Last week, mortgage backed securities (MBS) moved considerably lower in price moving par 30 year conventional rate mortgages higher by an .125 to .25 in rate.   Mortgage rates are set by the trading of MBS.  When demand is high for MBS, that moves their price higher which allows lenders to pass along lower mortgage rates, and when MBS move lower in price lenders increase mortgage rates.   Pressure is being applied to MBS by optimistic investors who see light at the end of the tunnel of our current recession.  Many recent economic reports are showing the current economic contraction easing which is encouraging investors to move their money away from the safe haven of MBS and treasury investments to the higher yielding stock market.  In times of economic woes, investors look to park their money in very safe but low paying investments such as mortgage backed securities and US treasuries.   Once the economy starts to show signs of life, investors looking for more healthy returns start to move the money into the stock market.  This is what we have seen over the last week or so and this is referred to as the flow of money.    It will be interesting to see if this optimism continues as each upcoming economic report will be more closely watched to see if the current trend continues.   The general rule is that better than expected economic news leads to higher mortgage rates while worse than expected economic news leads to lower mortgage rates.

Let’s get to the economic data for the week.

Monday

-           Other than headline news and the flow of money, the only relevant event today happens after the trading day is complete.  Federal Reserve Chairman Ben Bernanke will deliver the keynote address at the Atlanta Fed’s Financial Markets Conference.  As always, anytime Ben Bernanke speaks investors will be listening for any hint on future monetary policy and the economic outlook. 

Tuesday

-           The Department of Commerce will release our trade balance numbers which simply measures the difference between what our country exports and imports.   Last month’s numbers came in remarkably better with the trade balance dropping from a $-36.2 billion to $-26.0billion.   Exports showed a small increase but in a sign of our economic contraction, imports fell more than 5% from the prior month.   The stock market generally responds favorably when the trade balance decreases which can be at the expense of MBS.  Expectations are for this report to show our countries trade balance for the month of March to be at $-27.5billion

Wednesday

-           Mortgage Bankers’ Associations weekly report on purchase applications at mortgage lenders.  Increasing activity in home purchases is a sign of economic life which can cause investors to sell fixed income investments and move their money to higher yielding stocks.   Since a consumer must feel pretty good about their own job security and personal finances to buy a home, this report is a leading indicator of economic momentum.   How many things must a person buy once they get a new home?  New furniture, paint, window treatments, etc…  

-          The Department of Commerce will release their monthly report on Retail sales.   A better than expected number could validate investor’s belief in the bottoming of the current recession and lead to a rally in the stock market at MBS expense.    Retail sales declined in March by 1.1% after a small gain in February.  Economists’ are expecting April’s numbers to come in at  a 0.1% overall month over month gain and when excluding auto sales a 0.3% gain.   Retail sales is a measure of the total receipts at stores that sell durable and nondurable goods.  

-          Import and Export prices will be released by the Labor Department.   Since inflation is the biggest enemy to low mortgage rates, changes in import and export prices give investors a gauge into future inflationary pressures.   Last month’s report showed that prices declined by 0.6% giving us another report showing that inflation is not a concern at present time.

Thursday

-           The Department of Labor will release the monthly Producer Price Index which measures inflation at the producer level by measuring the average price level of a fixed basket of goods received by producers.  Quite often, producers do not pass along higher prices to their end customer, so this report is not as important as consumer inflation which we get on Friday.   In March, the PPI dropped 1.2% and expectations are for a  0.1% rise in both the overall and the core reading which strips out food and energy due to their volatility. 

-          The Department of Labor will also release their weekly jobless numbers which measures the number of first time filers for unemployment insurance.  Initial claims fell last week by over 30,000 to 601,000 which is the lowest reading since January.  Economists’ are expecting last week’s numbers to come in at 609,000.  The past few readings of this and Friday’s nonfarm payroll numbers are showing a decreasing trend in the number of people to file for unemployment and the number of job losses.   These reports have helped to create the current optimistic outlook by many investors and economists.  Another better than expected number might cause the stock market to move higher which could result in additional pressure on mortgage rates to move higher. 

Friday

-           The Department of Labor will release consumer inflation data in the form of the Consumer Price Index which measures the change in the average price of a fixed basket of goods and services purchased by consumers.  At the current time, inflation is not a worry but this report can definitely move the markets.   Expectations are  for this report to show a 0.0% month over month change to overall consumer prices and when excluding food and energy a 0.1% increase.

-          The Federal Reserve Bank of New York will release their monthly Empire State Manufacturing Survey which gives an investors a gauge into the strength of the manufacturing segment of our economy in the New York region.   Readings below 0 indicate a contracting economy while readings above 0 indicate an expanding economy.   Here is one of the reports that have created some of the optimism with investors.  In March this report came in at a very low and contractionary reading of -39 but in April it rebounded to a -14.7.   Economists’ expect this month’s report to continue to show optimism with an improved reading of -12 which is still contractionary but showing light at the end of the tunnel.   A better than expected reading will apply pressure on MBS to move lower in price which can lead to higher mortgage rates.

-          Federal Reserve Board will release the monthly Industrial Production report which measures the change in the production of our nation’s factories, mines, and utilities.  Last month this report showed our nation’s industrial production dropping 1.5% and expectations are for this month’s report to show a further decline of 0.6%.

-          University of Michigan Consumer Sentiment report will be released which  is a survey of consumers regarding their opinion of our current economic conditions and future economic expectations.  A positive consumer is much more likely to spend money while a pessimistic consumer is much more likely to save.   A higher than expected reading is favorable for a stock market rally at the expense of MBS and higher mortgage rates.  Expectations are for this report to show continued optimism with a reading of 67.0 after last month’s 65.1.  How do you feel about our economy?  Do you see light at the end of the tunnel?

So far this morning, MBS are starting the day and the week moving higher in price.  Remember, as MBS move higher in price that can lead to lower mortgage rates.  Early reports from fellow mortgage professional are showing lenders offering 4.625% to 4.875% as par today for a 30 year fixed rate conventional mortgage for the best qualified consumers.  To qualify for the best rates, you must have a FICO credit score of 740 or higher, a loan to value at 80% or lower and be willing to pay all closing costs associated with loan including 1 point loan origination/discount/broker fee.  I use those 3 terms since they can and are the same.  Whether you are paying 1 point loan origination or 1 point mortgage broker fee, you are paying the same costs just called something different.   If you have lower credit scores than 740, you can get the same rate but you would have to pay additional fees due to the loan level price adjustment fees initated by Fannie Mae and Freddie Mac.  These additional fees did not apply last year, so back than whether you had a 750 score or a 680 score you got the same rate with same fees.  Now, the best rates go to 740 and higher credit scores only. 

For intraday updates to the movement of MBS and other relevant items, check out the MBS Commentary blog.