The Week Ahead
Posted 07-27-2009 at 01:55 PM by VictorBurek
Last week was roller coaster for mortgage backed securities. After a nice rally on Tuesday and Wednesday which brought the par 30 year fixed rate mortgage back under 5%, by Friday MBS ended up where the week began. We have seen a consistent pattern develop lately where each time rates break the 5% barrier, they only remain there for a short period of time before sentiment shifts to drive mortgage rates higher. Driving this movement is the see sawing of investor sentiment from the green shoots theory of a quick economic recovery to a more MBS friendly path of a slow sluggish long recovery. Market participants believing in the green shoots theory have moved the Dow Jones over the 9000 mark. This has caused fixed income to move lower in price increasing yields and mortgage rates. On Friday, the par 30 year conventional rate had moved back to 5.25% for the best qualified consumers.
So far this morning, MBS have opened to the down side. It appears that treasuries are the driving force with the benchmark 10 year note falling off a cliff. Currently the yield on the 10 year note is down ¾’s of a point to a yield over 3.75. If you can recall on Wednesday it was trading well under 3.48 in yield. The rising treasury yields are probably the result of the record offering of treasuries for auction this week. More on that later. Since MBS and treasuries are both a fixed income investment, they tend to move in similar direction. So the selloff of treasuries are pressuring MBS to sell off as well. Let’s look what will drive the markets in the week ahead.
The economic data picks up this week following last week’s fairly light load of economic reports to digest. Today, we get the release of new home sales. This data set measures the number of newly constructed homes with a committed sale during the prior month. Since registering a annualized pace of 309,000 in January(a record low), this report has indicated a bottoming in new home sales. Since February new home sales have held relatively stable around the 340,000 level. Last month’s report moved lower by 0.6% while the previous month’s report indicated a 2.7% increase. The stock market tends to rally with a better than expected number since more new home sales would lead to higher purchases of items to build and fill the home such as flooring, appliances, furniture, etc… which is positive for corporate earnings. This would also lead to hiring in the construction industry which would increase payrolls and income which would be pumped into the overall economy. Also, new home sales is a good gauge of economic momentum. A consumer would have to feel pretty good about their personal finances and the overall economic outlook to take the big step of purchasing a new home. Better than expected home sales is negative for MBS since more sales could lead to higher prices which can stoke inflationary pressures.
The report has shown new home sales moving considerably higher to an annualized pace of 384,000 beating expectations of 350,000. Adding more to the positive news for housing is the increase in sales has lowered the supply of new homes available from 10.2 to 8.8 months. Somewhat offsetting the good news is the reason for the boost in sales was builders deeply discounting prices which has lowered the average price of a newly built home to $206,200 which is 5.8% lower than the prior month. Following the release of the better than expected report, MBS started to move lower based on the headline reading of a 11% rise in new home sales. After market participants had an opportunity to thoroughly review the report, it appears the huge decline in prices is offsetting the good news and MBS have regained the losses following the release of this report and are approaching the best levels of the day. Also, following the release of this report, the stock market has reversed direction and is moving much lower and currently at the lows of the day. You would expect the complete opposite to happen, so this report goes to show you that things can have different impacts on the markets than what you would expect.
Tuesday
-The S&P/Case Shiller home price index which tracks the monthly changes in the value of residential real estate in 20 regions across the U.S. Many economists believe that until home prices stabilize, it will be extremely difficult for our overall economy to turn the corner from recession to growth. This fact makes this report more important now than in previous times to market participants. This report has a 2 month lag, so the numbers we get will be for the month of May.
-Consumer Confidence, which is a survey conducted by the Conference Board of 5000 consumers across the country on their attitudes on present economic conditions and future expectations. An optimistic consumer is more likely to spend while a pessimistic consumer is more likely to save. Since our economy is driven by consumer spending, the equities market tends to benefit with a better than expected reading while the MBS market tends to benefit with a worse than expected reading. June’s report came in worse than expected following sizable improvements in the previous two months. Economists surveyed are expecting a reading of 50.0 following June’s 49.3
-At 1pm eastern, the U.S. Treasury Department will have their first of three auctions this week that will have an impact on MBS. They will auction off $42billion of 2 year notes to the highest bidders. The added supply(record supply this week) will apply pressure on yields to rise to attract buyers. Since the supply is already known the more important aspect of the auction will be the demand especially from foreign investors known as the indirect bid. For the auction to be successful and potentially helping MBS we would like to see strong demand from the indirect bids.
Wednesday
-At 7am eastern, the Mortgage Bankers’ Association Weekly Applications index will be released which tracks the month over month change in purchase and refinance activity at major lenders. An increasing trend in purchase activity would be a positive signal for our economy so the MBS market tends to benefit with a lower reading. Last week’s report only indicated a small improvement in housing activity signaling that housing is still in trouble. The purchase activity was up 1.3% following the prior week’s 9.4% decline while refinance activity moved higher by 4%.
