Following the release of the minutes from the last Federal Open Market Committee meeting, mortgage backed securities (MBS) managed to move higher in price which results in lower consumer borrowing costs.   Most lenders repriced for the better improving pricing by .25 in discount.  If you would like to see a graph of the action following the release of the statement, Click here.   From early morning until just before the release of the statement, MBS held very stable but you will notice a move higher in price following the release which lead to the reprice for the better from lenders.

The Fed minutes gave us several tidbits of information which led to the stock market changing course and moving lower which helped to bring the flow of money into MBS and treasuries.  First, the Fed lowered their forecast for GDP growth in 2009 from the prior forecast of -1.3 to -0.5 to a worse range of -2.0 to -1.3.  This forecast contradicts much of the optimism that investors have been feeling about our economy.   Next, they also increased the forecast for unemployment.  Initially, they forecasted unemployment to reach a high of 8.5% to 8.8% but the new forecast was revised to 9.2% to 9.6%.  Not the best news for the economy.  Since consumer spending makes up the vast majority of our economic growth it will be difficult for our economy to grow with unemployment increasing.   If you don’t have a job, do you think you will increase spending?  The only somewhat troubling aspect of the minutes is the revised forecast for inflation.  Initial forecast was for the Personal Consumption Expenditure, which is the Fed’s favorite gauge for inflation, to be in a range from 0.9% to 1.1%; but the new forecast calls for core PCE to be between 1.0% to 1.5% which is still well within the Fed’s comfort zone.  All in all, the Fed minutes are very friendly for fixed income investments which include MBS. 

Today, we are getting several economic reports to digest which will help determine the flow of investor money between equities and fixed income.

First out this morning is the weekly jobless claims which reports the number of Americans that have filed for first time unemployment insurance for the week of May 16^th.   Jobless claims fell 12,000 from the prior week’s revised 643,000, but continue to show no signs of easing with 631,000 people filing last week versus expectations of 630,000.  Continuing claims, which reports the number of Americans to continue to file for unemployment insurance due to the lack of finding a job, set another record at 6.662 million.    With GM possibly filing for bankruptcy in the near future which would result in major layoffs, the employment situation continues to be troubling.   Following the release of the numbers, dow futures have moved lower and MBS have started to move higher. 

Next, we received the release of the monthly Philadelphia Fed Survey which gives investors a reading on the strength of manufacturing in the Philadelphia area.  A strong manufacturing segment of our economy will translate into higher corporate profits which is good for the equities market; but can lead to inflation which is not so good for MBS.   Last month’s report showed an improvement coming in 10 points better at -24.4.  This month’s report came in very close to last month’s posting a -22.6 vs expectations of -20.0, signaling that the manufacturing segment is continuing to contract.  A negative number shows a contracting segment while a positive number shows a growing segment.  Since the release, the stock market has moved lower and MBS are holding steady.

Last and probably least important to the MBS market, is the release of the Leading Indicators report which gives us an idea of the current economic situation and predicts turning points in our economy.   Economists’ surveyed forecasted this report to come in at 1.0% following last month’s -0.3% which offered no signal of a rebound to our economy.  The report came in right no expectations at 1.0% which does signal turnaround in our economy, but the Philadelphia index contradicts this.   

Treasury Secretary Tim Geithner continues with another day of testimony on Capitol Hill.   Today he is speaking and answering questions in front of the Senate Banking Committee on the TARP program and other financial issues.   As always, investors will be paying attention to what he says and how he answers questions posed to him by the senators on this committee.  MBS Commentary blog will bring you the highlights once his testimony is complete.

We are also getting the announcement from the Treasury department regarding the amount of new treasuries being issued to fund the government.  The added supply will place pressure on treasuries and MBS.  The MBS Commentary blog will have complete coverage after the release at 11 am eastern.   The new supply has already been baked into the current pricing so we shouldn’t be too negatively impacted unless the new supply exceeds $100 billion or so.   

Early reports from fellow mortgage professionals are indicating mortgage rates to be slightly better than yesterday.  The best qualified consumers should be able to get a 30 year fixed rate mortgage in the 4.5% to 4.75% range.   In order to qualify, you must have a FICO credit score 740 or higher, a loan to value 80% or less and pay all closing costs including 1 point loan origination/discount/broker fee.   With a shortened trading day tomorrow and looking at past history, Friday’s have usually been a bad day for MBS resulting in higher rates.   To make matters even worse, we have a holiday on Monday which might cause investors to move their investment positions to cash by selling their fixed income investments.  If you are closing in the near future, under 2 weeks, you might want to consider locking today.  We are seeing as good of rates today as we have seen in quite a while.   Each time mortgage rates have approached these levels, they remained there for a short period than moved higher.   So fence sitters, waiting for lower rates, it time to move.   Plus, how could anybody be disappointed with a 30 year fixed rate mortgage at 4.5%?