Mortgage Rates Under Pressure Again with Higher Inflation Data
Posted 02-18-2010 at 08:25 AM by VictorBurek
On Tuesday, mortgage backed securities had a nice rally which brought mortgage rates back to the lows of 2010. Yesterday, was a different story as all of the price gains with mortgage backed securities were lost after better than expected economic data on housing and industrial production. Further fueling the move lower was a generally better economic outlook from the FOMC meeting minutes. All lenders did reprice for the worse as the price losses continued until close. To remind readers of the blog, as the price of MBS move higher lenders can offer lower mortgage rates but as the price declines they are forced to increase borrowing costs.
Like yesterday, we have another busy day of data.
This morning we received the weekly jobless claims. Recent reports have shown jobless claims moving stubbornly higher following the Christmas season, but last week’s report surprised to the better falling 43,000 to 440,000. This report does give us three measures of unemployment claims:
1. Initial Jobless Claims: totals the number of Americans who filed for first time unemployment benefits
2. Continued Claims: totals the number of Americans who continue to file due to lack of finding a new job
3. Extended Claims: totals the number of Americans who have exhausted their traditional benefits and our now receiving emergency benefits.
The release indicated many more people than expected filed for first time unemployment benefits last week. Economists expected a reading of 438,000 but the actual number of filers was 473,000! Last week’s initial claims were revised higher to 442,000. Continued claims edged higher to 4.56 million from 4.54 million while those receiving extended benefits rose 274,500 to 6 million! This is a troubling report for the jobs sector as hiring by firms is not appearing and businesses remain reluctant to hire new staff.
Released at the same time was a report that gives us a measure of inflation on the producer level with the Producer Price Index. PPI measures the changes in prices that manufacturers and wholesalers pay for goods during different stages of production. If businesses have to pay more for the materials they use to produce their widgets …they may be forced to pass along those additional costs to you…the consumer. Although inflation at the producer level does not always lead to higher prices paid by consumers, as producers are reluctant to pass along higher costs during bad economic times. As stated before, inflation is one of the largest enemies of low interest rates.
The release indicated that inflationary pressures on the producer level were higher than expected last month. The overall PPI posted a monthly increase of 1.4% when only a 0.8% increase was expected. When you exclude food and energy from the numbers, called the Core reading, prices increased 0.3% when only a 0.1% rise was expected. This is the second report in a row, yesterday’s Import/Export prices also came in higher, showing that inflation may be becoming a concern. It will be interesting to see if the CPI report tomorrow indicates inflation on the consumer level. With unemployment hovering around 10%, producers have found it quite difficult to pass along the higher costs to their clients.
The next report of the day came from the Conference Board: Leading Indicators. This is a composite index of 10 economic indicators that are expected to provide a forward looking indication of economic activity. If the month over month change is positive, it indicates the economy is improving. Most of the components of this report have already been released so this doesn’t give us much new information. Economists are expecting a 0.5% increase following last month’s large 1.1% increase.
The release posted the 10th consecutive increase but worse than expected at 0.3%. This continues to indicate that our economy has stabilized from record low levels of output.
The final economic release of the day gives us a measure of the strength of manufacturing in the Philadelphia region. Readings above 0 indicate improving conditions while readings below 0 indicate contraction. Recent readings have shown manufacturing conditions improving not just in the Philly region but in other regions as well helping to fuel the fire of an improving economy. Economists surveyed expect a slight increase this month from last month’s 15.2 to 17.0.
The release indicated business conditions in the Philly region are slightly better than expected posting a 17.6.
The final event for the day is the announcement from the Department of Treasury on the size of next week’s debt offering. When our government doesn’t have the money to pay for spending, they borrow money by issuing Treasuries. The added supply of debt on the market can pressure both treasury and mortgage yields higher. Market participants are expecting a new supply of $118billion, spread between $44billion of 2 year notes, $42billion of 5 year notes and $32billion of 7 year notes all the same as last offering.
Reports from fellow mortgage professionals indicates lender rate sheets to be worse than yesterday. The par 30 year fixed rate mortgage has moved higher to the 4.875% to 5.125% range for well qualified consumers. To secure a par interest rate on a conventional mortgage you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including an estimated one point loan origination/discount/broker fee. You may elect to pay less in fees but you will have to accept a higher interest rate.