-At 8:30am, Durable Goods Orders which tracks the month over month change in new orders with domestic manufacturers for immediate and future delivery of hard goods. This report gives investors a clue into how busy factories will be in the months ahead. An increasing trend hints at higher demand for goods by consumers which would be positive for stocks and negative for fixed income. Economists surveyed expect a month over month decline of -0.5% following last month’s 1.8% increase.
-At 1pm eastern, the U.S. Department of Treasury will have their second auction with $39billion in 5 year notes up for grabs.
Thursday
-At 8:30am eastern, Weekly Jobless claims which totals the number of Americans that filed for first time unemployment benefits during the prior week. Expectations call for 585,000 following last week’s 554,000. MBS tend to benefit with a higher reading.
-At 1pm eastern, the U.S. Department of Treasury will have its final auction of the week with $28billion of 7 year notes going on the auction block.
Friday
-At 8:30am, Gross Domestic Product will be released. This report is the broadest measure of aggregate economic activity and encompasses every sector of our economy. This will be the first measure of growth for the 2nd quarter of this year. Last month’s report indicated that our economy contracted -5.5% and expectations call for 2nd quarter to post a -0.7% contraction. MBS tend to benefit with a lower than expected reading. As part of this report we also get a measure on inflation which is the mortal enemy of mortgage rates. Higher inflation will lead to higher interest rates. Last month’s report showed inflation for first quarter at 2.8% and expectations for this report are for a reading of 1.3%.
-At 8:30am eastern, we get the Employment Cost index with measures total employee cost including wages, salaries and benefits and is the broadest measurement of labor costs. Economists surveyed expect a 0.3% increase matching last quarter’s numbers. Higher employment costs, which is referred to as wage based inflation, are usually passed on to the consumer in the form of higher prices, so MBS benefit with a lower than expected reading.
-At 9:45am eastern, Chicago PMI which measures the strength of business conditions around the Chicago area. Readings below 50 indicate contracting conditions while reading above 50 indicate expansion. The further the reading is from 50 indicates more rapid the pace of growth or decline. Economists surveyed expect a reading of 44.0 following last month’s worse than expected reading of 39.9. MBS, which prefer a more slowly growing economy which leads to less inflationary pressures, tend to benefit with a worse than expected reading.
Early reports from fellow mortgage professionals are indicating that the par 30 year conventional rate mortgage is in the 5.25% to 5.375% range for the best qualified consumers. In order to meet the criteria of best qualified 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 1 point loan origination/discount/broker fee. I suspect that MBS will take their direction from stocks today. If stocks move lower, MBS should move higher and vice versa. To remind readers, as MBS move higher in price mortgage rates move lower.
So far this morning, MBS have opened to the down side. It appears that treasuries are the driving force with the benchmark 10 year note falling off a cliff. Currently the yield on the 10 year note is down ¾’s of a point to a yield over 3.75. If you can recall on Wednesday it was trading well under 3.48 in yield. The rising treasury yields are probably the result of the record offering of treasuries for auction this week. More on that later. Since MBS and treasuries are both a fixed income investment, they tend to move in similar direction. So the selloff of treasuries are pressuring MBS to sell off as well. Let’s look what will drive the markets in the week ahead.
The economic data picks up this week following last week’s fairly light load of economic reports to digest. Today, we get the release of new home sales. This data set measures the number of newly constructed homes with a committed sale during the prior month. Since registering a annualized pace of 309,000 in January(a record low), this report has indicated a bottoming in new home sales. Since February new home sales have held relatively stable around the 340,000 level. Last month’s report moved lower by 0.6% while the previous month’s report indicated a 2.7% increase. The stock market tends to rally with a better than expected number since more new home sales would lead to higher purchases of items to build and fill the home such as flooring, appliances, furniture, etc… which is positive for corporate earnings. This would also lead to hiring in the construction industry which would increase payrolls and income which would be pumped into the overall economy. Also, new home sales is a good gauge of economic momentum. A consumer would have to feel pretty good about their personal finances and the overall economic outlook to take the big step of purchasing a new home. Better than expected home sales is negative for MBS since more sales could lead to higher prices which can stoke inflationary pressures.
The report has shown new home sales moving considerably higher to an annualized pace of 384,000 beating expectations of 350,000. Adding more to the positive news for housing is the increase in sales has lowered the supply of new homes available from 10.2 to 8.8 months. Somewhat offsetting the good news is the reason for the boost in sales was builders deeply discounting prices which has lowered the average price of a newly built home to $206,200 which is 5.8% lower than the prior month. Following the release of the better than expected report, MBS started to move lower based on the headline reading of a 11% rise in new home sales. After market participants had an opportunity to thoroughly review the report, it appears the huge decline in prices is offsetting the good news and MBS have regained the losses following the release of this report and are approaching the best levels of the day. Also, following the release of this report, the stock market has reversed direction and is moving much lower and currently at the lows of the day. You would expect the complete opposite to happen, so this report goes to show you that things can have different impacts on the markets than what you would expect.
