Mortgage Rates End the Week Worse, The Week Ahead

Last week ended on a very sour note thanks to better than expected economic data and a speech from Fed Chairman Ben Bernanke where he stated the Fed stands ready to help the economy if needed. The first revision to second quarter Gross Domestic Product(GDP) showed a downward revision on growth but not as far as economists expected. These events encouraged market participants to sell their fixed income investments to fund an almost 2% rally in the stock market. The 10 year treasury note suffered the most losses rising in yield from under 2.50% Friday morning to 2.66% by day’s end. The rising treasury yields pressured mortgage rates higher as well as all lenders did reprice for the worse increasing consumer borrowing costs.

The economic calendar is quite busy this week with some high impacting reports. The most influential report comes on Friday with the release of the Employment Situation Report.

We have only one economic release today, Personal Income and Outlays. This monthly report provides market watchers with a view into the strength of consumers by tracking what Americans earn and what they spend. A stronger consumer benefits the stock market while a weaker consumer helps keep mortgage rates low.

This data contains three separate reads on the health of consumers.

1. Personal Income: the monthly change in income that households receive from all sources (before taxes).
2. Personal Outlays (consumer spending): the monthly change in the amount of money consumers are spending on durable and non-durable goods and services.
3. Personal Savings Rate: the monthly change in the amount of money consumers are saving instead of spending

From the Bureau of Economic Analysis:

1. Personal Income: Increased 0.2% in July, less than the 0.3% that was expected.
2. Personal Outlays: Increased 0.4% in July, better than the 0.3% that was expected. This was the largest increase in spending since March.
3. Personal Savings: Decreased from 6.2% in June to 5.9% in July. Less savings by consumers might indicate more confidence in the economy.

This data also provides a read on consumer level price inflation: the PCE price index. The price index for PCE increased 0.2% helping to ease concerns of deflation, some inflation is okay. The core PCE price index, excluding food and energy, increased 0.1% after no change in the prior month. Year over year, headline PCE rose from 1.4% in June to 1.5% in July while the core rate held steady at 1.4%. Both well within the Fed’s comfort zone for acceptable price increases. Today’s reading on inflation matched economists’ expectations.

Here is a look at what might impact mortgage rates in the week ahead:

Tuesday
• S&P/Case-Shiller Home Price Index (medium impact) This data tracks the monthly change in the value of residential real estate across the United States. \
• Chicago PMI (low to medium impact)
• Consumer Confidence (medium impact). An optimistic consumer is more likely to spend money which benefits stocks while a pessimistic consumer is more likely to save or pay off debt which benefits the bond market.
• FOMC Minutes (potential for high impact)

Wednesday
• MBA Applications Index (low impact)
• ADP Employment Report(medium impact) This data is not as influential as the official Employment Situation Report but it does provide market participants with a sneak peak of the health of the labor market. The farther away this number is from expectations, the more important it will be to investors.
• ISM Manufacturing Index (medium to high impact)
• Construction Spending(low to medium impact)

Thursday
• Weekly Jobless Claims (low to medium impact)
• Productivity and Costs (low to medium impact)
• Factory Orders (low to medium impact)
• Pending Home Sales Index (medium impact)
• Annoucement from Department of Treasury of new supply of 3 year notes, 10 year notes and 30 year bonds.

Friday
• Employment Situation (HIGH IMPACT) The data is expected to show our economy lost 99,000 jobs last month following the prior month’s worse than expected loss of 131,000 jobs. The unemployment rate is expected to climb from 9.5% to 9.6%.
• ISM Non-Manufacturing Index(low impact)

Lender rate sheets are worse this morning when compared to Friday morning’s. The par 30 year conventional rate mortgage remains in the 4.25% to 4.50% 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 costs but you will have to accept a higher interest rate.

I continue to see very little benefit in floating. If you want to gamble on lower rates, keep an eye on stocks. If stocks rally, rates will be pressured higher. If stocks sell off, rates will either hold steady or move lower but there isn’t much room for rates to drop unless we have a sizable move lower in the stock market.