I continue to favor locking over floating. If tomorrow’s CPI shows inflation, mortgage rates will come under more pressure to increase. However, if it shows inflation to be in check on the consumer level, we might see a brief dip in rates back to the 4.75% to 5.00% range. With that said, float at your own risk.
Like yesterday, we have another busy day of data.
This morning we received the weekly jobless claims. Recent reports have shown jobless claims moving stubbornly higher following the Christmas season, but last week’s report surprised to the better falling 43,000 to 440,000. This report does give us three measures of unemployment claims:
1. Initial Jobless Claims: totals the number of Americans who filed for first time unemployment benefits
2. Continued Claims: totals the number of Americans who continue to file due to lack of finding a new job
3. Extended Claims: totals the number of Americans who have exhausted their traditional benefits and our now receiving emergency benefits.
The release indicated many more people than expected filed for first time unemployment benefits last week. Economists expected a reading of 438,000 but the actual number of filers was 473,000! Last week’s initial claims were revised higher to 442,000. Continued claims edged higher to 4.56 million from 4.54 million while those receiving extended benefits rose 274,500 to 6 million! This is a troubling report for the jobs sector as hiring by firms is not appearing and businesses remain reluctant to hire new staff.
Released at the same time was a report that gives us a measure of inflation on the producer level with the Producer Price Index. PPI measures the changes in prices that manufacturers and wholesalers pay for goods during different stages of production. If businesses have to pay more for the materials they use to produce their widgets …they may be forced to pass along those additional costs to you…the consumer. Although inflation at the producer level does not always lead to higher prices paid by consumers, as producers are reluctant to pass along higher costs during bad economic times. As stated before, inflation is one of the largest enemies of low interest rates.
The release indicated that inflationary pressures on the producer level were higher than expected last month. The overall PPI posted a monthly increase of 1.4% when only a 0.8% increase was expected. When you exclude food and energy from the numbers, called the Core reading, prices increased 0.3% when only a 0.1% rise was expected. This is the second report in a row, yesterday’s Import/Export prices also came in higher, showing that inflation may be becoming a concern. It will be interesting to see if the CPI report tomorrow indicates inflation on the consumer level. With unemployment hovering around 10%, producers have found it quite difficult to pass along the higher costs to their clients.
The next report of the day came from the Conference Board: Leading Indicators. This is a composite index of 10 economic indicators that are expected to provide a forward looking indication of economic activity. If the month over month change is positive, it indicates the economy is improving. Most of the components of this report have already been released so this doesn’t give us much new information. Economists are expecting a 0.5% increase following last month’s large 1.1% increase.
The release posted the 10th consecutive increase but worse than expected at 0.3%. This continues to indicate that our economy has stabilized from record low levels of output.
The final economic release of the day gives us a measure of the strength of manufacturing in the Philadelphia region. Readings above 0 indicate improving conditions while readings below 0 indicate contraction. Recent readings have shown manufacturing conditions improving not just in the Philly region but in other regions as well helping to fuel the fire of an improving economy. Economists surveyed expect a slight increase this month from last month’s 15.2 to 17.0.
The release indicated business conditions in the Philly region are slightly better than expected posting a 17.6.
The final event for the day is the announcement from the Department of Treasury on the size of next week’s debt offering. When our government doesn’t have the money to pay for spending, they borrow money by issuing Treasuries. The added supply of debt on the market can pressure both treasury and mortgage yields higher. Market participants are expecting a new supply of $118billion, spread between $44billion of 2 year notes, $42billion of 5 year notes and $32billion of 7 year notes all the same as last offering.
Reports from fellow mortgage professionals indicates lender rate sheets to be worse than yesterday. The par 30 year fixed rate mortgage has moved higher to the 4.875% to 5.125% range for well qualified consumers. To secure a par interest rate on a conventional mortgage you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including an estimated one point loan origination/discount/broker fee. You may elect to pay less in fees but you will have to accept a higher interest rate.
I continue to favor locking over floating. If tomorrow’s CPI shows inflation, mortgage rates will come under more pressure to increase. However, if it shows inflation to be in check on the consumer level, we might see a brief dip in rates back to the 4.75% to 5.00% range. With that said, float at your own risk.
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