Tuesday
-The S&P/Case Shiller home price index which tracks the monthly changes in the value of residential real estate in 20 regions across the U.S. Many economists believe that until home prices stabilize, it will be extremely difficult for our overall economy to turn the corner from recession to growth. This fact makes this report more important now than in previous times to market participants. This report has a 2 month lag, so the numbers we get will be for the month of May.
-Consumer Confidence, which is a survey conducted by the Conference Board of 5000 consumers across the country on their attitudes on present economic conditions and future expectations. An optimistic consumer is more likely to spend while a pessimistic consumer is more likely to save. Since our economy is driven by consumer spending, the equities market tends to benefit with a better than expected reading while the MBS market tends to benefit with a worse than expected reading. June’s report came in worse than expected following sizable improvements in the previous two months. Economists surveyed are expecting a reading of 50.0 following June’s 49.3
-At 1pm eastern, the U.S. Treasury Department will have their first of three auctions this week that will have an impact on MBS. They will auction off $42billion of 2 year notes to the highest bidders. The added supply(record supply this week) will apply pressure on yields to rise to attract buyers. Since the supply is already known the more important aspect of the auction will be the demand especially from foreign investors known as the indirect bid. For the auction to be successful and potentially helping MBS we would like to see strong demand from the indirect bids.
Wednesday
-At 7am eastern, the Mortgage Bankers’ Association Weekly Applications index will be released which tracks the month over month change in purchase and refinance activity at major lenders. An increasing trend in purchase activity would be a positive signal for our economy so the MBS market tends to benefit with a lower reading. Last week’s report only indicated a small improvement in housing activity signaling that housing is still in trouble. The purchase activity was up 1.3% following the prior week’s 9.4% decline while refinance activity moved higher by 4%.
-At 8:30am, Durable Goods Orders which tracks the month over month change in new orders with domestic manufacturers for immediate and future delivery of hard goods. This report gives investors a clue into how busy factories will be in the months ahead. An increasing trend hints at higher demand for goods by consumers which would be positive for stocks and negative for fixed income. Economists surveyed expect a month over month decline of -0.5% following last month’s 1.8% increase.
-At 1pm eastern, the U.S. Department of Treasury will have their second auction with $39billion in 5 year notes up for grabs.
Thursday
-At 8:30am eastern, Weekly Jobless claims which totals the number of Americans that filed for first time unemployment benefits during the prior week. Expectations call for 585,000 following last week’s 554,000. MBS tend to benefit with a higher reading.
-At 1pm eastern, the U.S. Department of Treasury will have its final auction of the week with $28billion of 7 year notes going on the auction block.
Friday
-At 8:30am, Gross Domestic Product will be released. This report is the broadest measure of aggregate economic activity and encompasses every sector of our economy. This will be the first measure of growth for the 2nd quarter of this year. Last month’s report indicated that our economy contracted -5.5% and expectations call for 2nd quarter to post a -0.7% contraction. MBS tend to benefit with a lower than expected reading. As part of this report we also get a measure on inflation which is the mortal enemy of mortgage rates. Higher inflation will lead to higher interest rates. Last month’s report showed inflation for first quarter at 2.8% and expectations for this report are for a reading of 1.3%.
-At 8:30am eastern, we get the Employment Cost index with measures total employee cost including wages, salaries and benefits and is the broadest measurement of labor costs. Economists surveyed expect a 0.3% increase matching last quarter’s numbers. Higher employment costs, which is referred to as wage based inflation, are usually passed on to the consumer in the form of higher prices, so MBS benefit with a lower than expected reading.
-At 9:45am eastern, Chicago PMI which measures the strength of business conditions around the Chicago area. Readings below 50 indicate contracting conditions while reading above 50 indicate expansion. The further the reading is from 50 indicates more rapid the pace of growth or decline. Economists surveyed expect a reading of 44.0 following last month’s worse than expected reading of 39.9. MBS, which prefer a more slowly growing economy which leads to less inflationary pressures, tend to benefit with a worse than expected reading.
Early reports from fellow mortgage professionals are indicating that the par 30 year conventional rate mortgage is in the 5.25% to 5.375% range for the best qualified consumers. In order to meet the criteria of best qualified 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 1 point loan origination/discount/broker fee. I suspect that MBS will take their direction from stocks today. If stocks move lower, MBS should move higher and vice versa. To remind readers, as MBS move higher in price mortgage rates move lower.
Total Comments 4
Comments
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This is great stuff! Keep us novices informed. Lots of us are watching rates right now and trying to decide when to lock in. ThanksPosted 07-27-2009 at 10:17 PM by BBall Coach
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Thanks BBall Coach. I will post everyday.Posted 07-28-2009 at 04:56 PM by VictorBurek
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I just got hooked on this blog. Great stuff and thanks.....Our refi has taken us over 60 days to close and lock in was not a sure thing for the 60 days. 4.375 to 4.5 but we are not complaining....Posted 07-31-2009 at 06:19 PM by Synergy1
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That is a fantastic rate.Posted 08-01-2009 at 02:45 AM by VictorBurek
