Mortgage Rates Under Pressure Ahead of Jobs Data
Posted 06-03-2010 at 09:25 AM by VictorBurek
We had a uneventful day in the mortgage market yesterday. Despite the stock market posting strong gains yesterday and benchmark U.S. Treasuries moving higher in yield, the prices of mortgage backed securities held relatively stable all day closing at the same price at which they opened. The lack of volatility with MBS allowed lenders to hold mortgage rates unchanged on the day.
We have several economic reports to discuss this morning. Prior to the release of any data, MBS have opened lowered pressuring mortgage rates higher.
First out was a sneak peek into the health of the labor market with the release of the ADP Employment report. We get the official government data on Friday. Historically, the ADP report has varied greatly from the official report, however its accuracy has been improving more recently. The biggest difference between the two jobs report is the ADP numbers do not take into account government hiring, only the private sector. Since our economy is driven by consumer spending, higher unemployment would indicate less consumer demand and spending, a negative for corporate profits. Investors tend to sell stocks when unemployment is high in favor of the safety of risk free Treasuries.
Today’s release showed the private sector added 55,000 jobs last month, slightly lower than the 60,000 that was expected. Offsetting the disappointing May’s number was the prior month’s data was revised higher from the first reported gain of 32,000 to a gain of 65,000. With the preview over, all eyes will be focused on Friday’s Employment Situation Report. Economists are expecting a gain of 513,000 jobs, thanks to government hiring of temporary census takers. The unemployment rate is expected to fall from 9.9% to 9.8%.
Next came the release of the weekly Jobless Claims. This report provides three measures of the health of the labor market:
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 for benefits due to an inability to find a new job
3. Extended and Emergency Benefits: totals the number of Americans who have exhausted their traditional benefits and are now receiving extended and emergency benefits
Since our economy is driven by consumer spending, market participants track employment data to get a sense of future economic momentum. Higher jobless claims lead to less consumer spending, which is bad for the overall economy but generally helpful in keeping consumer borrowing costs low. Below are the results...
1. Initial Jobless Claims: down -10,000 to 453,000, more than the 450,000 that was expected. Prior week’s data revised worse from 460,000 to 463,000.
2. Continued Claims: increased 31,000 to 4.67million, also worse than expected
3. Extended and Emergency Benefits: rose 57,000 to 5.4million
Released at the same time was the revision to first quarter Productivity and Costs Report. This data measures how efficient our work force is at producing our nation’s goods and services. A more productive work force means employers do not need to hire additional staff to increase production, while unit labor costs measures the labor cost of producing each unit of output. Higher productivity lowers the unit cost of producing goods which helps to keep inflation in check.
The release indicated first quarter productivity was not as high as first thought. Productivity was revised lower from the first reported 3.6% to 2.8%, lower than the 3.4% that was expected. Unit labor costs was revised higher from -1.6% to -1.3%, in line with estimates. Year over year, productivity is up 6.1% as workers work harder due to fear of losing their job. With productivity revised lower, it may indicate employers cannot squeeze out more production from the current staff which can lead to future hiring.
The final two reports on the day were released at 10am eastern. First report was Factory Orders from the Department of Commerce. This data represents the value of new orders placed for both durable and non-durable goods. Durable goods are products that have a life expectancy of at least three years such as autos, computers, machinery. Non-durable goods are products that can only be used one time or a product with less than a three year life expectancy. New orders is a forward looking indicating of industrial output. If orders are increasing, it indicates manufactures will be busier in the months ahead as they ramp up production to meet the demand. Busier factories can lead to additional hiring which is good for the overall economy and the equities market. To remind readers, as a general rule positive economic data benefits the stock market while negative economic data benefits the bond market and low mortgage rates.
The report showed factory orders for April, this data has a two month lag, were lighter than expected with a month over month increase of 1.2%... a 1.8% increase was expected. Offsetting the bad news was the prior month’s data revised higher from 1.3% to 1.7%.
Our final economic report on the day was the ISM Non-Manufacturing Index. The Institute for Supply Management(ISM) surveys 400 firms including mining, construction, retail, etc… on the strength of business conditions. Readings above 50 indicate improving conditions while readings below 50 imply contraction or worsening conditions. The previous 5 readings have shown business conditions improving with last month’s survey coming in at 55.4, the highest reading since the summer of 2007. Economists surveyed prior to the release expected today’s report to come in slightly higher at 55.5. The release registered a print of 55.4 matching last month.
If the economic data wasn’t enough, we also got a new supply of U.S. debt to absorb. The Department of Treasury announced the size of next week’s debt offering. The added supply of debt can pressure treasury yields higher which can lead to higher mortgage rates. The last cycle of debt offering was the first decline since hitting record levels earlier this year. Next week, the Department of Treasury will auction $36billion of 3 year notes on Tuesday, this is $2billion less than last one. On Wednesday, $21billion of 10 year notes will be auctioned, $3billion less than last time and on Thursday $13billion of 30 year bonds will be offered which is also $3billion less than last auction. It is positive news for mortgage rates to see less borrowing by our government.
Reports from fellow mortgage professionals indicate lender rate sheets to be worse than yesterday due to the morning weakness in the MBS market. The par 30 year conventional rate mortgage has risen to the 4.75% to 5.00% 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. If you are seeking a 15 year term, you should expect par in the 4.125% to 4.375% range with similar costs but lower FICO score requirements.
