The Week Ahead
Posted 08-10-2009 at 08:00 AM by VictorBurek
Last week was tough on mortgage rates. Mortgage backed securities lost almost 200 basis points since last Friday(7/31) which moved the par interest rate from 4.875% up to 5.375% by week’s end. Better than expected economic data highlighted by a much better employment situation report caused market participants to liquate safe low yielding treasuries and MBS to fund the stock market rally. On Friday, lenders issued rate sheets when MBS were at the lows of the day/week/month immediately following the nonfarm payrolls numbers. As the day progressed, MBS managed to recapture about half the losses which allowed some lenders to offer better pricing later in the day. Typical for a Friday though, many lenders did not pass along the improvements to hedge against any unknown event taking place over the weekend.
This week brings us several key pieces of data which will either continue to stoke the fires of a quick economic recovery or cause for second thoughts of a double dip recovery. As far as today, there are no relevant reports being released. It appears that MBS will take their directional guidance by the flow of money between equities and the fixed income sector. Very typical to see MBS benefit when stocks move lower and sell off when stocks move higher. To remind readers, as MBS move higher in price, mortgage rates move lower and when MBS move lower in price mortgage rates move higher.
Tuesday we get the first of 3 auctions with $37 billion in 3 year notes up for auction. This auction will not be as important as the 10 year auction which follows the next day. This is due to the average life of a mortgage being closer to 10 years than 3 years but this auction could set the tone for the week. The only economic report to be released is Productivity and Costs which measures how efficient our labor market is in producing our economy’s goods and services. An efficient labor force keeps wage pressures down which is positive for both stocks and fixed income. Productivity is expected to post a annualized gain of 5.5% following last month’s 1.6% increase while unit labor costs are expected to fall by 2.8% following the prior month’s 3.0% rise. Also the Federal Open Market Committee starts the first day of their 2 day meeting which will culminate with the release of the Fed statement on Wednesday. At these meetings which are held every 8 weeks, the Fed sets monetary policy for our country, gives an outlook on economic conditions and sets the Fed funds rate. It is widely accepted that they will maintain status quo of the current rate of 0 to .25%.
Wednesday brings us the weekly Mortgage Bankers’ Association applications index which tracks the weekly change in applications at major lenders. An increasing trend suggests an improvement in housing which would be seen as a positive economic indicator. Strong demand for housing would lead to higher demand for items such as flooring, appliances, furniture, etc… and in addition you would have to feel pretty good about your own personal financial position to purchase a new home. This is one of the few reports which is yet to show a measureable improvement on the housing front. At 1pm eastern, the Treasury Department will auction $23billion in 10 year notes. The added supply of debt on the market will apply pressure on both treasury yields and mortgage rates to move higher. Strong demand for the securities can help MBS to improve but weak demand will almost certainly cause mortgage rates to continue the recent trend of moving higher. Lastly, at 2pm eastern the Fed will release their FOMC statement which will be scrutinized line by line by market participants for any hint at future monetary policy and their economic outlook.
Thursday we get retail sales report and weekly jobless claims. Retail sales is expected to post a month over month gain of 0.8% following last month’s 0.6% improvement. The governments incentive program cash for clunkers is expected to help boost the numbers. When excluding auto sales, the report is expected to only show a 0.1% improvement. Better than expected reading on retail sales will provide further evidence of economic momentum which would be positive for stocks but could lead to higher mortgage rates. Weekly jobless claims are expected to post modest improvement from last week to 543,000 from 550,000. Recent jobless claims and last week’s Employment Situation report have shown labor conditions to be improving which is helping to stoke the fires of a quick economic recovery. This mind set which is the main driving force behind the recent trend of increasing mortgage rates.
On Friday comes the release of a couple key economic reports. First will be a reading on inflation with the Consumer Price Index which tracks the monthly change in price of a fixed basket of goods and services purchased by consumers. At the present time, inflation is not a worry and this report is expected to confirm that by showing a month over month increase of 0.1% following last month’s 0.7% increase. When excluding food and energy, due to their volatility, consumer prices are expected to rise 0.2% matching last month. Next will be the release of consumer sentiment which lets market participants know how the consumer is feeling. 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 stock market generally rallies with a better than expected reading while the MBS market would prefer a lower reading. Economists surveyed are expecting this report to show an improvement from last month’s disappointing 66.0 to 68.5. Until last month, this report posted improvements for 4 consecutive months.
