their meeting, the FOMC will issue a press release that will be heavily scrutinized by global investors.
Traders will be reading between the lines to see if the Fed believes our economy is expanding or contracting.
Any whiff of contraction and mortgage rates will plummet because the prevailing expectation is that the Fed is comfortable with the current expansion levels.
The other expectation setter comes in two parts: Monday’s Housing Starts data and Friday’s Existing Home Sales data.
Markets will be looking at both of these figures to see if sub-prime mortgage defaults spilled over into builders’ development plans and the general housing market, respectively.
This could be a volatile week for mortgage rates with so much uncertainty ahead.