ADP Jobs Preview Pressures Mortgage Rates Higher

Yesterday we received the ADP Employment report which blew away expectations showing our private sector added three times as many jobs as expected( 297k vs 101k expected). Typically, this report does not carry a great deal of impact…unless it varies greatly from expectations. The good news on jobs, led benchmark treasury yields higher forcing mortgage backed securities lower in price which increases consumer borrowing costs. At the open, lender rate sheets were worse than the prior day. As the day progressed, lenders repriced worse for the first time around noon and repriced for the worse again later in the day as the losses continued through close. In total, consumer borrowing costs increased a half point (on a $200,000 mortgage that equals an additional $1000 in costs).

Our lone economic report today was the weekly Jobless Claims. From the Department of Labor, this report tracks the number of Americans that filed for first time unemployment benefits in the prior week. Since our economy is driven by consumer spending, higher jobless claims indicates consumers will have less money to spend which is bad for corporate profits and stocks but generally helpful in keeping interest rates low. Recent reports have shown a steady decline in jobless claims which indicates a improving jobs sector.

This report gives us three measures of unemployment claims:

- 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 collecting extended and emergency benefits which can last as long as 99 weeks

Here are the results:

- Initial Jobless Claims: +18,000 to 409,000 vs estimates of 400,000. Prior week was revised worse to show an additional 3,000 claims. Weekly claims are quite volatile so market participants track the 4 week moving average which fell 3500 to 410,750.
- Continued Claims: -47,000 to 4.103million vs estimates of 4.095million.
- Extended and Emergency Benefits: -23,000 to 4.51million

Jobless claims continue to move it the right direction.

Lender rate sheets are slightly better than the last rates sheets of yesterday by .125 in discount. The par 30 year conventional rate mortgage remains in 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.

Floating through tomorrow’s Non-Farm Payrolls report is highly risky; however, it appears a better than expected report is already baked into the market thanks to the ADP report. Currently, economists are expecting the report to show our economy added 160,000 jobs but some economists have revised estimates even higher.