The Range Breaks, Mortgage Rates Rise

The range which has held mortgage rates relatively stable over the last month or so finally broke to the bottom side yesterday. Despite weakness in stocks, the fixed income sector came under considerable pressure with the benchmark 10 year treasury note rising from 3.40% to 3.50%. This led mortgage backed securities prices lower forcing lenders to reprice for the worse. MBS closed at their lowest level since the end of December. At the open this morning, MBS fell further which will worsen rate sheets this morning unless the economic data is worse than expected.

We have three data releases and a speech from Fed Chairman Bernanke today that will impact the markets. At 8:30am we received two of those reports, weekly Jobless Claims and Productivity and Costs.

First let’s take a look at the weekly Jobless Claims. 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. Last week’s report indicated a steep decline in claims following a couple weeks worth of increasing claims.

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: -42,000 to 415,000 vs estimates of 420,000. Prior week was revised worse to show 3,000 more claims. Weekly claims are quite volatile so market participants track the 4 week moving average which rose 1,000 to 430,500 from a revised 429,500.
- Continued Claims: -84,000 to 3.925million vs estimates of 3.95million. Prior week’s data revised worse from 3.991million to 4.009million.
- Extended and Emergency Benefits: -68,000 to 4.55million. The decline is being attributed to many people losing benefits and falling off the roles.

Released at the same time was the Productivity and Costs Report for the fourth quarter of last 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 rose 2.6%, higher than the 2.0% rise that was expected. Third quarter productivity was revised better from 2.3% to 2.4%. Year over year, productivity improved to 3.6%, the highest level since 2002. Unit labor costs fell 0.6% vs estimates of a 0.3% rise which continues to indicate that there is no wage based inflation, very good news for bonds. Year over year, labor costs fell 1.5%.

Higher productivity and lower labor costs is positive news for both stocks and bonds but not great news for those without a job. Employers are squeezing more work from the current work force instead of hiring new employees. This is partly due to workers fearing losing their job, so they continue to work harder and harder. Additionally, employers are using more technology to increase efficiency eliminating some jobs permanently.

Not much reaction from the markets following the release of the two early morning releases. MBS are still below yesterday’s close price and the 10 year treasury note has risen to 3.51%.

Our other data release was the ISM Non-Manufacturing Index. This report gives us a look into the strength of the non manufacturing sector of our economy. Readings above 50 indicate expanding or improving conditions while readings below 50 indicate contraction or worsening conditions. This report is a lower tier report and historically has had minimal effect on the overall market sentiment. Last month’s report rose from the prior month to 57.1, the highest reading since July 2007.

The index indicated the non-manufacturing sector of our economy improved to a print of 59.4, beating expectations of 57.2. This continues the streak of improving non-manufacturing conditions to five months. The ISM Manufacturing index released on Tuesday also showed much better than expected improvement in business conditions.

Following the release of all data, stocks are under pressure despite the positive economic data. It appears the Egypt crisis is wearing on the markets and people are getting worried the crisis may spread to other countries. The benchmark 10 year treasury note briefly touched 3.54% following the ISM report but has since started to move lower and currently sits around 3.51%. MBS are off the lows of the day but still below yesterday’s close.

At 12:30am, Federal Reserve Chairman Ben Bernanke will deliver a speech titled "The Economic Outlook and Macroeconomic Policies" at the National Press Club Luncheon, in Washington DC. Market participants will pay close attention to what he says for any hints of future monetary policy and his outlook for economic growth. His words can move the markets.

Lender rate sheets are worse this morning. The par 30 year conventional rate mortgage has risen to the 4.875% to 5.125% range for well qualified consumers. There are a few lenders that continue to offer 4.75%. 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. For consumers with lower FICO scores or higher loan to values, you should consider an FHA loan which offers similar rates but with higher costs.

Tomorrow we get the Employment Situation Report which will impact the rates market one way or the other. My gut is telling me that it will be worse than expected and we see some kind of a rally tomorrow. However, if it is close or better than expected, rates could get worse very quickly. If you cannot afford the risk of a higher rate, you should lock later today. It is always better to lock when you should have floated than it is to float when you should have locked.