This week is action packed with economic reports with the biggest impacting reports coming Friday.
- Personal Income and Spending, economists expecting a -0.4% and -0.9% respectively. The actual number came in at a -.2% drop but the consumer spending part of the report shows a -1.0% drop in consumer spending. This report is an important gauge of future economic activity. If people’s income is on the rise they are more likely to spend money which is good for the economy and leads to economic expansion and possibly future inflation. The biggest enemy to mortgage rates is higher inflation so a weaker then expected report is generally positive for mortgage backed securities.
- Construction Spending, economist’s expecting a -0.9%.
- ISM Index, economist’s expecting a 32.0 reading after last months 32.4. This is a survey of manufacturers that gives investor’s insight into the strength of our manufacturing segment of our economy. Readings above 50 indicate expansion and readings below 50 indicate a contracting economy. A expanding economy generally leads to higher inflation and higher mortgage rates.
- Pending Home Sales Index, economist’s expecting a 0.0% reading after last months -4.0%. The National Association of Realtors developed the pending home sales index as a leading indicator of housing activity. A pending sale is when a contract has been signed but the purchase has not closed yet. So, this report is a gauge into future demand for housing and economic activity.
- ISM Services Index, economist’s expecting 39.0 after last months 40.1. This report is similar to the ISM Index we get today, but this is a non manufacturing survey. Readings above 50 indicate an expanding economy and readings below 50 indicate a contracting economy.
- Productivity, economist’s expecting a 1.0% increase. Productivity measures the growth of labor efficiency in producing the economy's goods and services. Higher productivity allows employers to pay employees more money without the threat of wage inflation. A better then expected reading is seen as a positive for mortgage backed securities.
- Jobless claims, economist’s expecting 585,000 after last months 589,000. A higher then expected number is seen as a positive for mbs. With more people unemployed, the threat of wage based inflation is subdued. Employers do not have to pay higher wages to attract new employees during high unemployment times as people will be happy just to have a job.
- Factory Orders, economist’s expecting a -2.5% drop after last months -4.6% drop. A higher then expected number shows that factories are ordering large products that are expected to last more then a couple years. This gives investors insight into future economic activitly.
- Non farm payrolls, economist’s expecting a drop of -500,000 after last months -524,000. A worse then expected number is generally seen as a positive for mbs.
- Unemployment rate, economist’s expecting a 7.4% reading after last months 7.2%. A higher then expected number is generally a positive for mbs.
So far this morning, mortgage backed securities are up on the day mainly due to the Personal Income and Spending report which showed consumer spending down more then expected. Also imbedded in the Personal Income and Spending report is the personal consumption expenditure which measures inflation on the consumer level. The report showed that consumer inflation came in at a year over year increase of 1.7%. The Federal Reserve would like to see this number under 2%, so with this report it is further confirmation that inflation is of no concern right now. We still have not made back all the losses from last week, but I suspect we should continue to see lenders conventional rate sheets priced anywhere from 4.625% to 5.25% and government rates being about .25% higher. Lenders needing more loans will price a little more aggressive and lenders still trying to catch up will price more conservatively. We still do have 2 more reports to be released today and historically speaking the ISM index has been a market mover. This report will be released in about an hour and a lower number would be seen as a positive for mortgage backed securities. It appears again that mbs and treasuries will track well again today. The 10yr Treasury which peaked last week at a yield of 2.86% is currently rallying and is at a yield of 2.79. Hopefully, this trend will continue throughout the day.
To the readers who left comments saying the Cards would win, HAHAHAHAHAH, Go Steelers!!