I continue to favor locking all loans. Tomorrow’s Employment Situation report can move the markets very quickly and to a large degree. With rates still near historic lows, there isn’t much room for rates to improve. If tomorrow’s data is much better, we could see mortgage rates jump very quickly. Additionally, the report is released before lenders issue rate sheets giving you no time to lock in the morning. The wise and safe move is to lock today ahead of that report.
We have several economic reports to discuss this morning. Prior to the release of any data, MBS have opened lowered pressuring mortgage rates higher.
First out was a sneak peek into the health of the labor market with the release of the ADP Employment report. We get the official government data on Friday. Historically, the ADP report has varied greatly from the official report, however its accuracy has been improving more recently. The biggest difference between the two jobs report is the ADP numbers do not take into account government hiring, only the private sector. Since our economy is driven by consumer spending, higher unemployment would indicate less consumer demand and spending, a negative for corporate profits. Investors tend to sell stocks when unemployment is high in favor of the safety of risk free Treasuries.
Today’s release showed the private sector added 55,000 jobs last month, slightly lower than the 60,000 that was expected. Offsetting the disappointing May’s number was the prior month’s data was revised higher from the first reported gain of 32,000 to a gain of 65,000. With the preview over, all eyes will be focused on Friday’s Employment Situation Report. Economists are expecting a gain of 513,000 jobs, thanks to government hiring of temporary census takers. The unemployment rate is expected to fall from 9.9% to 9.8%.
Next came the release of the weekly Jobless Claims. This report provides three measures of the health of the labor market:
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 for benefits due to an inability to find a new job
3. Extended and Emergency Benefits: totals the number of Americans who have exhausted their traditional benefits and are now receiving extended and emergency benefits
Since our economy is driven by consumer spending, market participants track employment data to get a sense of future economic momentum. Higher jobless claims lead to less consumer spending, which is bad for the overall economy but generally helpful in keeping consumer borrowing costs low. Below are the results...
1. Initial Jobless Claims: down -10,000 to 453,000, more than the 450,000 that was expected. Prior week’s data revised worse from 460,000 to 463,000.
2. Continued Claims: increased 31,000 to 4.67million, also worse than expected
3. Extended and Emergency Benefits: rose 57,000 to 5.4million
Released at the same time was the revision to first quarter Productivity and Costs Report. This data measures how efficient our work force is at producing our nation’s goods and services. A more productive work force means employers do not need to hire additional staff to increase production, while unit labor costs measures the labor cost of producing each unit of output. Higher productivity lowers the unit cost of producing goods which helps to keep inflation in check.
The release indicated first quarter productivity was not as high as first thought. Productivity was revised lower from the first reported 3.6% to 2.8%, lower than the 3.4% that was expected. Unit labor costs was revised higher from -1.6% to -1.3%, in line with estimates. Year over year, productivity is up 6.1% as workers work harder due to fear of losing their job. With productivity revised lower, it may indicate employers cannot squeeze out more production from the current staff which can lead to future hiring.
The final two reports on the day were released at 10am eastern. First report was Factory Orders from the Department of Commerce. This data represents the value of new orders placed for both durable and non-durable goods. Durable goods are products that have a life expectancy of at least three years such as autos, computers, machinery. Non-durable goods are products that can only be used one time or a product with less than a three year life expectancy. New orders is a forward looking indicating of industrial output. If orders are increasing, it indicates manufactures will be busier in the months ahead as they ramp up production to meet the demand. Busier factories can lead to additional hiring which is good for the overall economy and the equities market. To remind readers, as a general rule positive economic data benefits the stock market while negative economic data benefits the bond market and low mortgage rates.
The report showed factory orders for April, this data has a two month lag, were lighter than expected with a month over month increase of 1.2%... a 1.8% increase was expected. Offsetting the bad news was the prior month’s data revised higher from 1.3% to 1.7%.
Our final economic report on the day was the ISM Non-Manufacturing Index. The Institute for Supply Management(ISM) surveys 400 firms including mining, construction, retail, etc… on the strength of business conditions. Readings above 50 indicate improving conditions while readings below 50 imply contraction or worsening conditions. The previous 5 readings have shown business conditions improving with last month’s survey coming in at 55.4, the highest reading since the summer of 2007. Economists surveyed prior to the release expected today’s report to come in slightly higher at 55.5. The release registered a print of 55.4 matching last month.
If the economic data wasn’t enough, we also got a new supply of U.S. debt to absorb. The Department of Treasury announced the size of next week’s debt offering. The added supply of debt can pressure treasury yields higher which can lead to higher mortgage rates. The last cycle of debt offering was the first decline since hitting record levels earlier this year. Next week, the Department of Treasury will auction $36billion of 3 year notes on Tuesday, this is $2billion less than last one. On Wednesday, $21billion of 10 year notes will be auctioned, $3billion less than last time and on Thursday $13billion of 30 year bonds will be offered which is also $3billion less than last auction. It is positive news for mortgage rates to see less borrowing by our government.
Reports from fellow mortgage professionals indicate lender rate sheets to be worse than yesterday due to the morning weakness in the MBS market. The par 30 year conventional rate mortgage has risen to the 4.75% to 5.00% 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. If you are seeking a 15 year term, you should expect par in the 4.125% to 4.375% range with similar costs but lower FICO score requirements.
I continue to favor locking all loans. Tomorrow’s Employment Situation report can move the markets very quickly and to a large degree. With rates still near historic lows, there isn’t much room for rates to improve. If tomorrow’s data is much better, we could see mortgage rates jump very quickly. Additionally, the report is released before lenders issue rate sheets giving you no time to lock in the morning. The wise and safe move is to lock today ahead of that report.
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