Last week ended on a good note with mortgage backed securities(MBS) rallying into the close on Friday. So far this morning, the upward trend in MBS price(higher price, lower rates) is continuing. The media attributes the rally to global conflict (Iran almost in a state of rebellion and North Korea is well North Korea) and the World Bank announcing lowered forecasts of global growth for this year and next year. AQ and MG say this a function of technical trading biases. Regardless of reasoning, fundamental or technical, market participants are leaning towards risk averse assets ahead of the high risk FOMC announcement. Treasuries are posting healthy gains with the benchmark 10 year note moving from a yield of 3.80 on Friday to currently trade at 3.72. MBS are up 10/32 in price and down a few basis points in yield. No matter the activity in secondary markets today, we must remain defensive as market participants are employing day trading strategies ahead of the FOMC meeting, this implies market conditions can change rather quickly...if you need proof of that look back at last Thursday by clicking HERE.
The week ahead brings us some economic reports but the 2 biggest events will be the FOMC meeting and treasury auctions. Today we get no economic reports to move the markets. Matt and Adam inform me that trading so far is relatively light as investors keep status quo ahead of the FOMC meeting. This will probably result in a somewhat stable day but the possibility of volatility increasing is high because of the lack of volume being traded in the markets, thus be on the defensive.
- The Federal Open Market Committee(FOMC) begins their 2 day conference where they set our country’s monetary policy and give an outlook on the economy. The FOMC meets 8 times per year announcing their policy immediately following the end of the conference on the 2nd day. We do not expect any announcement regarding increased treasury buying but hopefully they reinforce their commitment to low mortgage rates and keeping the Fed fund rate at present level until next year. Some market participants are expecting the Fed to increase the Fed fund rate by year’s end which is one of the factors that has contributed to the recent spike in mortgage rates. We do not expect that to be the case as inflation is still of no concern at present times.
- Existing Home Sales will be announced by the National Association of Realtors. This report totals the number of existing homes, homes which are not new construction, that a sale closed during the prior month. Expectations are for this report to show continued improvement after April’s 2.9% increase. Economists surveyed expect this report to show existing home sales to increase from a annualized pace of 4.68million to 4.85 million. It will be interesting to see if the recent rise in mortgage rates has a negative impact on this report. A lower than expected number would benefit MBS.
- The first of 3 treasury auctions with $40billion in 2 year notes being offered to the highest bidder. Since the supply is already known, the most important aspect will be the demand that is seen. MBS and treasuries tend to benefit with strong demand especially by foreign or indirect investors.
- Mortgage Bankers’ Association Index which tracks the increase or decrease in purchase and refinance activity at major lenders. The recent spike in rates has dramatically reduced the refinance activity while the purchase index has shown some signs of improving. An increasing trend of purchase applications would be a positive for the stock market and negative for MBS. With more home sales, one would expect increased furniture, flooring, appliance, etc… sales thus the reason why the stock market would tend to rally with a better than expected reading.
- Durable Goods Orders which reflects new orders placed with manufactures for goods they produce. Following April’s revised increase in orders of 1.7%(March posted a drop of -2.2%), economists are expecting a decline of -0.5%. If factory orders are increasing, that suggests a belief that sales will be increasing. Why order more goods if you do not expect an increase in demand? So MBS tend to benefit with a lower than expected reading.
- New Home Sales which measures the number of newly constructed homes with a contract for sale. These are not necessarily sales that close only new homes that a contract has been placed. With tougher underwriting standards many more purchase loans are being denied by lenders. April’s release showed a slight rebound to an annualized pace of 352,000. Year over year, that pace is down 34% and to put this number in perspective, at the height of the housing boom during 2006, new home sales where at a annualize pace of well over a million. Economists surveyed are expecting the increasing trend to continue to an annualized pace of 365,000.
- The 2nd treasury auction with $37billion of 5 year notes being offered up to the highest bidder.
- At 2:15 eastern, the FOMC meeting concludes with the release of their ever so important monetary policy statement. This will be the highest impacting event of the week.
- Gross Domestic Product(GDP) which is a measure of the aggregate economic activity and covers every sector of our economy. This is the final reading for Quarter 1 and since it is looking backwards, measuring growth for last quarter, unless far from consensus this should not have a major impact on the markets. Expectations are for a reading of -5.7%.
- Weekly jobless claims which measures the number of Americans that filed for first time unemployment insurance. Also included within this report is the continuing claims number which totals the number of Americans that continue to file for benefits for lack of finding new employments. Last week’s report showed signs of improvement on both counts with the continuing claims falling from 6.85 million to 6.687 million which broke it’s streak of record highs going back to January. Expectations for first time claims are expected to post a slight increase from last week’s 608,000 to 613,000. MBS tend to benefit with worse than expected numbers.
- The last treasury auction for the week with $27billion of 7 year notes going up for the bidding.
- Personal Income and Outlays which gives us a measure of the dollar value of income received and money spent by consumers. A part of this report is a measure on inflation in the form of the Personal Consumption Expenditure(PCE). Personal income posted a nice gain last month of 0.5% and expectations are for continued improvement with a 0.4% increase. If consumers are making more money, that tends to be a sign of future increase in spending so the stock market tends to rally with a better than expected number. Personal outlays are expected to show an increase of 0.3% following last month’s decline of -0.1%. Since consumer spending drives our economy, MBS tend to benefit with a lower than expected reading. The PCE index gives us 2 readings, the headline and the core. The core strips out food and energy from the numbers due to their volatility and is the one that is more closely watched by the Fed. So far this year, inflation is of no concern and this report is expected to continue to show that with the core expected to show a month over month increase in prices of 0.1% following last month’s 0.3% increase. A higher than expected read on inflation would be very bad news of MBS as inflation is the mortal enemy to low mortgage rates.
- Consumer sentiment which is a survey of 500 households conducted by the University of Michigan’s Consumer Survey Center on their own financial conditions and attitudes about the economy. An optimistic consumer is more likely to spend while a pessimistic consumer is more likely to save. This report has shown signs of improvement which has led to the rally in the stock market and the increase in mortgage rates. Expectations are for a reading of 69.7 following last month’s 69.0. The stock market generally benefits with a better than expected reading.
So far this morning, things are shaping up for a decent day. MBS are up on the day, treasury yields are moving lower and the stock market is posting a triple digit decline. We are operating under in a low volume environment so volatility remains a possibility ahead of the Fed statement on Wednesday. With that said, things can change quickly and often for no apparent reason. If you would like to track MBS price movement, you can do that by clicking on Mortgage News Daily Mortgage Rates page.
Early reports from fellow mortgage professionals are indicating that the par 30 year fixed rate mortgage has inched lower to 5.25% to 5.50% for the best qualified consumers. In order to qualify you must have a FICO credit score 740 or higher, a loan to value at 80% or less and pay all closing costs including 1 point loan origination/discount/broker fee. For intraday updates and float/lock alerts, click over to the MBS Commentary blog.