Following weaker than expected data on retail sales and higher unemployment claims, consumer borrowing costs declined yesterday. Led by a post auction Treasury rally, price of mortgage backed securities moved higher yesterday, giving lenders the opportunity to drop mortgage rates a few basis points. So far today this trend is continuing.
We did have some economic data being released today that had an impact on the markets. The first report this morning was the Consumer Price Index (CPI). This data measures the average price level of a fixed basket of goods and services purchased by consumers. In other words, this report lets market participants know if the price of items which consumers buy are increasing or decreasing. Increasing prices are necessary for healthy economic growth but only to a certain extent. If prices rise too fast it creates inflation which is the biggest enemy to low interest rates. We get two reads from the CPI report, the headline number and the core. Core CPI removes food and energy from the numbers as those commodities are very volatile.
All recent reports indicate that inflation is not a immediate concern to our economy which is also supported by the most recent Fed statement. This was again the case today with both the headline and the core CPI coming in slightly better than expected. Today's numbers bring the year over year inflation rate to it's lowest level since 1950. READ MND STORY
This report confirmed that inflation is generally not a current concern to mortgage investors which spurred moderate gains in MBS prices. Additional data, added to the positivity.
One such piece of data was the Consumer Sentiment report. This is a survey conducted by the University of Michigan’s Consumer Survey Center were they question 500 households on their personal financial conditions and attitudes about the economy. Since an optimistic consumer is more likely to spend, the stock market likes to see an increasing trend in this report. A pessimistic consumer is more likely to save money which generally is bad for the overall economy but helps to keep mortgage rates low. Recent reports have shown steady improvement; but with last month’s worse-than-expected results, today was a bit of an unknown. When surveyed for predictions, Economists voted that last month would be an outlier as they predicted an improved reading for today. But instead of the expected reversal, today's report shows a second straight month of declines with the index moving roughly 3% lower. Somewhat of a slap in the face to rapid economic recovery camp, this data has been a key factor pushing stocks lower and bonds higher this AM. READ MND STORY
Our last piece of economic data before we can start our weekend is the Industrial Production Report, which shows how much factories, mines and utilities are producing. An increasing trend of production of goods suggests that producers feel economic activity will be increasing which benefits stocks. The MBS market, which prefers slow steady economic growth usually benefits with a lower reading. Recent reports have shown a decellerating contraction in activity with the forecast for today finally calling for the tides to turn toward expansion. Although this was indeed the case, it was so close to the consensus that any impact of the improvement had already been priced into recent stock gains as the markets showed no discernable reaction after the release. READ MND STORY
Early reports from fellow mortgage professionals are indicating that rates continue to improve. The par 30 year conventional rate mortgage has fallen to the 5.0% to 5.25% range for the best qualified consumers. In order to secure a par rate 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 one point loan origination/discount/broker fee. You can elect to pay less in closing costs, but your mortgage rate will move higher. Think about it as a see-saw, the higher the costs, the lower the rate and vice versa.
If you are currently floating an interest rate, continue to float for the day but do consider locking by day’s end. We are approaching 4.875% as par and each time we have hit those levels in the recent months they did not remain there very long. The economic data this morning was quite friendly to MBS. In addition, with the stock market posting a 3 digit decline this morning, there is a reasonably good chance that working money flows into the fixed income sector which might lead to reprices for the better later in the day.
Floating over a weekend is always risky as events can happen(we call this tape bombs) that can change investor sentiment quickly which means we must be highly defensive. Check in with Matt and AQ on the MBS Commentary blog throughout the day for updates to MBS pricing and lock alerts if rates start to move higher. Everyone have a wonderful weekend and let’s hope this Friday rally continues. Feel free to post questions or comments in the comments section below.