Up and Down Day in the Markets

Mortgage rates came under considerable pressure yesterday following better than expected economic data. Mortgage backed securities fell in early morning trading which resulted in lenders increasing borrowing costs. As the day progressed, stocks which were posting strong gains after the economic data, reversed course to close in the red. As stocks fell, money flowed into bonds causing MBS prices to rise leading to lenders repricing for the better.

Our data started today with Personal Income and Outlays. This monthly report provides market watchers with a view into the strength of consumers by tracking what Americans earn and what they spend. A stronger consumer benefits the stock market while a weaker consumer helps keep mortgage rates low.

This data contains three separate reads on the health of consumers.
1. Personal Income: the monthly change in income that households receive from all sources (before taxes).
2. Personal Outlays (consumer spending): the monthly change in the amount of money consumers are spending on durable and non-durable goods and services.
3. Personal Savings Rate: the monthly change in the amount of money consumers are saving instead of spending

From the Bureau of Economic Analysis:
1. Personal Income: Increased 0.5% in August, beating estimates of only a .3% increase. This is the largest increase since December 2009. Some of the increase is being attributed to the resumption of extended and emergency unemployment benefits when Congress passed legislation in late July.
2. Personal Outlays: Increased 0.4% in August, matching last month and expectations.
3. Personal Savings: Rose to 5.8%, from 5.7% in July. Higher savings rate might indicate less consumer confidence in the economy.

This data also provides a read on consumer level price inflation: the PCE price index. The overall PCE index rose 0.2% in August matching last month’s increase. The core rate, which strips out food and energy prices due to their volatility, also matched last month with a 0.1% increase. Both measures matched economists’ expectations. Year over year, headline PCE rose from 1.4% in July to 1.5% in August while the core rate held steady at 1.4%. Inflation continues to be of no concern and the price increases will help ease any concerns of deflation.

Next to be released: Consumer Sentiment. The Reuter’s/University of Michigan’s Consumer Center surveys 500 households on their attitudes on the economy and personal financial status. Market participants track consumer attitudes to gauge future economic momentum. An optimistic consumer is more likely to spend, this benefits stock markets. A pessimistic consumer is more likely to save, which supports low yields in the bond market. Low yields in the bond market allow lenders to keep mortgage rates low. Since peaking in June with a reading over 75, this index has been falling. September’s mid-month index fell to 66.6. Today’s final release for September indicates consumers to be more optimist than thought registering a 68.2.

Our final report looks at the strength of the manufacturing sector. The ISM Manufacturing Index is based on a survey conducted by the Institute for Supply Management. It covers more than 300 manufacturing firms and reports on their feedback of business conditions. Readings above 50 indicate economic expansion or improving conditions while readings below 50 indicate economic contraction or deteriorating conditions. The ISM index has held above 50 since the Summer of 2009 with the read last month coming in at a better than expected 56.3. However, the recent trend has been a decline. ISM peaked in April with a print of 60.4 and since has been moving lower. The report indicated business conditions came in basically in line with expectations at 54.4.

Lender rate sheets are similar to what we had yesterday afternoon following the reprices. The par 30 year conventional rate mortgage remains in the 4.25% to 4.50% range for well qualified consumers with a few lenders offering 4.125%. 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.

Same lock advice as the last few days. If you have time before your closing, more than 2 weeks, floating is acceptable. MBS continue to hold near the middle of the range which we have used to give lock/float advice. If closing within the next two weeks, you should consider locking today as consumer borrowing costs are very near all time lows.

Have a great weekend.