Positive Economic Data Boosts Stocks, Hurts Mortgage Rates

Stronger than expected data on manufacturing helped a over sold stock market to rally yesterday. The strength in equities pulled money away from the fixed income sector forcing lenders to increase consumer borrowing costs. The price losses with mortgage backed securities were not large, yet lenders increased costs on average .375 to .50 in discount proving yet again they take away much faster than they pass along gains. As the day progressed, MBS did manage to claw their way off the lows to recapture about half of the losses from the morning but no lender repriced better.

We have another busy day of economic reports. First out was the weekly jobless claims from the Department of Labor. This will be our last look into the jobs sector ahead of tomorrow’s key Employment Situation report. The report provides three timely metrics on the health of the labor market:

• Initial Jobless Claims: totals the number of Americans who filed for first time unemployment benefits in the previous week
• Continued Claims: totals the number of Americans who continue to file for benefits due to an inability to find a new job
• 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 gauge on economic momentum. Higher jobless claims imply less consumers have jobs and therefore less money to spend. This is a negative for the overall economy but generally helpful in keeping consumer borrowing costs from rising. Recent reports have shown jobless claims moving higher calling into question our economic recovery.
Here are the results:

• Initial Jobless Claims: -6,000 to 472,000 vs. estimates for a read of 475,000. Prior week’s data was revised worse to show 5,000 more claims. This is the second week in a row with declining first time claims.
• Continued Claims: -23,000 to 4.46 million vs. estimates of 4.45million.
• Extended and Emergency Benefits: -320,000 to 5.44million. The large decline in Emergency Benefits can be in part the expiration of benefits and not necessarily finding a new job.

Released at the same time was the Productivity and Costs Report for the second quarter of this year. 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 which is one of the biggest enemies of low rates.

The release indicated productivity fell at a 1.8% rate, in line with expectations. Unit labor costs increased in line with expectations by 1.1%. Lower productivity and higher unit costs is bad news for both stocks and bonds as the higher costs can lead to unacceptable inflation and lower corporate profits. Additionally, as workers are less productive employers have the need to hire additional staff which has a positive effect on hiring in the future. This is potentially good news for those without a job and our economy.

The Department of Commerce released the monthly Factory Orders report at 10am. 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 indicated factory orders for July increased for the first time in two months by 0.1%, but below expectations of a 0.3% rise.

The final economic release of the day gives market watchers a look into the housing sector: Pending Home Sales. This data shows the monthly change in the amount of existing homes, not new construction, in which a contract has been signed, but has not closed. This is a leading indicator of housing activity and economic momentum as consumers would have to feel pretty confident about their own finances to purchase a home. Additionally, when a home is purchased, there are many other items needed to furnish the home, this adds to consumer spending which benefits the overall economy.

The National Association of Realtors reported that Pending Home Sales rose 5.2% in July, better than expectations and the first month over month increase since the end of the Home Buyer Tax Credit.

Lender rate sheets are slightly worsened this morning. The par 30 year conventional rate mortgage has risen to the 4.25% to 4.50% range with several lenders still offering 4.125%. To secure a par rate on a conventional loan you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all of the closing costs including an estimated one point loan origination/discount/broker fee. You may elect to pay less in closing costs but you will have to accept a higher interest rate.

To lock or float? Rates are still fantastic so I find it hard to not recommending locking… especially for loans closing in the near term. For longer term closings, it will come down to the jobs report tomorrow. If that report is worse than expected, rates should be able to hold or maybe improve. However, if the jobs numbers come in as expected or surprises to the better, rates will most certainly be pressured higher in the near term.