After the brutal beating over the last week and a half, mortgage-backed securities are looking for direction.  In total, since “Black Wednesday” (5/27), mortgage rates have risen from a range of 4.5% to 4.75% to a range between 5.250% to 5.625%,  depending on individual borrower characteristics.   The main driving force behind this move higher in mortgage rates is the belief that our economy is on the rebound. This perception adds emphasis to each scheduled economic report as data sets will either reinforce this economic turnaround or provide evidence of a stabilization with a long road ahead.   Optimistic investors will jump at any hint of recovery for fear of missing the boat and higher returns that the stock market can bring.  So, let’s look at the week ahead.

The week begins slow as Monday brings no  money moving economic reports. The lack of data give the market an opportunity to reflect on the past two week. As always we have to keep a watch out for any potential tape bombs that might affect sentiment in the stock market and of course MBS’s closest relative, treasuries.  We refer to unexpected news reports as tape bombs, in case you didn’t know. 

Tuesday will be very similar to today with no high impacting reports.   We do get some weekly reports on retail sales, the ICSC-Goldman Store Sales and the Redbook, but these reports are historically overlooked by the broader marketplace.   The most significant event of the day will be the first of three treasury auctions this week . $35billion 3 year treasury notes will be auctioned at 1pm.   With the supply already known, these auctions generally do not move the market unless demand falls out of expectations to the top or bottom side. AQ and MG tell me they have been witnessing a heavy amount of pre-auction positioning, which means there is a higher chance for unexplained shifts in interest rates after the auctions.  

Wednesday

-           Mortgage Bankers’ Association Purchase Applications index which tracks the number of purchase and refinance applications at mortgage lenders.  This report helps investors gauge if housing activity is trending higher or lower.  Higher demand in housing is generally seen as a positive economic indicator since you would have to feel pretty confident in your own personal finances and the current state of the economy to buy a new home.   The purchase activity has been flat all year but last week’s report did post a nice gain adding fuel to the economic recovery fire.   The refinance activity posted a decline as a result of the increasing mortgage rates.

-          International Trade report which measures the difference between imports and exports.   Last month’s report showed the trade balance widening to $-27.6billion and further widening is expected this time mainly due to the dramatic rise in oil prices.  Expectations call for a trade deficit of $-28.5b.

-          Second treasury auction for the week,  $19billion 10 year treasury notes to be auctioned.  Poor demand will push treasury yields higher which will also apply pressure on mortgage rates to follow.

Thursday

-          Retail Sales, which measures the total receipts at stores that sell durable and non durable goods.  Since consumer spending account for 2/3rds of our economy this report is a key indicator of economic growth.  Higher consumer spending equates to higher corporate profits and can lead to higher inflation.  MBS usually benefit from a lower than expected reading.  Last month’s report showed overall retail sales falling 0.4% from the prior month and expectations call for a sharp turnaround with a 0.6% increase.  When excluding auto sales, expectations call for a 0.3% increase following last month’s 0.5% decline.   This report will be the highest impacting report for the week.

-          Weekly Jobless claims, which totals the number of Americans who filed for first time unemployment benefits.  Expectations call for 625,000 following last week’s improved level of 621,000.  As part of this report we get continuing claims which total the number of Americans that continue to file due lack of finding a new job.  Last week’s report showed an improvement in continuing claims breaking the streak of record claims that started in January of this year dropping 15,000 to 6.735 million.  If initial claims and continuing claims continue to show improvement, that will add fuel to the economic recovery fire which will place pressure on mortgage rates to move higher.   MBS should benefit with a higher than expected reading. 

-          Business Inventories report which totals the dollar amount of inventories held by manufacturers, wholesalers and retailers.   Inventory levels tend to drop when economic activity is weak since demand falls during a weak economy.   Rising inventory levels is a sign of economic optimism that sales will be increasing.  MBS usually benefit for a lower reading.    Last month, inventory levels showed a -1.0% month over month decline and expectations call for another drop of -0.8%.

-          The last of the treasury auctions will be held, with the Treasury Department auctioning $11billion in 30 year bonds.  Low demand will apply pressure on treasury and mortgage yields to move higher.

Friday

-          Import and Export Prices which is a gauge of inflation.  Since inflation is the mortal enemy of mortgage rates, MBS benefit when this report indicates less inflationary pressures.   Last month’s report showed a sharp increase in overall import prices mainly due to the sharp rise in energy prices, but when excluding oil, prices fell 0.4%.    Export prices rose 0.5% following the prior months -0.6% decline. 

-          Consumer sentiment which is a survey conducted by the University of Michigan’s Consumer Survey Center and is a survey of 500 households on their financial conditions and attitude about the economy.  An optimistic consumer is more likely to spend while a pessimistic consumer is more likely to save.   The stock market tends to rally when this report comes in better than expected while MBS benefit with a lower reading.   Last month’s report showed a sharp move higher helping to stoke the economic recovery fire, and expectations are calling for continued improvement with a 70.0 reading following last month’s 68.7.   It will be interesting to see if the sharp move higher in gasoline prices will hurt the consumers outlook.

Lastly, the Fed has remained quiet since mortgage rates began moving higher. Increasing mortgage rates will make it more difficult for housing to stabilize (one of the FOMC's main goals)  so it will be interesting to see if Ben Bernanke and the Fed have any other tricks up their sleeve.  AQ and MG are both thinking some sort of new Federal Reserve lending/swap window will be opened. What do you think the Fed will do to fight higher borrowing costs?

So far this morning, downward price pressure continues on MBS.  As MBS move lower in price, mortgage rates move higher.   Early reports from fellow mortgage professionals are indicating that the par 30 year fixed rate mortgage is in the 5.250% to 5.625% range for the best qualified consumers.  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. Currently the stock market is moving  lower which would usually result in some money flowing into the MBS market.  As of yet, that is not happening.  After MBS opened in positive terroritory, they have since given back all their gains and moved into negative territory.

For intraday updates on the movement of MBS, click here for MBS pricing and here for written MBS Commentary.