Mortgage Rates Rise Ahead of Long Weekend

The pressure on mortgage rates continued yesterday as stock market optimism led to an unwinding of the “flight to safety” trade. Market participants sold their risk free U.S. Treasuries driving those yields higher. This led to mortgage-backed securities moving lower in price despite worse than expected economic data. As MBS moved lower, all lenders were forced to reprice for the worse increasing consumer borrowing costs.

We have several economic reports to discuss this morning.

First report to hit the news wires comes from the Department of Commerce with the release of Personal Income and Outlays which gives market participants a measure on the strength of the American consumer. A stronger consumer benefits the stock market while a weaker consumer benefits the bond market. This report gives us three readings. The first is personal income which shows the monthly change in income that households receive from all sources. Next is consumer spending, which shows the monthly change in the amount of money consumers are spending on durable and non-durable goods and services. The final reading is the Personal Consumption Expenditure, a preferred read on inflation.

The release indicated worse than expected readings on spending and income while inflation remains non-existent.

Personal income rose +0.4%, less than the +0.5% that was expected. Last month’s figure was revised higher from +0.3% to +0.4%. Year over year, personal income has risen +2.5%.

Consumer spending was unchanged when a +0.2% increase was expected with no revisions to the prior month’s +0.6% increase. This breaks a streak of six consecutive reports showing consumer spending increasing month over month. Contributing to the weaker spending numbers was an increase in the personal savings rate for the first time in four months to 3.6%, the highest level since January. Year over year, consumer spending is up +4.6%.

The PCE index continues to show inflation to be of no concern today. The core PCE index posted a modest +0.1% increase matching estimates while the overall index came in unchanged from last month. Year over year, the core PCE fell from last month’s +1.3% to +1.2% well within the Fed’s comfort zone for acceptable price increases.

Despite the less than expected results on income and spending, this report is still rather positive. Personal income did rise less than expected but those with a job are making more money which is positive news for the economy. Yes, spending did come in unchanged and lower than expected, but it had increased for 6 consecutive months. It appears the pull back was due to Americans rebuilding their savings which they used in the prior months to increase spending. Additionally, unchanged is much better than a decline in spending and one report does not make a trend. Lastly, the tame inflation data is a positive for fixed income investments. Following the release, MBS have regained a little of yesterday’s losses but it will take weakness in stocks for the gains to hold or increase further.

The next report to hit gives us a look at the strength of business conditions in the Chicago region with the Chicago PMI report. The Institute of Supply Management surveys both manufacturing and non-manufacturing firms, readings above 50 indicate an expanding conditions while readings below 50 indicate contraction. Recent surveys have shown conditions improving with last month’s survey coming in at the highest level in over 3 years at 63.8. Economists expected today’s survey to take a step back to a read of 62.0. The release indicated business conditions in the Chicago region unexpectedly declined last month with a read of 59.7.

The final report of the week provides the market with a measure of how consumers are feeling: Consumer Sentiment. The Reuter’s/University of Michigan’s Consumer Survey Center surveys 500 households on their personal financial conditions and attitudes about the economy. Market participants track consumer attitudes to get a gauge at future economic momentum. An optimistic consumer is more likely to spend which benefits stocks. A pessimistic consumer is more likely to save, which supports the bond market. This report is released twice per month. Economists surveyed prior to the release expected consumer sentiment to be unchanged from Mid May’s report with a read of 73.3. The actual survey came in basically as expected with a print of 73.6.

The market closes early today in honor of Memorial Day weekend and will be closed all day on Monday.

Reports from fellow mortgage professionals indicate lender rate sheets to be similar to yesterday’s repriced sheets. The par 30 year conventional rate mortgage has risen to the 4.75% to 5.00% range for well qualified consumers. There are a few lenders that continue to offer 4.625%. 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.

Hopefully you have already locked in your interest rate. If you haven’t, the only way I would recommend you float over the long weekend is if stocks move lower today. If you cannot keep an eye on the stock market, go ahead and lock at today’s rates… they are still fantastic. The markets have been very volatile with large swings, so you will have to keep up with the market if you want to risk floating.

Have a fantastic weekend and please remember our soldiers on Monday, past and present. If not for them, we wouldn’t have all the freedoms we get to enjoy in this wonderful and blessed country of ours. Be back to you on Tuesday.