“ANTICIPATION…ANTICIPA-A-TION IS MAKING ME LATE, IS KEEPING ME WAITING”...and whether this line conjures up images of Carly Simon or a slow pouring Heinz ketchup bottle, “inflation anticipation” is now the tune home loan rates are dancing to. Inflation is the arch-enemy of fixed income Bonds and therefore home loan rates, so the anticipation of inflation slowing is music to Bond traders ears. Last week, the Fed made their thirteenth consecutive .25% hike to the Fed Funds Rate, but made an interesting change of note to the Policy Statement. The statement removed the word “accommodative” in terms of their monetary policy, signaling that inflation appears to be contained, and that their rate hikes may be nearing an end.

More news came with a surprise drop in the Consumer Price Index (CPI), which measures inflation on the consumer level. The headline CPI number actually fell at the fastest pace since 1949, largely due to crude oil prices finally retreating from historic highs. Yet when removing volatile food and energy prices from the Index, the pace of consumer inflation still appeared to be in line with analyst’s expectations. Along with the Fed move, this helped Bonds and home loan rates improve very slightly over the past week.

TODAY OR NOT TODAY?…THAT IS THE QUESTION TAXPAYERS SHOULD BE ASKING THEMSELVES ON DECEMBER 31ST, IN ORDER TO MAXIMIZE TAX SAVINGS. BUT UNFORTUNATELY, MOST PEOPLE WAIT UNTIL JANUARY TO START SERIOUSLY THINKING ABOUT TAXES…AND BY THEN, IT MAY BE TOO LATE. READ THIS WEEK’S IMPORTANT MORTGAGE MARKET VIEW, AND DON’T MISS YOUR OWN CHANCE TO SAVE.

So as Bonds and home loan rates continue to saunter sideways as illustrated by the chart below…what might lie ahead? This week is packed with economic reports, probably the most notable being the Producer Price Index (PPI). This important report indicates inflation on the producer level, and since inflation is the name of the game lately, this report will be dissected very carefully by traders, analysts, and the inflation fighters at the Fed. A report showing that inflation appears to be “contained” as the Fed said recently could help Bond pricing and home loan rates improve slightly, but more whiffs of inflationary pressure could cause some worsening effects.

As we approach the holiday season, trading volume will begin to lighten with fewer traders manning the pits. Low trading volume can cause more exaggerated swings in price, but for Bonds to bust a big move out of their current sideways pattern in either direction, it will take some very noteworthy news.

“What a Difference a Day Makes...” Dinah Washington sang back in 1959. So as we approach tax season, it’s time to think. Is December 31, 2005 or January 1, 2006 YOUR best day for maximizing tax deductions?

Many people start seriously thinking about tax season after the start of the New Year…which is actually a bit too late. Ideally, taxes should be planned two years at a time to save the most tax money. So before the year is over, it’s wise to look at the acceleration or postponement of deductions and income between years. For example, many taxpayers want to minimize the current year’s tax bill, so making sure your state income tax is paid in December rather than January can help. Additionally, you can pay Real Estate taxes and even January’s home loan payment in December to beef up your deductions. In fact, you are eligible to take the deduction if the checks are mailed in December…even if they are not cleared until January.

But watch out for AMT, Alternative Minimum Tax, which can erase your deductions. Testing to see if you fall into this trap may cause you to do the opposite – pushing some deductions off until next year, paying them in January rather than December. The same holds true for income. It is sometimes possible to accelerate or delay commissions, bonuses, billings, etc…and that can help you maximize tax savings.

You should always consult your tax pro on the strategy that is best for your own situation, but you can start by visiting www.irs.gov/newsroom. This link contains a list of the new inflation adjusted dollar amounts for many important tax figures for 2006. Comparing the allowable deductions for 2006 versus 2005 will help you choose in which year to take advantage of certain deductions. And remember, the time to consult with a CPA is now, not after the New Year begins…so if you need a referral for a qualified tax planner, please contact me.

Remember, as a general rule, weaker than expected economic data is good for rates,
while positive data causes rates to rise.

Economic Calendar for the Week of December 19 – December 23