MARKET RECAP

The Federal National Mortgage Association, better known as Fannie Mae, sent a brief chill through the markets last week when it reported an unexpected loss of $2.2 billion in the first quarter of 2008. It also announced that it planned to raise $6 billion in capital through an equity offering, and said that it would cut its dividend starting in the third quarter.

But the market soon warmed. Two days later, Fannie Mae raised $4.5 billion by selling preferred and common stock. While the sales will dilute the stake of existing shareholders, Fannie Mae managed to get a good price for its offering, nonetheless.

Fannie Mae is simply the only game in town. As commercial banks shy away from lending, Washington officials have increasingly relied on Fannie Mae and its sister government-sponsored entity, Federal National Mortgage Corporation (Freddie Mac), to keep the housing market afloat. Both have recently received broad new powers and billions of dollars of investing authority from the federal government.

U.S. workers provided a burst of warmth as well. Productivity, a measure of worker efficiency, rose at a 2.2% annual rate in the first quarter of 2008 after a 1.8% gain in the prior quarter, the Labor Department reported. That’s good news for the credit markets; productivity is solid and labor costs are slowing, which lessens the inflation pressure for the Federal Reserve.

The prospect of lower inflation, in turn, helped ease mortgage rates last week. The 30-year fixed-rate mortgage averaged 6.13%, the 15-year fixed-rated mortgage averaged 5.71% and the five-year Treasury-indexed ARM averaged 5.87%, according to Bankrate’s weekly survey.

Economic
Indicator

Release
Date and Time

Consensus
Estimate

Analysis

Retail Sales
(April)

Tues. May 13,
8:30 am, et

0.1%
(Increase)

Important. Continued increases in monthly retail sales suggest some confidence in the economic outlook.

Import Prices
(April)

Tues. May 13,
8:30 am, et

1.4%
(Increase)

Important. Higher energy prices are driving the prices of all goods higher.

Business Inventories
(March)

Tues. May 13,
10:00 am, et

0.6%
(Increase)

Moderately Important. The expected increase reflects neither optimism nor pessimism on economic growth.

Mortgage Applications

Wed. May 14,
7:00 am, et

None

Important. Range-bound rates and increased application activity might be a sign of market stabilization.

Consumer Price Index

Wed. May 14,
8:30 am, et

All Goods: 0.3% (Increase)
Core: 0.2%
(Increase)

Very Important. Consumer prices are showing remarkable restraint given the pressure from higher oil prices.

Industrial Production
(April)

Thurs. May 15,
9:15 am, et

0.1%
(Decrease)

Moderately Important. Manufacturers are reducing production on slowing demand.

Housing Market Index
(May)

Thurs. May 15,
1:00 pm, et

20 Index

Important. The index appears to have stabilized and could begin to move higher.

Housing Starts
(April)

Fri. May 16,
8:30am, et

910,000
(Annualized)

Important. The new multi-year low is reflective of the need to reduce inventories.

Consumer Sentiment
(May)

Fri. May 16,
10:00 am, et

62.6
Index

Moderately Important. High energy prices continue to cloud the consumer outlook.