Weak Data Improves Mortgage Rates
Posted 08-14-2009 at 08:26 AM by VictorBurek
Following weaker than expected data on retail sales and higher unemployment claims, consumer borrowing costs decreased yesterday. Mortgage backed securities managed to continue the recent trend of the last several days of moving higher in price which reduces mortgage rates. Keeping this trend alive was a successful auction of 30 year treasury bonds which saw above average demand. Following the auction many lenders offered reprices for the better as the gains continued to close.
We do have some additional economic data being released today that can have an impact on the markets. The first report this morning is the Consumer Price Index (CPI) which is a measure of the average price level of a fixed basket of goods and services purchased by consumers. In other words, this report lets market participants know if the price of items consumers buy are increasing or decreasing. Increasing prices are necessary for healthy economic growth but only to a certain extent. If prices rise too fast it creates inflation which is the biggest enemy to low interest rates. We get two reads from the CPI report, the headline number and the core. Core CPI removes food and energy from the numbers as those commodities are very volatile. All recent reports indicate that inflation is not a immediate concern to our economy which is also supported by the most recent Fed statement.
The report shows that both the headline and the core CPI came in better than expected at a month over month reading of 0.0% vs 0.1% while the core came in at 0.1% vs 0.2% expected. Year over year, the headline CPI has posted the largest decline since 1950 at -2.1%! The core rate year over year fell from last month’s 1.7% to 1.5%. So, we have yet another report confirming inflation is not a current threat to the economy. Following the release of this report, MBS have managed to continue to move higher continuing the recent trend.
Next out this morning is the Industrial Production numbers which shows how much factories, mines and utilities are producing. An increasing trend of production of goods suggests that producers feel economic activity will be increasing which benefits stocks. The MBS market, which prefers slow steady economic growth usually benefits with a lower reading. Recent reports have shown that industrial production is improving but still at very anemic levels. June’s report showed a decline of only 0.4% following the prior month’s reading of a 1.2% drop. Economists surveyed expect measurable improvement with a 0.6% increase. The report shows that industrial production for July posted a nice gain of 0.5% basically in line with economists’ expectations. Following the release, no reaction from the markets.
Our last piece of economic data before we can start our weekend is the Consumer Sentiment report. This is a survey conducted by the University of Michigan’s Consumer Survey Center were they question 500 households on their personal financial conditions and attitudes about the economy. Since an optimistic consumer is more likely to spend, the stock market likes to see an increasing trend in this report. A pessimistic consumer is more likely to save money which generally is bad for the overall economy but helps to keep mortgage rates low. Recent reports have shown steady improvement; however, last month’s report came in weaker than expected reversing that trend coming in at 66.0 following June’s 70.8 reading which was the highest reading for consumer sentiment since early 2008. The report indicates that consumer sentiment is much worse than expected coming in at 63.2 vs estimates of 68.5. This is the second month in a row of declining consumer sentiment which goes against the green shoots theorists who believe we are in for a quick economic recovery. Following the release of this report, stocks have moved considerably lower while MBS inched higher.
Early reports from fellow mortgage professionals are indicating that rates continue to improve. The par 30 year conventional rate mortgage has fallen to the 5.0% to 5.25% range for the best qualified consumers. In order to secure a par rate 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. You can elect to pay less in closing costs, but your mortgage rate will move higher. Think about it as a see-saw, the higher the costs, the lower the rate and vice versa.
If you are currently floating an interest rate, continue to float for the day but do consider locking by day’s end. We are approaching 4.875% as par and each time we have hit those levels in the recent months they did not remain there very long. The economic data this morning was quite friendly to MBS. In addition, with the stock market posting a 3 digit decline this morning, there is a reasonably good chance that money flows into the fixed income sector which might lead to reprices for the better later in the day. Floating over a weekend is always risky as events can happen(we call this tape bombs) that can change investor sentiment quickly which means we must be highly defensive.
We do have some additional economic data being released today that can have an impact on the markets. The first report this morning is the Consumer Price Index (CPI) which is a measure of the average price level of a fixed basket of goods and services purchased by consumers. In other words, this report lets market participants know if the price of items consumers buy are increasing or decreasing. Increasing prices are necessary for healthy economic growth but only to a certain extent. If prices rise too fast it creates inflation which is the biggest enemy to low interest rates. We get two reads from the CPI report, the headline number and the core. Core CPI removes food and energy from the numbers as those commodities are very volatile. All recent reports indicate that inflation is not a immediate concern to our economy which is also supported by the most recent Fed statement.
The report shows that both the headline and the core CPI came in better than expected at a month over month reading of 0.0% vs 0.1% while the core came in at 0.1% vs 0.2% expected. Year over year, the headline CPI has posted the largest decline since 1950 at -2.1%! The core rate year over year fell from last month’s 1.7% to 1.5%. So, we have yet another report confirming inflation is not a current threat to the economy. Following the release of this report, MBS have managed to continue to move higher continuing the recent trend.
Next out this morning is the Industrial Production numbers which shows how much factories, mines and utilities are producing. An increasing trend of production of goods suggests that producers feel economic activity will be increasing which benefits stocks. The MBS market, which prefers slow steady economic growth usually benefits with a lower reading. Recent reports have shown that industrial production is improving but still at very anemic levels. June’s report showed a decline of only 0.4% following the prior month’s reading of a 1.2% drop. Economists surveyed expect measurable improvement with a 0.6% increase. The report shows that industrial production for July posted a nice gain of 0.5% basically in line with economists’ expectations. Following the release, no reaction from the markets.
Our last piece of economic data before we can start our weekend is the Consumer Sentiment report. This is a survey conducted by the University of Michigan’s Consumer Survey Center were they question 500 households on their personal financial conditions and attitudes about the economy. Since an optimistic consumer is more likely to spend, the stock market likes to see an increasing trend in this report. A pessimistic consumer is more likely to save money which generally is bad for the overall economy but helps to keep mortgage rates low. Recent reports have shown steady improvement; however, last month’s report came in weaker than expected reversing that trend coming in at 66.0 following June’s 70.8 reading which was the highest reading for consumer sentiment since early 2008. The report indicates that consumer sentiment is much worse than expected coming in at 63.2 vs estimates of 68.5. This is the second month in a row of declining consumer sentiment which goes against the green shoots theorists who believe we are in for a quick economic recovery. Following the release of this report, stocks have moved considerably lower while MBS inched higher.
Early reports from fellow mortgage professionals are indicating that rates continue to improve. The par 30 year conventional rate mortgage has fallen to the 5.0% to 5.25% range for the best qualified consumers. In order to secure a par rate 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. You can elect to pay less in closing costs, but your mortgage rate will move higher. Think about it as a see-saw, the higher the costs, the lower the rate and vice versa.
If you are currently floating an interest rate, continue to float for the day but do consider locking by day’s end. We are approaching 4.875% as par and each time we have hit those levels in the recent months they did not remain there very long. The economic data this morning was quite friendly to MBS. In addition, with the stock market posting a 3 digit decline this morning, there is a reasonably good chance that money flows into the fixed income sector which might lead to reprices for the better later in the day. Floating over a weekend is always risky as events can happen(we call this tape bombs) that can change investor sentiment quickly which means we must be highly defensive.
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