So far this morning, MBS are posting very modest gains. This is allowing lenders to offer better pricing today than we saw on Friday. Early reports from fellow mortgage professionals are indicating that the par 30 year conventional rate mortgage is in the 5.25% to 5.5% range for the best qualified consumers. In order to qualify 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 one point loan origination/discount/broker fee.
This week brings us several key pieces of data which will either continue to stoke the fires of a quick economic recovery or cause for second thoughts of a double dip recovery. As far as today, there are no relevant reports being released. It appears that MBS will take their directional guidance by the flow of money between equities and the fixed income sector. Very typical to see MBS benefit when stocks move lower and sell off when stocks move higher. To remind readers, as MBS move higher in price, mortgage rates move lower and when MBS move lower in price mortgage rates move higher.
Tuesday we get the first of 3 auctions with $37 billion in 3 year notes up for auction. This auction will not be as important as the 10 year auction which follows the next day. This is due to the average life of a mortgage being closer to 10 years than 3 years but this auction could set the tone for the week. The only economic report to be released is Productivity and Costs which measures how efficient our labor market is in producing our economy’s goods and services. An efficient labor force keeps wage pressures down which is positive for both stocks and fixed income. Productivity is expected to post a annualized gain of 5.5% following last month’s 1.6% increase while unit labor costs are expected to fall by 2.8% following the prior month’s 3.0% rise. Also the Federal Open Market Committee starts the first day of their 2 day meeting which will culminate with the release of the Fed statement on Wednesday. At these meetings which are held every 8 weeks, the Fed sets monetary policy for our country, gives an outlook on economic conditions and sets the Fed funds rate. It is widely accepted that they will maintain status quo of the current rate of 0 to .25%.
Wednesday brings us the weekly Mortgage Bankers’ Association applications index which tracks the weekly change in applications at major lenders. An increasing trend suggests an improvement in housing which would be seen as a positive economic indicator. Strong demand for housing would lead to higher demand for items such as flooring, appliances, furniture, etc… and in addition you would have to feel pretty good about your own personal financial position to purchase a new home. This is one of the few reports which is yet to show a measureable improvement on the housing front. At 1pm eastern, the Treasury Department will auction $23billion in 10 year notes. The added supply of debt on the market will apply pressure on both treasury yields and mortgage rates to move higher. Strong demand for the securities can help MBS to improve but weak demand will almost certainly cause mortgage rates to continue the recent trend of moving higher. Lastly, at 2pm eastern the Fed will release their FOMC statement which will be scrutinized line by line by market participants for any hint at future monetary policy and their economic outlook.
Thursday we get retail sales report and weekly jobless claims. Retail sales is expected to post a month over month gain of 0.8% following last month’s 0.6% improvement. The governments incentive program cash for clunkers is expected to help boost the numbers. When excluding auto sales, the report is expected to only show a 0.1% improvement. Better than expected reading on retail sales will provide further evidence of economic momentum which would be positive for stocks but could lead to higher mortgage rates. Weekly jobless claims are expected to post modest improvement from last week to 543,000 from 550,000. Recent jobless claims and last week’s Employment Situation report have shown labor conditions to be improving which is helping to stoke the fires of a quick economic recovery. This mind set which is the main driving force behind the recent trend of increasing mortgage rates.
On Friday comes the release of a couple key economic reports. First will be a reading on inflation with the Consumer Price Index which tracks the monthly change in price of a fixed basket of goods and services purchased by consumers. At the present time, inflation is not a worry and this report is expected to confirm that by showing a month over month increase of 0.1% following last month’s 0.7% increase. When excluding food and energy, due to their volatility, consumer prices are expected to rise 0.2% matching last month. Next will be the release of consumer sentiment which lets market participants know how the consumer is feeling. 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 stock market generally rallies with a better than expected reading while the MBS market would prefer a lower reading. Economists surveyed are expecting this report to show an improvement from last month’s disappointing 66.0 to 68.5. Until last month, this report posted improvements for 4 consecutive months.
So far this morning, MBS are posting very modest gains. This is allowing lenders to offer better pricing today than we saw on Friday. Early reports from fellow mortgage professionals are indicating that the par 30 year conventional rate mortgage is in the 5.25% to 5.5% range for the best qualified consumers. In order to qualify 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 one point loan origination/discount/broker fee.
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