Price of mortgage-backed securities progressively moved higher as the day wore on yesterday, after all was said and done loses from the prior day were recovered.   The improvement in price allowed most lenders to reprice for the better by day’s end.  Helping fuel the turnaround was the stock market moving off its highs of the day and benchmark treasury yields moving lower. The 10yr Treasury note closing at a yield of 3.54 after hitting 3.60 earlier in the day.    Most of the fluctuations in financial markets appeared to traders setting themselves up for today: the biggest impacting report of the month, the Employment Situation report.

The U.S. Department of Labor released their monthly Employment Situation report this morning. The Non-farm payrolls report serves as the benchmark barometer for the health of the labor market.  A strong economy is very dependent on a healthy labor market as consumers fuel economic growth. If consumers are without jobs, they are unlikely to spend which stunts economic growth.

Last month’s report came in much better than expectations regarding the number of jobs lost, 345,000 versus economist expectations for a loss of 530,000 jobs.  This morning the opposite occurred as job losses were much higher than expected. In June 467,000 jobs were lost, when only 360,000 were expected!  Last month’s number was however revised slightly better to 322,000. 

The unemployment rate came in slightly lower at 9.5% when expectations called for 9.6%.  Also as part of the employment situation we get a measure on consumer income.  First, the hourly work week declined to a 27 year low of 33.0 hours versus economist expectations for 33.2 hours.  This means that on average, people are working less hours which equates to a smaller pay check which would lead to less consumer spending, bad for the economy.  Lastly, the hourly wages came in lower than expectations at a 0.0% monthly increase against expectations of a .2% increase.  With wages flat, there is no concern of wage based inflation at the moment.  So, people are working less hours and income is flat. Overall this report was bad for stocks, good for bonds, and therefore a positive event for MBS. 

Mitigating somewhat the positive effect of the employment situation report as it relates to fixed income is a better than expected weekly jobless claims.   The U.S. Department of Labor released  weekly jobless claims data which indicated that, in the last week, 614,000 Americans filed for first time unemployment benefits. This was better than the consensus forecast for 619,000 new claims.  Last week’s data was however revised slightly worse from 627,000 to 630,000.  The continuing claims read, which totals the number of Americans that continue to file due to lack of finding a new job, showed a small improvement from last month coming in at 6.702 million from 6.738 million the prior week. 

Following the release of both employment reports, Treasuries and MBS both moved higher in price.   Currently the benchmark 10 year Treasury note has moved to a yield of 3.50 after closing at 3.54 yesterday and "rate sheet influential" MBS coupons are up 6  ticks in price or roughly .25 discount points. As has been the case lately, for MBS to continue to improve they need their bigger brother(treasuries) to continue to move lower in yield.  Unfortunately, AQ and Matt inform me that until the some of the economic unknowns are clarified, it will be tough for mortgage rates to move much lower. 

The last piece of economic data today is Factory Orders which totals the dollar level of new orders for durable and non durable goods.  An increasing trend is a positive sign of economic growth which would benefit stocks at the expense of fixed income.  This report will take a back seat to the other data already released.   April’s report showed a 0.7% increase and expectations for May is a further increase of 1.4%.   With the release, factory orders posted a month over month increase of 1.2% which is the biggest gain since June of 2008. 

If you have been floating your rate, we have crossed a major hurdle this morning but are still in search of direction. This means every economic report ,earnings statement, and headline news will effect financial markets.  The only other scheduled event today is the announcement by the Treasury Department of the amount of treasuries to be auctioned next week.   When our government does not have the cash to pay for spending, they issue treasuries to borrow the money.  Next week the Treasury will auction $37billion 3 year notes, $19billion 10 year notes, $11billion in 30 year bonds, and $8bn in 10 yr TIPS notes.  The added supply will apply pressure on treasuries to move higher in yield. Just remember much of the economic outlook remains unknown, therefore financial markets will be looking for guidance from any source.  This implies markets will be volatile at times.

Early reports from fellow mortgage professionals are indicating that rates are improved from yesterday morning.  The par 30 year fixed rate loan is in the 5.00% to 5.25% range for the best qualified consumers.   If you are still floating your rate, hold off on locking this morning but make sure you check back with the  MBS Commentary blog for updates.  MBS have continued to improve and some lenders may reprice for the better.  However, with a 3 day weekend ahead of us, it is not unusual for lenders to be reluctant to pass along gains as anything can happen over the weekend.

Tomorrow the markets will be closed in observance of the 4^th of July.  My next update will come to you on Monday morning.  I hope everybody has a safe holiday weekend.  Hopefully you will be able to spend time with friends and family at a good ol' American cookout.  I sure am looking forward to that myself.