Market Update

Fannie Mae is suing its former auditor, KPMG LLP, for $2 billion in damages alleging that negligence on the part of the accounting firm caused it to violate accounting standards and undertake one of the largest earnings restatements in history. A spokesman for KPMG indicated that the firm is likely to file a countersuit, and attorneys everywhere are giddy with a case that is likely to drag on for years.

Mortgage demand increased 11.4% last week. Purchase applications were +8.7% and refinance applications increased 15.8%. It appears that the measures are strong: overall we are +17% from a year ago, refinancing is 60% higher than a year ago, and purchases are 12% higher than a month ago.

The market got smacked yesterday after Retail Sales were up stronger than expected, followed by a weak 10-yr auction. Numerous investors changed prices as the yield on the 10-yr went from 4.48% up toward 4.60%, the highest rates in over a month. The Retail Sales data continued a run of decent economic numbers that have come since the very low national ISM numbers on the first of the month. The consumer appears to have held up in the 4th quarter, adding further upside risk to the growth rate in the quarter.

This morning we've already had all the news that we're going to see:
Jobless Claims dropped from 324k down to 304k, stronger-for-the-economy than expected, and Import Prices were +.2%, year-over-year +1.2%. And
mortgage prices are unfortunately slightly worse again. Tomorrow we have November's Consumer Price Index (CPI). The CPI is one of the most important reports that are released each month (measuring inflation at the consumer level) and is this week's biggest release for the bond market. Forecasts call for +0.2% in the overall index and a 0.2% rise in the core data reading. Rapidly rising inflationary pressures is a concern to the bond market because inflation erodes the value of a bond's future fixed interest payments. The Industrial Production report gives us a measurement of manufacturing sector strength by tracking output at U.S. factories, mines and utilities. Analysts are expecting this report to show a 0.1% increase in output.