Mortgage rates dodged a bullet yesterday. As you know mortgage rates have basically mirrored the movements of the stock markets recently. As stocks rallied, loan pricing worsened and mortgage rates rose. As stocks sold, loan pricing improved and mortgage rates fell. This relationship has dictated the direction of mortgage rates since early April. While interest rates generally managed to hold their ground against the effects of the "stock lever" yesterday, benchmark yields still rose. There was good news though, although MBS prices declined, most lenders did not reprice for the worse. Unfortunately, falling MBS prices put lenders on the defensive and the reprices for the worse that were due yesterday were passed down in loan pricing this morning. Let's see how the day played out...
Like yesterday, the economic calendar was busy today. This set up the market for volatile movements.
First up: Weekly Jobless Claims. This data is important because it provides a timely read on new developments in the labor market.
Released by the Department of Labor, this report provides three measures of the health of the job market:
1. Initial Jobless Claims: totals the number of Americans who filed for first time unemployment benefits in the previous week
2. Continued Claims: totals the number of Americans who continue to file for benefits due to an inability to find a new job in the previous week
3. Extended and Emergency Benefits: totals the number of Americans who have exhausted their traditional benefits and are now receiving extended and emergency benefits, in the previous week
Since our economy is driven by consumer spending, market participants track employment data to get a sense of future economic momentum. Higher jobless claims imply less consumers have jobs and therefore less money to spend. This is a negative for the economy...but generally helpful in keeping consumer borrowing costs down.
Here are the results:
1. Initial Jobless Claims: +12,000 to 472,000 vs forecasts for a print of 450,000. Last week's report was revised higher from 456,000 to 460,000. WORSE THAN EXPECTED
2. Continued Claims: +88,000 to 4.57million vs. forecasts for a read of 4.640 million. BETTER THAN EXPECTED
3. Extended and Emergency Benefits: -169,000 to 5.22 million
Jobless claims may be lower when compared to the darkest days of the economic downturn, but they're still holding at stubbornly high levels.
Released at the same time was the Consumer Price Index. The CPI measures price changes (inflation or deflation) on a fixed basket of goods and services that consumers purchase. Inflation is a high ranking enemy of interest rates. The Federal Reserve has stated over and over that inflation is not a concern and today's release supports that theory. The report came in right on expectations. Consumer prices fell 0.2% in May following a 0.1% decline in April. When stripping out the more volatile categories, food and energy, consumer prices rose 0.1% vs. a flat read in April. The core rate has risen 0.9% since last May, this is the smallest year over year increase since 1966. Like the PPI report, this data indicates deflation is still a bigger threat to the economic recovery than inflation.
Next came the release of Leading Indicators for May. This is a composite index of 10 economic data points that are believed to be forward looking indicators of economic activity. If the month over month change is positive, it indicates the economy is improving. Most of the components of this report have already been released so the market generally has a limited reaction to the news. Today’s data indicated Leading Indicators rose 0.4%, matching economist forecasts.
The final report of the week was the Philadelphia Federal Reserve's Business Conditions Survey. This survey gives market participants a read on the strength of business conditions in the Philadelphia region. Readings above 0 indicate conditions are improving while readings below 0 indicate business activity is contracting. In May the index rose from 20.2 to 21.4, this was the highest index read in more than 3 years, but today’s report was extremely disappointing. The Business Conditions" index was 8.0 in June vs. expectations for a print of 20.0. This is the lowest index level since last August.
Last but not least, the Treasury Department announced the terms of next week's round of Treasury auctions. When our government does not have enough cash on hand to pay for current spending outlays, they borrow funds in the debt market by issuing Treasury bills, notes, and bonds. The added supply of debt on the market can pressure yields and mortgage rates higher, however the ongoing European debt crisis has helped create a "flight to safety” bid which has eased the pressures that can be put on interest rates by adding debt supply in the market. The Treasury Department announced it will sell $40billion 2 year notes next Tuesday, $38 billion 5-year notes next Wednesday, and $30 billion 7-year notes next Thursday. These offering amounts are $2billion less for 2-year notes and 5 year notes, and $1billion less of 7 year notes than the prior auction of similar securities. Less supply of debt is positive news for treasury yields and mortgage rates.
It was another volatile day in the markets. Stocks traded in a wide range before eventually closing in positive territory. Interest rates seem to now be ignoring the movements of stocks as benchmark Treasuries rallied this morning after Jobless Claims data and never looked back. While mortgages were slow to keep pace with the Treasury rally, they eventually caught up and most lenders repriced for the better.
After the reprices for the better, total consumer borrowing cost are improved vs. the loan pricing offered by lenders yesterday. The par 30 year fixed conventional mortgage rate continues to hold in the 4.50% to 4.75% range for well qualified consumers. Loan pricing improvements should show up via cheaper closing costs (discount points. larger lender credit). To secure a par interest rate on a conventional mortgage you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including an estimated one point loan origination/discount/broker fee.